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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-18954
COMMUNICATIONS AND ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
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NEVADA 95-4269048
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1875 CENTURY PARK EAST, SUITE 2130, 90067
LOS ANGELES, CALIFORNIA (Zip code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (310) 229-2430
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 30, 1996 was approximately $2,049,161 (based on the
mean between the closing bid and asked prices of the Common Stock on such date),
which value, solely for the purposes of this calculation, excludes shares held
by Registrant's officers and directors. Such exclusion should not be deemed a
determination by Registrant that all such individuals are, in fact, affiliates
of the Registrant.
As of September 30, 1996 there were outstanding 2,591,242 shares of
Communication and Entertainment Corp.'s common stock, par value $.01 per share
(the "Common Stock").
Portions of the Registrant's Proxy Statement relating to the 1996 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
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COMMUNICATIONS AND ENTERTAINMENT CORP.
FORM 10-K REPORT FOR THE FISCAL YEAR
ENDED JUNE 30, 1996
TABLE OF CONTENTS
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PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Communications and Entertainment Corp. ("ComEnt" or the "Company") was
formed in December 1989 as a holding company. At such time, the Company had no
material assets. In September 1990, Double Helix Films, Inc. ("Double Helix"), a
producer of low budget films, and Odyssey Entertainment Ltd. ("Odyssey"), an
international film distribution company, were merged with wholly-owned
subsidiaries of the Company (the "Mergers"). Subsequent to the Mergers, each of
Double Helix and Odyssey became a wholly-owned subsidiary of the Company. In
June 1991, the Company sold Double Helix and thereafter began to focus on the
distribution of motion pictures in overseas markets as its primary business.
A change in the entire Board of Directors of the Company (the "Board")
occurred on April 12, 1995 pursuant to the terms of a Settlement Agreement,
dated as of March 31, 1995 (the "Settlement Agreement"), by and among Robert
Hesse, Shane O'Neil, Lawrence I. Schneider, Henry N. Schneider, Robert E.
Miller, Jr., Russell T. Stern, Jr. (collectively, a group of shareholders
originally formed to effect a change in management control of the Company and
known as the "CECO Shareholders Committee"), the Company, Odyssey, Global
Intellicom, Inc., each of Jerry Silva, Robert Ferraro, N. Norman Muller, Thomas
W. Smith and David A. Mortman (constituting all the directors of the Company at
the time of the execution of the Settlement Agreement and hereinafter referred
to collectively as the "Former Directors"), and others.
As contemplated by the Settlement Agreement, on April 11, 1995, the Former
Directors increased the size of the Board from five to six directors and elected
Henry N. Schneider, a designee of the CECO Shareholders Committee, a new
director effective upon the closing of the Settlement Agreement. The closing of
the Settlement Agreement occurred on April 12, 1995 and, upon the closing, the
resignations of the Former Directors became effective. After the closing, Henry
N. Schneider, as sole remaining director of the Company, elected Lawrence I.
Schneider, Russell T. Stern, Jr., Patrick J. Haynes, III and Robert E. Miller,
Jr. as new directors of the Company. In addition to the change in the
composition of the Board, the Settlement Agreement provided for the settlement
of all outstanding litigation between the Company and the CECO Shareholders
Committee. The CECO Shareholders Committee disbanded upon the closing of the
Settlement Agreement. Effective September 8, 1995, each of Messrs. Haynes, Stern
and Henry N. Schneider resigned as directors of the Company and were replaced by
Stephen R. Greenwald and Ira N. Smith, each of whom was appointed to the Board
by the remaining members thereof on such date. See "Directors And Executive
Officers Of The Registrant."
During the early 1990s, the Company developed an excellent reputation in
overseas markets for the distribution of quality motion picture entertainment, a
reputation which the Company's management believes it continues to enjoy despite
its recent difficulties. Past films distributed by the Company which enjoyed
considerable success in the overseas market include such well-known productions
as Sidney Lumet's "Q & A," Blake Edward's "Switch," Michael Caton Jones' "This
Boy's Life," and Irwin Winkler's "Guilty by Suspicion" and "Sniper." The Company
is committed to expanding its activities in the foreign distribution of high
quality motion pictures and expects that the international distribution of films
will continue to be its primary line of business.
On March 6, 1996, the Company declared a reverse one-for-six stock split of
its Common Stock (the "Reverse Split"), effective March 18, 1996. All share
amounts and per share prices reflected in this Report have been adjusted to give
effect to the Reverse Split.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Since the sale of its Double Helix subsidiary in 1991, the Company has been
engaged in only one industry segment and line of business, the international
distribution of motion pictures. See "Selected Financial Data."
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(c) NARRATIVE DESCRIPTION OF BUSINESS
FOREIGN SALES AND DISTRIBUTION OPERATIONS
GENERAL.
The foreign distribution of films involves two principal activities--the
acquisition of rights from the licensor or the seller, usually the producer of
the film, and the licensing of the distribution rights to subdistributors in
foreign markets. In general, the rights obtained from the producer relate to all
media, including theatrical distribution, video and all forms of television.
However, the licensing of rights to subdistributors may exclude certain
territories and/or media.
It is unlikely that subdistributors would bypass the Company and deal
directly with the licensors of film rights. Historically, independent licensors
of film rights prefer to deal with a single sales agent/ distributor rather than
deal with various subdistributors in foreign markets. Consequently, even if a
particular subdistributor attempted to perform the function of the Company, it
is unlikely that the film's licensor would be willing to deal with such
subdistributor. Furthermore, with respect to any particular film, the Company
would typically enter into an exclusive distributorship arrangement, thereby
precluding others from competing with the Company with respect to that film.
Moreover, in certain circumstances, the Company may also provide a financing
function for the production of a film which a subdistributor would generally be
unable to provide. See "Terms of Distribution Agreements."
TERMS OF DISTRIBUTION AGREEMENTS. Foreign distribution is generally handled
by a distributor such as the Company which coordinates worldwide sales in all
territories and media. Overseas film sales companies rely on local
subdistributors to physically deliver the motion picture and related marketing
materials and to collect revenues from local exhibitors and other local
distributors of the film. Typically, the territorial rights for a specific
medium such as television exhibition are sold for a "cycle" of approximately
seven years, after which the rights become available for license for additional
cycles.
The Company's film distribution business breaks down into two broad
categories:
- SALES AGENCY REPRESENTATION. As a sales agent, the Company will undertake
to represent and license a motion picture in all markets and media on a
best-efforts basis, with no guarantees or advances, for a fee of 15-20%,
and typically for a term ranging from seven to fifteen years.
- DISTRIBUTION. As a distributor, the Company may provide the producer of
the film a guarantee of a portion of the budget of the project. This
guarantee may be in the form of a bank commitment to the producer, secured
by license agreements with foreign licensees, which is used by the
producer to finance the production. Typically, the Company receives a
distribution fee of 25-35% over a term ranging from 15 years to
perpetuity. In addition, the Company may acquire a profit participation in
the film project.
Once the rights to a picture are obtained either as sales agent or
distributor with minimum guarantee, the Company will then seek to license its
rights to subdistributors in the territories for which it has acquired
distribution rights. In general, the grant of rights to the subdistributors
includes all media other than satellite, although satellite is included in some
subdistributors' territories. The subdistributor in each territory generally
pays for its distribution rights with a down payment at the time the contract is
executed with the balance due upon delivery of the picture to the
subdistributor. (Delivery occurs upon the Company's acceptance of the master
negative and its obtaining access to the interpositive and certain other items
necessary for the distribution of the film). In certain instances, the
subdistributors' obligations for the payment due on delivery are secured by a
letter of credit. Sales take place primarily at three film markets-- Cannes,
France in May; MIFED in Milan, Italy in October; and the American Film Market
("AFM") in Los Angeles in February.
In general, after financing (if any) is repaid, the Company applies the
distribution receipts from its subdistributors first to the payment of
commissions due to the Company, then to the recovery of certain distribution
expenses advanced by the Company, and third, to the extent not recouped as part
of the
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repayment of the financing, to the reimbursement of the Company for its
guarantee, if any, paid to the producer. Additional distribution receipts, if
any, are shared by the Company and the producer according to the percentages
negotiated in the agreement between the Company and the producer.
INDEPENDENT FILM PRODUCTION AND PRODUCT ACQUISITION
Overseas film distribution companies such as the Company primarily represent
independent producers of motion pictures (rather than motion picture studios) in
all overseas markets and all media, including theatrical release, television and
home video distribution, and cable or satellite-distributed media.
Producers seek to be independent producers of motion pictures for a variety
of reasons, including greater creative control of a project and potentially a
greater profit participation through the retention of the copyright or the
ability to sell the film directly in particular markets. Often, young, new
directors and producers have no choice but to independently produce their
projects, and the motion picture industry has a long history of "breakthrough"
films produced at very low cost by first time producers and directors which
subsequently achieve considerable revenues. Recent examples include "Pulp
Fiction", "Four Weddings and a Funeral" and "The Crying Game". The Company
generally obtains its product from among these independently produced films
rather than from major motion picture studios which typically have their own
in-house distribution networks. Nevertheless, from time to time, the Company may
enter into a "split rights" arrangement with a studio to represent a film in the
overseas market.
The Company's management seeks to identify attractive projects very early in
their development, either through relationships with producers, directors and
agents or through industry announcements of new productions. In addition, the
Company's acquisitions personnel attends festivals and film markets, such as the
Sundance Film Festival and the Cannes Film Festival, in order to locate new
product.
BUSINESS STRATEGY
The Company's strategy is to capitalize on its reputation and the experience
of its management to expand the scale and scope of its activities in the
international film distribution business. Management intends to expand the
Company's asset base and to build a sales infrastructure to service these
assets. Since overseas film distribution generally requires relatively low
overhead, the Company anticipates that its expansion will create economies of
scale in its sales operations.
Specifically, the Company's strategy includes the following:
- ACQUISITION OF FILM RIGHTS--The Company's film acquisition strategy is to
seek out and acquire quality films with broad appeal in overseas markets.
The Company has begun to acquire rights to new films as well as films
currently in distribution ("library films"). In addition, the Company
intends to maximize the risk/return profile of its film assets by building
a portfolio of films with minimal levels of risk and financial exposure.
In the past, the Company has been dependent on obtaining outside financing
to acquire distribution rights to films. New management has reduced the
Company's reliance on outside financing by placing more emphasis on
acquiring distribution rights through arrangements which require lower or
no advance payments. At present, the Company is not able to secure
distribution rights by issuing letters of credit or advancing significant
production funds, as it has in the past. Generally, the films that the
Company represents are financed by the producers of the film, through
independent or bank financing, utilizing the license agreements generated
by the Company as collateral for production loans.
To ensure a flow of quality film projects to the Company and to create
opportunities for the Company to acquire ownership interests in films and
build its film library, the Company intends to enter into certain
"first-look" and "second-look" agreements with successful film producers.
Under these arrangements, the producers agree to give the Company a first
or second (after a major studio) "look" at any film projects they are
developing. This "look" gives the Company the right to acquire foreign
and/or domestic distribution rights, to serve as an executive producer on
the project
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for a fee and to acquire an ownership interest in the project with little
or no financial risk (see "Producer Agreements").
- EXPANSION OF DISTRIBUTION CAPABILITIES--To facilitate the distribution of
films in overseas markets, the Company intends to augment its in-house
sales capability and seek strategic relationships with sales organizations
in the film distribution business. The Company believes that strategic
relationships with other companies may offer opportunities to diversify
its product offerings, gain additional economies of scale in its sales
operations, and expand the Company's distribution base.
Following the installation of new management in October 1995, the Company
began to implement a strategy of expanding its distribution capabilities by
acquiring rights to 21 films, including 11 library films and 10 new films.
During the past fiscal year, the Company was represented at all of the major
film markets, including MIFED in October 1995, AFM in February 1996, and the
Cannes Film Festival in May 1996. At MIFED, the Company concluded six sales
arrangements; at AFM, the Company generated sales in eight territories and began
representing two of its new films, "Crimes of Fashion" and "Fifth Freedom"; and
at Cannes, the Company added two additional new films, "Dark Angel 2" and "By
the Sea of Crystal", and concluded fourteen sales agreements, including two
"output" arrangements with prominent theatrical distributors in Canada and
Brazil.
As part of its overall business strategy, the Company will consider selling
portions of its film library form time to time for current cash consideration,
thereby accelerating and, in effect, guaranteeing all or part of the future
revenues that may be derived from the sales of these films in foreign markets.
See "Sales of Library Films".
SALES OF LIBRARY FILMS
On January 2, 1996, the Company entered into an agreement with Regency
International Pictures, B.V. ("Regency"), the Company's joint venture partner,
to sell the Company's interest in the related joint ventures through which it
held approximately 50% ownership interests in four theatrical motion pictures,
entitled "Switch", "Q & A," "Guilty by Suspicion" and "This Boy's Life".
Pursuant to the agreement with Regency, the Company received $1,000,000 on
January 23, 1996 and $500,000 on February 14, 1996, in exchange for all of the
Company's interests in the joint ventures. In addition, the Company retained a
contingent interest in certain receivables, not to exceed $212,500, and a
contingent interest in future revenues from the pictures.
On August 29, 1996, the Company entered into an agreement with Kinnevik
Media Properties, Ltd. ("Kinnevik"), pursuant to which the Company agreed to
grant to Kinnevik subdistribution rights in, and to sell to Kinnevik other
distribution rights to, certain films in the Company's film library. In exchange
for these rights, the Company will receive a total cash consideration of
$1,075,000, payable $500,000 on closing, $275,000 six months after closing, and
$300,000 eighteen months after closing. In addition, the Company will retain a
continuing right to receive revenues from certain of the films, valued by
management at a minimum of approximately $150,000. Kinnevik has also agreed to
provide the Company with a $500,000 revolving line of credit to be secured by
accounts receivable and other contractual rights acquired by the Company. As
part of the transaction, the Company will grant 100,000 stock options to
Kinnevik, exercisable over a three year period at the bid price of the Company's
common stock in effect on August 5, 1996 ($.625). The transaction with Kinnevik
closed on October 7, 1996.
CURRENT LIBRARY
After giving effect to the Kinnevik transaction, the Company's current
inventory of films consists of twelve (12) films, two of which are library films
(i.e., already in distribution), and ten of which are new films which have
either recently been completed or are in various stages of pre-production.
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The two library films are as follows:
- "Mr. Write", a high energy romantic comedy about an aspiring playwright
who falls hopelessly in love with a stunning actress. The film stars Paul
Reiser, Martin Mull and Jessica Tuck and was originally released in the
U.S.
- "Rich Girl", a romantic film about a spoiled rich girl who leaves home and
falls in love with a rock star from the wrong side of the tracks.
The Company has acquired overseas distribution rights to the following ten
new films, three of which are recently completed but not yet released ("Up, Down
& Sideways," "Danger in Paradise" and "Sudden Manhattan"), and seven of which
are in various stages of pre-production with delivery anticipated in 1997:
- "Up, Down and Sideways", an urban comedy set in Athens, Greece directed by
Michael Cacoyannis, who directed "Zorba the Greek", and starring Irene
Papas;
- "Danger in Paradise", an action/adventure film in which "paradise" turns
into a danger zone for two men on a sailing trip; starring Frank Stallone.
- "Sudden Manhattan", an off-beat comedy that revolves around a woman in her
twenties living in Manhattan who has recently been fired from her job and
inadvertently becomes immersed in a bizarre modern day fable of good
versus evil.
- "Crimes of Fashion" (in pre-production), a romantic comedy about a fashion
designer who gets involved with a mobster's wife. The film is budgeted at
$25 million and will be distributed theatrically in the U.S. by a major
studio with a significant commitment to prints and advertising support;
- "Dark Angel 2" (in pre-production), a sequel to the successful science
fiction thriller starring Dolph Lundgren, "Dark Angel I (I Come In
Peace)". The film is budgeted at $4 million and was written by Harv
Zimmel, who wrote "Shoot to Kill";
- "Fifth Freedom" (in pre-production), a suspense, action film about two
American brothers who travel to Holland to retrieve their grandfather's
remains and end up getting involved with diamond smuggling and murder. The
film is budgeted at $5.5 million and will be directed and produced by John
DeBello, who produced and directed the "Attack of the Killer Tomato"
films;
- "By the Sea of Crystal" (in pre-production), a dark drama centering around
a man who is involved in drugs and crime and ends up falling in love with
a woman who turns his life around. The film is budgeted at $12 million and
was written by Paul Schrader, the acclaimed screenwriter of "Taxi Driver",
and will be directed by John Smith, who directed "Dangerous Minds".
- "Wasteland" (in pre-production), an action, adventure film in which dark
skies fall upon a man who travels down a desert road to escape his past,
only to find that his past is infinitely brighter than his future. The
film is budgeted at $6 million and will be directed by Cameron Thor.
- "King Lear" (in pre-production), a contemporary adaptation of the
Shakespearean play starring Paul Sorvino. This film is budgeted at $20
million.
- "Downrange" (in pre-production), an action, adventure film starring Luke
Perry in which two women accidentally stumble upon military maneuvers and
an ex-Green Beret must save the day. This film is budgeted at $5 million.
As of October 10, 1996, the only financial obligations incurred by the
Company with respect to the foregoing films were for writing fees on two films
in the aggregate amount of $40,000, of which $20,000 has already been paid.
As of June 30, 1996, the Company had agreements in principle with
subdistributors relating to distribution commitments or guarantees of
approximately $6 million that had not been recognized in the
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statement of operations, an increase of $4.9 million from June 30, 1995. The
Company will recognize these guarantees as revenues and the costs related to
such revenues when the motion pictures to which they relate are completed and
available for delivery. It is possible that changes in schedules and
cancellations of pictures may defer and/or reduce the amount of revenues that
will be recognized in later periods.
PRODUCER AGREEMENTS
The Company has begun to implement its strategy of entering into
"second-look" and "first-look" agreements with certain producers. In exchange
for these "look" rights, the Company will agree to cover certain overhead
expenses of the producers, recoupable out of revenues from the films developed.
In addition, the Company may grant certain of its producers stock options on the
commencement of production of a film.
The Company has entered into the following producer agreements:
- A "second-look" agreement with Riche-Ludwig Productions, a development and
production company with a first-look deal at Warner Bros. Under this
agreement, Riche-Ludwig will submit to the Company for acquisition any
projects not picked up by Warner Bros. The agreement has a term of two
years, commencing as of April 15, 1996. Riche-Ludwig has already developed
one project for the Company, "Downrange", an action-adventure script with
Luke Perry attached to star. The Company has a one-year option to arrange
financing and production for this film and will retain foreign rights,
serve as executive producer and have an ownership interest in the film.
Riche-Ludwig will receive an annual consulting fee of $75,000 during the
term of the agreement and up to a maximum of 208,333 options to purchase
Common Stock of the Company, exercisable at $1.875 per share, such number
of options to depend upon the number of films produced and/or delivered by
Riche-Ludwig to the Company during the term of the agreement.
- A "first look" agreement with Presto Productions. Presto is one of the
producers of "Dark Angel 2" and produced "Mr. Write", a Paul Reiser comedy
film which Presto has licensed to the Company for both domestic and
foreign sales. Presto will receive compensation at the rate of $2,000 per
month during the one year term of their agreement with the Company.
FILM BRIDGE JOINT VENTURE
On March 11, 1996, the Company and Film Bridge International, Inc. ("Film
Bridge") executed a memorandum regarding the formation of a joint venture (the
"Joint Venture") for the purpose of acquiring and exploiting film distribution
rights. Shortly thereafter, in April 1996, the Company advised Film Bridge that
it was terminating the Joint Venture but desired to enter into negotiations for
a consulting or employment agreement with Film Bridge. Negotiations continued
until August 1996, but did not result in a new agreement between the parties.
The Company and Film Bridge engaged in discussions regarding the allocation of
their respective interests in the film distribution rights held by the Joint
Venture, but without resolution. The Company is advised that on September 18,
1996, Film Bridge filed a complaint in a Los Angeles court seeking declaratory
relief with respect to the Joint Venture. The Company is in the process of
seeking restraining orders establishing its rights in the Joint Venture.
RECENT FINANCINGS
In August and October of 1995, the Company concluded a private placement
pursuant to which it issued unsecured promissory notes to unaffiliated investors
in the aggregate amount of $312,500. The notes have a maturity date of one year
and bear interest at the rate of 12% per annum. A total of 6.25 units were sold
at a purchase price of $50,000 per unit. In addition, warrants were issued to
the purchasers at the rate of 4,167 warrants for each unit sold, or a total of
26,042 warrants (on a post Reverse Split basis). Each warrant certificate
entitles the holder thereof to purchase one share of common stock at an exercise
price of either $2.83 per share (the August warrants) or $2.37 per share (the
October warrants) over a three year period commencing one year after the closing
of the private placement. After paying expenses and commissions of $42,500, the
Company received net proceeds of $270,000 from the private placement. The
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notes issued in the private placement were due to be paid by the Company upon
their respective due dates on August 28 and October 3, 1996. The Company has
made a proposal to the noteholders which would involve the payment of current
interest and either the deferral of the maturity date of the notes (the first
proposal) or the cancellation of the notes in their entirety (the second
proposal), in each case in exchange for varying amounts of registered stock of
the Company (subject to the Company's completion of a registration statement
with respect to such shares). In the first proposal, the maturity date of the
notes would be deferred until December 15, 1997 and the warrants would be
exchanged for registered shares in an amount equal to 20% of the principal
amount of the notes, with shares valued at $.75 per share. In the second
proposal, the notes would be cancelled and exchanged for registered shares in an
amount equal to 150% of the principal amount of the notes, with shares valued at
the price in effect on the effective date of registration. As of October 10,
1996, noteholders representing $162,500 in principal amount of the notes elected
the first proposal, and noteholders representing $50,000 in principal amount of
the notes elected the second proposal. The remaining notes for $100,000 have not
been paid on their respective due dates, although the Company has not yet
received any indication from these noteholders that they will not consider one
of the two alternative proposals offered. The Company has paid current interest
on all of the notes through the first anniversary date of the respective notes.
On September 25, 1996, the Company entered into an agreement with an
unaffiliated third party (David Somerstein) for the purchase of 1,000,000 shares
of the Company's common stock in consideration of $750,000, or $.75 per share,
payable all cash at closing. In addition, the investor will receive 1,000,000
class A warrants and 1,000,000 class B warrants, each set of warrants being
exercisable over a three year period for the purchase of 1,000,000 shares of
common stock at the respective exercise prices of $.75 and $1.00 per share. If
all warrants are exercised, a total of 3,000,000 shares will be issued and the
Company will receive a total of $2,500,000 from the initial sale of the shares
and the exercise of the warrants. The closing of the transaction is contingent
upon (i) shareholder approval of an amendment to the Company's Articles of
Incorporation authorizing an increase in the number of authorized shares of the
Company, and (ii) the effectiveness of a registration statement filed by the
Company on behalf of the investor with respect to the initial shares purchased
and the shares underlying the warrants. The investor agreed to bear the first
$50,000 of costs in connection with such registration.
Management does not believe that the Somerstein transaction, in and of
itself, will adversely affect the Company's tax loss carryforward position.
However, no assurances can be given that future changes in the equity positions
of shareholders of the Company, in combination with the equity changes resulting
from the Somerstein transaction, will not result in the imposition of certain
limitations on the utilization or availability of the Company's tax loss
carryforward position. See "Tax Loss Carryforward."
In 1992, the Company gave a $2.7 million contractual guarantee to Paramount
Pictures to acquire all of the foreign distribution rights to the film
"Wuthering Heights". The payment was never made by the Company and new
management of the Company has been negotiating with Paramount since October 1995
with respect to a resolution of this matter. In September, 1996, the Company and
Paramount reached a verbal understanding pursuant to which the Company believes
that Paramount will agree to cancel the outstanding indebtedness of $2.7 million
in full, in exchange for which the Company agreed to (i) relinquish all further
distribution rights to "Wuthering Heights"; (ii) assign to Paramount all of its
rights in any outstanding distribution agreements for the film, and any
receivables to be generated therefrom; and (iii) guarantee that Paramount will
collect a total of $500,000 in sales revenue from existing distribution
agreements no later than January 15, 1997. The Company anticipates that existing
license agreements will yield at least $450,000 in revenues prior to January 15,
1997 (of which the Company would have been entitled to retain approximately 20%
thereof in commissions), thereby minimizing the Company's exposure under the
guarantee to Paramount.
COMPETITION
The entertainment industry generally, and the film industry in particular,
are highly competitive. The Company competes both for the acquisition of film
product to distribute in overseas markets as well as
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with other distributors for the placement of its product with overseas
subdistributors and users. The Company's competition includes the smaller
independent producers and other overseas and local distributors. Many of the
Company's competitors have financial and other resources which are significantly
greater than those available to the Company.
Management believes that the Company will be able to compete in this
environment as it continues to enjoy a favorable reputation overseas and, as a
result of the consolidation in the film industry, is one of relatively few
reliable overseas distributors of independently produced motion pictures.
OPERATIONS
The Company's operations have been greatly reduced as a result of the
restructuring of the Company by new management. The Company maintains a single
office in Los Angeles (see "Properties") and, as of June 30, 1996, had a staff
of 7 full-time employees and 2 part-time employees, the functions of which staff
are to expand the Company's acquisition and distribution operations, maintain
the Company's rights, and service its existing sales contracts. As of October 1,
1996, the Company had 13 employees, including 8 full-time and 5 part-time
employees.
TAX LOSS CARRYFORWARD
The Company is entitled to the benefits of certain net operating loss
carryforwards to reduce its tax liability. The utilization by the Company of
such tax loss carryforwards is limited under applicable provisions of the
Internal Revenue Code of 1986, as amended, and the applicable regulations
promulgated thereunder. As of June 30, 1996, there were approximately $27
million in net operating loss carryforwards remaining to be used to reduce tax
liability. The utilization of approximately $4.9 million of these losses in
future periods will be limited to approximately $350,000 per year.
ITEM 2. PROPERTIES
On May 9, 1996, the Company entered into a two year lease, commencing June
1, 1996, for office premises located at 1875 Century Park East, Suite 2130, Los
Angeles, California 90067. The monthly rental is $5,301 per month and the
premises consist of 3,272 square feet of rentable space. The Company conducts
all of its operations out of these leased premises, although Messrs. Greenwald,
Smith and Schneider, the principal executive officers of the Company, devote a
significant portion of their time to the Company's business out of their
respective New York offices without additional charge or expense to the Company.
Rent expense for each of the fiscal years ended June 30, 1996, 1995 and 1994
was $38,772, $297,287, and $489,559, respectively.
ITEM 3. LEGAL PROCEEDINGS
On December 20, 1990, Hibbard Brown & Company, Inc. ("Hibbard Brown") filed
a complaint entitled HIBBARD BROWN & COMPANY, INC. V. DOUBLE HELIX FILMS, INC.,
ODYSSEY ENTERTAINMENT LTD. AND COMMUNICATIONS AND ENTERTAINMENT CORP. in the
Supreme Court of the State of New York, County of New York. The Complaint sought
payment of $300,000 under an agreement with the Company, Odyssey, Double Helix
and Hibbard Brown dated December 21, 1989 for certain investment banking
services allegedly performed in introducing Odyssey and Double Helix and
assisting them in consummation of the Mergers by which they became wholly-owned
subsidiaries of the Company. A counterclaim seeking recovery of $50,000 paid to
Hibbard Brown upon execution of the Agreement was asserted.
Hibbard Brown's motion for summary judgment was granted in October, 1991. On
January 30, 1992, the Company moved, by order to show cause, to renew and
thereupon deny, dismiss or stay Hibbard Brown's previously granted motion for
summary judgment on the ground that Hibbard Brown had intentionally concealed
the fact that it was an unauthorized foreign corporation transacting business in
New York. By Order dated March 2, 1992, the court granted the Company's motion
in part by renewing the action and staying judgment pending Hibbard Brown's
qualification in New York. On October 29,
8
<PAGE>
1992, Hibbard Brown moved for an order vacating the stay of judgment, a
declaration that it was now an authorized foreign corporation and reinstatement
of the summary judgment granted in October, 1991 or, in the alternative, to
rehear its motion for summary judgment on the original papers and grant judgment
in its favor.
On January 29, 1993, Double Helix, Odyssey and the Company cross-moved for
an order granting reargument and/or renewal of Hibbard Brown's motion for
summary judgment and consolidating the litigation with an action that the
Company had brought against Hibbard Brown (described below), or staying the
issuance, entry and execution of judgment pending the resolution and trial of
the Company's action against Hibbard Brown.
On March 26, 1993, the court issued a Decision and Order vacating the stay
of entry of the $300,000 judgment against the Company and granting the Company's
cross-motion for a stay of execution pending the determination of the Company's
action against Hibbard Brown. The Company's cross-motions for reargument and
renewal and consolidation were denied.
By Decision and Order dated June 18, 1993, the court affirmed the stay of
execution of the judgment, but required the Company to obtain a bond to secure
the stay. The Company obtained a non-collateral bond.
On March 5, 1992, the Company instituted an action entitled COMMUNICATIONS
AND ENTERTAINMENT CORP. V. HIBBARD BROWN & COMPANY in the Supreme Court, New
York County, for the return of 150,000 shares of Common Stock previously issued
on the ground that Hibbard Brown failed to perform the required services.
Hibbard Brown counterclaimed for breach of contract.
In July 1993, after considerable pre-trial discovery, the Company and
Hibbard Brown moved for summary judgment. By Decision and Order dated August 11,
1993, the court denied both motions. Both parties appealed. On March 3, 1994,
the appellate court affirmed the denial of summary judgment.
On or about October 14, 1994, Hibbard Brown filed a voluntary petition for
relief under Chapter 11, Title 11 of the United States Code with the United
States Bankruptcy Court, Southern District of New York. Consequently, the
Company's action against Hibbard Brown has been automatically stayed. The
Company has filed a Proof of Claim.
On or about September 11, 1992, Joseph Duignan brought an action in the
Superior Court of New Jersey, Mercer County, entitled JOSEPH DUIGNAN V. DOUBLE
HELIX FILMS LIMITED PARTNERSHIP NO. 1, L.P., DOUBLE HELIX FILMS, INC., CINECOM
INTERNATIONAL FILMS, FILM GALLERY, INC., STAN WAKEFIELD, JERRY SILVA, ARTHUR
ALTARAC AND ANTHONY TAVONE (MER-L-4262-92). Jerry Silva, the only defendant who
was served, is former Vice Chairman of the Board of Directors of the Company.
Mr. Silva has demanded that the Company indemnify him against any expenses,
judgments, and amounts paid in settlement of the action. The Company contends
that it is not required to indemnify Mr. Silva because he breached his fiduciary
duties to the Company.
Mr. Duignan claims that he invested $75,000 to acquire a partnership
interest in Double Helix Films Limited Partnership No. 1 and that Mr. Silva
forged or caused to be forged his signature on a Subscription Agreement dated
July 28, 1986. The Complaint alleges claims for rescission, unjust enrichment
(against Double Helix), conversion, fraud, breach of contract, breach of
fiduciary duty and breach of covenants of good faith and fair dealing (against
Mr. Silva and Double Helix). Mr. Duignan seeks to recover compensatory damages,
including but not limited to, his alleged $75,000 investment, punitive damages
and attorney's fees. Mr. Silva has answered the Complaint.
On or about December 30, 1994, Krishna Shah, who allegedly served as
President of Double Helix from about July 1991 until about March 1993, brought
an action in the Superior Court of California, Los Angeles County, entitled
KRISHNA SHAH V. NORMAN MULLER, COMMUNICATIONS AND ENTERTAINMENT CORP., ATC II,
CARNEGIE FILM GROUP, INC., JERRY MINSKY, PERRY SCHEER, SUSAN BENDER, LARRY
MYERS, ROBERT HESSE, DOUBLE HELIX FILMS, INC. AND DOES 1-100. Mr. Muller, a
former Chairman of the Board and CEO of the Company, had demanded that the
Company indemnify him against any expenses, judgments and amounts paid in
settlement of the litigation. The Company contends that, by virtue of Mr.
Muller's wrongful actions and
9
<PAGE>
failure to comply with various obligations to the Company, it is not required to
provide indemnification. The Complaint alleges claims for breach of an oral
agreement to pay Mr. Shah $152,000 (which he allegedly advanced for the benefit
of Double Helix) and to give him a 19.5% ownership interest in its corporate
successors, and money paid, services rendered and fraud against the Company,
Double Helix and Mr. Muller. Mr. Shah also alleges a claim for intentional
infliction of emotional distress against Mr. Muller. Mr. Shah seeks to recover
unspecified compensatory, punitive, exemplary and emotional distress damages. A
trial has been scheduled for February 1997.
IN THE PRIVATE LESSONS PARTNERSHIP V. CARNEGIE FILM GROUP, INC., MONOGRAM
PICTURES CORP., FILMWAYS ENTERTAINMENT CORP., ATC, INC., KRISHNAH SHAH, LONNIE
ROMATI, GERALD MULLER, JERRY MINSKY AND DOES 1-100 (California Superior Court,
Los Angeles County, Case No. BC091840), the plaintiff asserted claims for breach
of oral contract, fraud in the inducement and fraudulent conveyance against Mr.
Shah, seeking damages in the amount of $315,000, plus further unspecified
compensatory damages and punitive damages. In August 1995, Mr. Shah filed a
cross-complaint against the Company, Double Helix Films and Norman Muller for
indemnification, apportionment of fault and declaratory relief. In addition to
compensatory damages, he seeks punitive and exemplary damages, emotional
distress damages and attorney's fees. The Company has answered the
cross-complaint and a trial has been scheduled for February 1997.
On or about May 15, 1995, Credit Lyonnais Bank Nederland N.V. and Cinecom
Entertainment Group, Inc. filed a Complaint in the Superior Court for the State
of California, County of Los Angeles, captioned CREDIT LYONNAIS BANK NEDERLAND
N.V. AND CINECOM ENTERTAINMENT GROUP, INC. V. ODYSSEY DISTRIBUTORS, LTD. AND
DOES 1 THROUGH 100 (No. BC 127790). They allege that Odyssey Distributors, Ltd.
(a subsidiary of the Company) collected but failed to remit to them assigned
distribution proceeds in the amount of $566,283.33 from the foreign distribution
of "Aunt Julia and the Scriptwriter" and "The Handmaid's Tale." The Complaint
alleges claims for breach of contract and breach of fiduciary duty and demands
damages in excess of $566, 283, attorney's fees, an accounting, a temporary
restraining order and a preliminary injunction. In June 1995, the Court denied
plaintiffs an attachment and stayed the action pending arbitration in New York.
In September, 1996, the Court dismissed the Complaint. No arbitration has yet
been commenced in this action.
In August 1995, G.P. Productions, Inc. ("GP") and Greenwich Subject Films,
Inc. ("Greenwich") commenced an action entitled G.P. PRODUCTIONS, INC. AND
GREENWICH STUDIOS, INC. V. DOUBLE HELIX FILMS, INC., COMMUNICATIONS AND
ENTERTAINMENT, INC., KRISHNA SHAW, GERALD MULLER AND NORMAN MULLER in the United
States District Court, Southern District of Florida (Case No. 95-1188). Mr.
Muller has demanded that the Company indemnify him against any expenses,
judgements and amounts paid in settlement of the action. The Company contends
that, by virtue of Mr. Muller's breaches of fiduciary duty and violation of his
obligations to the Company, it is not required to provide indemnification.
GP and Greenwich allege that they are the exclusive owners of the films "The
Gallery" and "South Beach". They assert claims for copyright infringement,
unfair competition, breach of contract, accounting, conversion, civil theft,
conspiracy and fraudulent conveyance. The Complaint demands a recall of the
films, an attachment, preliminary and permanent injunctive relief, an
accounting, and unspecified compensatory, punitive and treble damages. The
Company has made a motion to dismiss the action for lack of personal
jurisdiction and lack of venue. The motion is pending.
On or about September 18, 1995, the agent for the landlord for the premises
formerly occupied by the Company at 800 Third Avenue, New York, New York, filed
a Summons and Verified Complaint against the Company in the Supreme Court of the
State of New York, County of New York, entitled JOSEPH P. DAY REALTY CORP. V.
COMMUNICATIONS AND ENTERTAINMENT CORP. The plaintiff alleged that it was due
$66,694 from the Company (plus interest) for rent allegedly owed during the
period from April through September, 1995. The Company had vacated the premises
on April 12, 1995. Summary judgment was awarded to the plaintiff on May 22, 1996
and a judgment was entered for $74,142 on May 31, 1996. The Company has a motion
pending for reconsideration of the matter on the grounds that the landlord
wrongfully refused to consider and accept a subtenant for the balance of the
term of the lease. On July 8, 1996, the plaintiff commenced a second action
against the Company in the same court for $121,000 for rent allegedly owed
10
<PAGE>
during the period from October 1995 through July 1996. The Company has not yet
filed an Answer in this action and is seeking an extension of time in which to
answer pending the resolution of its motion for reconsideration in the prior
action.
On or about October 10, 1995, Canon Financial Services filed a Complaint in
the Superior Court of New Jersey entitled CANON FINANCIAL SERVICES, INC. V.
COMMUNICATIONS AND ENTERTAINMENT CORP. The plaintiff is claiming that it is due
$47,499.83, plus damages, pursuant to a lease agreement. The Company has filed
an Answer in this action and plaintiff has made a motion for summary judgment
which is being defended by the Company.
On or about December 5, 1995, Robert F. Ferraro, a former director of the
Company, brought an action against the Company in the Supreme Court of the State
of New York, New York County. The action was brought on a promissory note in the
amount of $25,000 and plaintiff obtained a judgment on a summary judgment
motion. The plaintiff has not yet moved to enforce the judgment and the Company
is considering whether or not it has a claim for indemnification against prior
management in connection with the issuance of the note.
On or about January 23, 1996, an action was filed in the Los Angeles
Superior Court entitled GREENBERG, GLUSKER, FIELDS, CLAMAN & MACHTINGER V.
ODYSSEY DISTRIBUTORS LTD., ODYSSEY ENTERTAINMENT LTD. AND COMMUNICATIONS AND
ENTERTAINMENT CORPORATION, in which the plaintiff seeks damages in the amount of
$33,849.98 for legal services rendered to the Company and its subsidiaries. The
complaint was served on the Company on April 30, 1996; the Company has filed an
Answer in this action and an arbitration hearing has been scheduled for October
1996.
On or about March 12, 1996, an action was filed in Los Angeles Municipal
Court entitled JUDY HART V. ODYSSEY DISTRIBUTORS, LTD. The plaintiff is claiming
that she is due $17,920.49 pursuant to a promissory note previously issued to
her by the Company. The Company has filed a cross-claim against the plaintiff
seeking offsets against the amount due and other damages.
On or about March 25, 1996, a class action complaint was filed in Los
Angeles Superior Court entitled DENNIS BLEWITT V. N. NORMAN MULLER, JERRY
MINSKY, DORIAN INDUSTRIES, INC. AND COMMUNICATIONS AND ENTERTAINMENT
CORPORATION. The complaint seeks damages in connection with the Company's
treatment in its financial statements of the disposition of its Double Helix
subsidiary in June 1991. The complaint seeks unspecified damages on behalf of
all persons who purchased shares of the Company's common stock from and after
June 1992. The complaint was served on the Company on or about July 8, 1996. The
Company has made a motion to dismiss the action both on procedural and
substantive grounds and a hearing on the motion has been scheduled for October
1996. In connection with this matter, Mr. Muller has demanded that the Company
indemnify him against any expenses, judgments, and amount paid in settlement of
the litigation. The Company contends that, by virtue of Mr. Muller's wrongful
actions and failure to comply with various obligations to the Company, it is not
required to provide such indemnification.
The Company was advised on October 10, 1996 that Film Bridge International,
Inc. filed a Complaint against the Company in a Los Angeles court on September
18, 1996 seeking declaratory relief with respect to the Joint Venture. The
Company is in the process of seeking restraining orders establishing its rights
in the Joint Venture. The Company has not yet been served in this action.
Other than the foregoing, which may or may not be deemed material, there are
no material legal proceedings pending to which the Company is a party or
pursuant to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
COMPARATIVE MARKET PRICE DATA
The following table sets forth the range of high and low bid information for
the Common Stock of the Company as reported by the Nasdaq Stock Market, Inc.
("Nasdaq") on a quarterly basis for each of the two preceding fiscal years. On
May 1, 1996, Nasdaq notified the Company that its shares of Common Stock were
being deleted from Nasdaq's SmallCap market, effective May 2, 1996, because the
Company did not maintain a combined capital and surplus of $1,000,000, as
required by Section 1(c)(3) of Schedule D of the NASD By-Laws. Since May 2,
1996, the Company's shares have traded in the over-the-counter market on the OTC
Bulletin Board. The Company's Common Stock trades under the symbol CECO.
No dividends have been declared or paid with respect to the Common Stock.
On March 6, 1996, the Company declared a reverse one-for-six stock split
(the "Reverse Split") of its Common Stock, effective on March 18, 1996. The
share prices reflected below for all periods prior to the Reverse Split have
been adjusted upward (by a multiple of six) to give effect to the Reverse Split
for such prior periods on a pro forma basis.
The bid quotations represent inter-dealer prices and do not include retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
COMMON STOCK
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter................................................................ $ 6.96 $ 3.18
Second Quarter............................................................... 5.64 1.32
Third Quarter................................................................ 6.96 1.86
Fourth Quarter............................................................... 5.82 2.28
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
First Quarter................................................................ $ 4.00 $ 2.12
Second Quarter............................................................... 2.75 1.37
Third Quarter................................................................ 2.37 1.50
Fourth Quarter............................................................... 1.81 .40
</TABLE>
As of October 9, 1996, there were 4,597 record holders of the Company's
Common Stock.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA).
The following table sets forth the selected financial data for the Company
and should be read in conjunction with the Consolidated Financial Statements and
Notes thereto, and with Management's Discussion and Analysis of Financial
Condition and Results of Operations which appear elsewhere in this report.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA
Revenues................................................... $ 1,011 $ 1,521 $ 14,797 $ 31,430 $ 29,947
Income (loss) from continuing operations................... (4,960) (6,852) (7,607) (1,450) 1,814
Income (loss) from discontinued operations................. (458) (766) 187
Income (loss) before extraordinary gain.................... (4,960) (7,310) (8,373) (1,263) 1,814
Extraordinary gain(a)...................................... 725
Net income (loss).......................................... $ (4,960) $ (7,310) $ (8,373) $ (1,263) $ 2,539
PER SHARE DATA:*
Income (loss) from continuing operations................... $ (2.17) $ (2.94) $ (3.18) $ (0.57) $ 0.90
Income (loss) from discontinued operations................. (0.20) (0.32) .07
Extraordinary gain (a)..................................... 0.36
Net income (loss).......................................... $ (2.17) $ (3.14) $ (3.50) $ (0.50) $ 1.26
Cash Dividends............................................. -- -- -- -- --
Weighted average shares*................................... 2,284 2,332 2,392 2,551 2,065
BALANCE SHEET DATA
Film costs................................................. $ 1,001 $ 10,656 $ 13,127 $ 10,614 $ 10,736
Total assets............................................... 2,488 15,078 27,949 35,409 50,411
Indebtedness............................................... 562 249 179 366 179
Shareholders' Equity....................................... (2,749) 1,979 9,796 18,786 21,856
</TABLE>
- ------------------------
(a) Consists of the utilization of a net operating loss carryforward
* Per share data and weighted average shares for all periods have been
restated to reflect the effect of a one-for-six reverse stock split in March
1996.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996 AND 1995
Operations for the fiscal year ended June 30, 1996 ("fiscal 1996") resulted
in a loss from continuing operations of $4,959,716, compared to a loss from
continuing operations of $6,851,458 for the fiscal year ended June 30, 1995
("fiscal 1995"). The loss for fiscal 1996 is primarily the result of a
$3,262,478 loss on the sale of interests in joint ventures relating to four
theatrical films, and from the continued decline in film distribution revenue.
The loss for fiscal 1995 is due to a substantial decline in revenues, as
compared to the previous fiscal year, and certain write-offs, including film
costs and receivables resulting from the settlement of litigation with Home Box
Office Inc. ("HBO"), costs associated with the sale or abandonment of film
development projects and unrecoverable distribution costs.
Revenues declined 34% to $1,010,826 for fiscal 1996 from $1,521,434 for
fiscal 1995. Revenues for both periods reflect the continued licensing of rights
in the Company's library of feature films. There were no new films which became
available for delivery to the Company in either period, partly due to prior
management's failure to acquire rights to new film projects.
Costs related to revenues for fiscal 1996 exceeded film distribution
revenues by $35,473, primarily due to the write-off of unrecoverable
distribution costs. For fiscal 1995 costs related to revenues exceeded revenues
by $3,223,896, primarily due to write-offs of approximately $2,518,000
associated with the settlement of litigation with Home Box Office, Inc., and
write-offs of film development projects, film assets acquired in settlement of
loans receivable and unrecoverable distribution costs.
As of January 2, 1996, the Company entered into an agreement with its joint
venture partner to sell its related joint ventures through which it held
approximately 50% ownership interests in four theatrical motion pictures. As a
result of the sale, the assets and obligations of the joint ventures, heretofore
included in the consolidated financial statements of the Company, were
eliminated, including approximately $3,485,000 of funds held in joint venture
accounts, net film costs of approximately $6,051,000, payable due to producers
and participants of approximately $7,244,000, deferred income of $520,000 and
other net obligations of approximately $272,000.
Selling, general and administrative expenses decreased $2,140,156 (58%) to
$1,565,307 for fiscal 1996 from $3,705,463 for fiscal 1995. The reductions in
expenses is a direct result of new management's efforts to eliminate unnecessary
overhead. Expenses for fiscal 1996 reflect significant decreases in personnel
and related expenses, rent (due to the closure of the New York office and the
relocation of the Los Angeles office) and professional fees.
The decrease in interest income for fiscal 1996 is due to a reduction in the
average available cash balances, including funds held in joint venture accounts.
Interest expense increased to $97,701 for fiscal 1996 from $19,498 for
fiscal 1995. The increased interest resulted primarily from the private
placement sale of an aggregate of $312,500 principal amount of 12% Senior
Unsecured Promissory Notes in August and October 1995.
The Company did not recognize any tax benefits related to its losses from
operations for the 1996 and 1995 fiscal years due to its inability to carry-back
such losses to prior years.
As of June 30, 1996, the Company had federal net operating loss
carryforwards, for tax purposes, of approximately $27,000,000, expiring through
2011, available to be used to reduce future tax liability. Due to limitations
imposed by the Internal Revenue Service, the utilization of approximately
$4,900,000 of these net operating losses will be limited to approximately
$350,000 per year.
14
<PAGE>
The Company's principal activity has been the acquisition of rights in
either completed motion pictures or motion pictures in development or
pre-production, and the licensing of these rights to subdistributors in foreign
countries. As of June 30, 1996, the Company had agreements in principle with
subdistributors relating to distribution commitments or guarantees of
approximately $6 million that had not been recognized in the statement of
operations, an increase of $4.9 million from June 30, 1995. The Company will
recognize these guarantees in revenues and the costs related to such revenue
when motion pictures are completed and available for delivery. It is possible
that changes in schedules and cancellations of pictures may defer and/or reduce
the amounts of revenues that will be recognized in later periods.
YEARS ENDED JUNE 30, 1995 AND 1994
Revenues declined 90% to $1,521,434 for fiscal 1995 from $14,797,040 for the
fiscal year ended June 30, 1994 ("fiscal 1994"). The decline in revenues is due
to the unavailability of financing to acquire rights to new film projects, and
the cancellation of the output agreement with HBO. There were no films which
became available for delivery in fiscal 1995. Revenues for fiscal 1994 were
largely attributable to the initial availability of four motion pictures
produced by HBO.
Film costs exceeded film distribution revenues for fiscal 1995 due primarily
to the write-off of approximately $2,518,000 of film costs and receivables
resulting from the settlement of a lawsuit with HBO, the write-off of
approximately $401,000 associated with the sale or abandonment of film
development projects, and the write-off of approximately $394,000 of film assets
acquired in settlement of loans receivable for ATC II, Inc., and the write-off
of unrecoverable distribution costs on films of approximately $357,000. Film
costs as a percentage of revenues for fiscal 1994 were 91%. Film costs for
fiscal 1994 also reflect provision for doubtful accounts, the write-downs of two
pictures to net realizable value and the write-off of costs related to certain
abandoned film projects.
Selling, general and administrative expenses decreased 36% to $3,705,463,
compared to $5,757,010 for fiscal 1994. The decrease in expenses is largely due
to cost cutting measures implemented by management because of the decline in
revenues, partially offset by increased legal and professional fees and costs
associated with the proxy contest. Fiscal 1994 expenses also included the
write-off of $311,000 of costs incurred in connection with an abandoned
financing transaction and the write-off of $203,000 of costs associated with an
abandoned acquisition.
The loss for fiscal 1994 includes a provision for loss on investment of
$3,363,829 attributable to its investment in ATC II Corp.
The Company did not recognize any tax benefits related to its loss from
operations for fiscal 1995 due to its inability to carryback such losses to
prior years. The Company recorded benefits for income taxes of $179,000 for
fiscal 1994 attributable to pretax losses from continuing operations. The
benefit is lower than expected based on the pretax losses due to limitations on
the Company's ability to carryback such losses to prior years.
The loss from discontinued operations of $458,193 for fiscal 1995 includes
the write off of $393,588 of film rights acquired in settlement of loans made by
ComEnt Funding Corp. ("CFC"), the Company's finance subsidiary, and $64,605 of
loss from operations of Global Intellicom, the shares of which were acquired in
December 1994 and sold in April 1995. The loss from discontinued operations of
$765,566 for fiscal 1994 was associated with the discontinued operations of CFC
and includes the write-off of deferred costs, including the balance of deferred
start up costs related to the formation of CFC.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company held approximately $463,000 of cash.
In many instances, the Company acquires the rights to motion picture
productions prior to their completion. As a result, there may be a substantial
delay between the time the Company enters into
15
<PAGE>
distribution agreements with producers and sub-distribution agreements with
foreign sub-distributors and the time it recognizes revenues and generates cash
from each production.
As of June 30, 1996, the Company had an outstanding commitment of
approximately $2.7 million for the acquisition of distribution rights relating
to the motion picture "Wuthering Heights", which obligation is included in the
consolidated statement of financial condition. In September, 1996 the Company
reached a verbal understanding with Paramount, pursuant to which the Company
believes that Paramount will agree to cancel outstanding indebtedness of $2.7
million in full, in exchange for which the Company agreed to (i) relinquish all
further distribution rights "Wuthering Heights"; (ii) assign to Paramount all of
its rights in any outstanding distribution agreements for the film, and any
receivables to be generated therefrom; (iii) guarantee that Paramount will
collect a total of $500,000 in sales revenues from existing distribution
agreements no later than January 15, 1997. The Company anticipates that existing
license agreements will yield at least $450,000 in revenue prior to January 15,
1997 (of which the Company would have been entitled to retain approximately 20%
thereof in commissions), thereby minimizing the Company's exposure under the
guarantee to Paramount.
In the past, the Company has been dependent on obtaining outside financing
to acquire distribution rights to films. New management has reduced the
Company's reliance on outside financing by placing more emphasis on acquiring
distribution rights through arrangements which require lower or no advance
payments. At present, the Company is not able to secure distribution rights by
issuing letters of credit or advancing significant production funds, as it has
in the past.
New management have taken significant steps to recapitalize the Company.
In August and October 1995, the Company received net proceeds of $219,250
and $50,750, respectively, from the private placement of an aggregate of
$312,500 principal amount of 12% Senior Unsecured Promissory Notes.
In January 1996, the Company entered into an agreement to sell its interest
in joint ventures relating to four theatrical motion pictures, pursuant to which
it received net proceeds of $1.5 million.
In August 1996, the Company entered into an agreement, pursuant to which the
Company agreed to grant subdistribution rights in, and to sell other
distribution rights to, certain films in the Company's film library. In exchange
for these rights, the Company will receive a total cash consideration of
$1,075,000, payable $500,000 on closing, $275,000 six months after closing, and
$300,000 eighteen months after the closing. In addition, the Company will retain
a continuing right to receive revenues from certain of the films, valued by
management at a minimum of approximately $150,000. Additionally, the purchaser
will provide the Company with a $500,000 revolving line of credit to be secured
by accounts receivable and other contractual rights acquired by the Company. As
part of the transaction, the Company will grant 100,000 stock options,
exercisable over a three year period at the bid price of the Company's common
stock in effect on August 5, 1996 ($.625). The transaction closed on October 7,
1996.
In September 1996, the Company entered into an agreement with an
unaffiliated third party for the purchase of 1 million shares of the Company's
common stock in consideration for $750,000 cash and warrants to purchase up to 2
million shares of common stock.
The Company had no material commitments for capital expenditures as of June
30, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of this report
commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This item is incorporated herein by reference to the Proxy Statement of the
Company relating to the 1996 Annual Meeting of Stockholders of the Company under
the caption headings "Election of Directors," "Executive Officers of the
Company," and "Compliance with Section 16(a) of the Securities Exchange Act of
1934."
ITEM 11. EXECUTIVE COMPENSATION.
This item is incorporated herein by reference to the Proxy Statement of the
Company relating to the 1996 Annual Meeting of Stockholders of the Company under
the caption headings "Executive Compensation," "Options/Stock Appreciation
Rights," "Aggregated Option/SAR Exercises and Fiscal Year-End Options/SAR Value
Table," "Director Compensation," "Compensation Agreements, Termination of
Employment and Change-in-Control Arrangements," and "Compensation Committee
Report and Compensation Committee Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This item is incorporated herein by reference to the Proxy Statement of the
Company relating to the 1996 Annual Meeting of Stockholders of the Company under
the caption heading "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This item is incorporated herein by reference to the Proxy Statement of the
Company relating to the 1996 Annual Meeting of Stockholders of the Company under
the caption heading "Certain Relationships and Related Transactions."
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<C> <S>
(a)(1) The response to this portion of Item 14 is submitted as a separate section of this report commencing on page F-1.
(a)(2) See (a)(1) above.
(a)(3) Exhibits
3.1 Articles of Incorporation, as amended through June 30, 1995(1)
3.2 Amendments to Articles of Incorporation filed in March and June, 1996(8)
3.3 By-laws(1)
4.1 Indenture between Odyssey and Continental Stock Transfer and Trust Company ("Continental") dated as of July 15, 1987(1)
4.2 Form of Supplemental Indenture between Continental and the Company(1)
4.3 Form of Common Stock Certificate(1)
4.4 Form of options granted of officers, directors and 5% stockholders(2)
4.5 Form of Warrant issued to purchasers parties to the 1995 Private Placement completed September 30, 1995(5)
4.6 Form of 12% Unsecured Promissory Note issued to purchasers parties to the 1995 Private Placement completed September 30,
1995(5)
4.7 Form of Stock Option Agreement by and between the Company and officers and directors of the Company, for stock options issued
in April 1995(5)
4.8 Form of Common Stock Purchase Warrant by and between the Company and officers, directors, employees and consultants of the
Company for warrants issued during the fiscal year ended June 30, 1996(8)
4.9 Common Stock Purchase Warrant, dated March 6, 1996, between the Company and G & H Media, Ltd. (assignee of Stephen R.
Greenwald)(7)
4.10 Common Stock Purchase Warrant, dated March 6, 1996, between the Company and Lawrence I. Schneider(7)
4.11 Common Stock Purchase Warrant, dated March 6, 1996, between the Company and Ira N. Smith(7)
10.1 1989 Long Term Incentive Plan(1)
10.2 Agreement of Settlement and Release, dated October 2, 1995, by and between Home Box Office, Inc. and Odyssey(5)
10.3 Private Placement Memorandum used in connection with 1995 Private Placement (the "1995 Private Placement Memorandum")(5)
10.4 Supplement to the 1995 Private Placement Memorandum(5)
10.5 Supplement No. 2 to the 1995 Private Placement Memorandum(5)
10.6 Supplement No. 3 to the 1995 Private Placement Memorandum(5)
</TABLE>
18
<PAGE>
<TABLE>
<C> <S>
10.7 Settlement Agreement, dated as of March 31, 1995, by and between the Company, Odyssey, Global Intellicom, Inc., N. Norman
Muller, Thomas W. Smith, David Mortman, Robert Ferraro, the CECO Shareholders Committee, Lawrence Schneider, Robert E.
Miller, Henry Schneider, Robert Hesse, Shane O'Neil, Patrick Haynes, Russell T. Stern, Jr., Thurston Group, Inc., The Insight
Fund, L.P. and Lois Muller(3)
10.8 Memorandum of Agreement, dated as of August 24, 1995 between the Company and Multipix Communications, Inc.(4)
10.9 Termination Agreement, dated as of January 2, 1996, between Regency International Pictures, B.V. and Odyssey Distributors
B.V.(6)
10.10 Employment Agreement dated October 1, 1995, between the Company and Stephen R. Greenwald(6)
10.11 Employment Agreement dated October 1, 1995, between the Company and Lawrence I. Schneider(6)
10.12 Employment Agreement dated October 1, 1995, between the Company and Ira N. Smith(6)
10.13 Agreement, dated March 6, 1996, between Communications and Entertainment Corp. and its wholly-owned subsidiary, Odyssey
Distributors, Ltd.(7)
10.14 Severance and Consulting Agreement, dated March 26, 1996, between the Company and Shane O'Neil, and related modifying
agreement dated March 28, 1996(7)
10.15 Management Agreement between the Company and Stephen R. Greenwald, dated March 6, 1996, superseding the Employment Agreement
dated October 1, 1995(8)
10.16 Management Agreement between the Company and Lawrence I. Schneider, dated March 6, 1996, superseding the Employment Agreement
dated October 1, 1995(8)
10.17 Management Agreement between the Company and Ira N. Smith, dated March 6, 1996, superseding the Employment Agreement dated
October 1, 1995(8)
10.18 Addendum to Management Agreements of Messrs. Schneider, Greenwald and Smith(8)
10.19 Joint Venture Letter between the Company and Film Bridge International, Inc., dated March 11, 1996(8)
10.20 Lease for office premises at 1875 Century Park East, Suite 2130, Los Angeles, California, dated May 9, 1996(8)
10.21 Agreement dated August 29, 1996, between the Company and Kinnevik Media Properties, Ltd.(8)
10.22 Agreement dated September 6, 1996 between the Company and Mr. David Somerstein(8)
21.1 Subsidiaries of the Registrant(3)
</TABLE>
- ------------------------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-4, File No. 33-34627.
(2) Incorporated herein by reference to the Company's Registration Statement on
Form S-1, File No. 33-43371.
(3) Incorporated herein by reference to the Company's Current Report on Form 8-K
filed April 12, 1995, File No. 0-18954.
19
<PAGE>
(4) Incorporated herein by reference to the Company's Current Report on Form 8-K
filed August 30, 1995, File No. 0-18954.
(5) Incorporated herein by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995, File No. 0-18954.
(6) Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1995, File No. 0-18954.
(7) Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, File No. 0-18954.
(8) Filed herewith.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this Report.
(c) See (a)(3) above.
(d) None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNICATIONS AND ENTERTAINMENT CORP.
Dated: October 10, 1996 By: /s/ STEPHEN R. GREENWALD
-----------------------------------------
Stephen R. Greenwald,
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ LAWRENCE I. SCHNEIDER Co-Chairman in the Office 10/10/96
- ------------------------------ of Chairman; Director
Lawrence I. Schneider
/s/ STEPHEN R. GREENWALD Chief Executive Officer; 10/10/96
- ------------------------------ Co-Chairman in the Office
Stephen R. Greenwald of Chairman; Director
/s/ IRA N. SMITH President; Co-Chairman in 10/10/96
- ------------------------------ the Office of Chairman;
Ira N. Smith Director
/s/ ROBERT E. MILLER, JR. Director 10/10/96
- ------------------------------
Robert E. Miller, Jr.
/s/ MARVIN GROSSMAN Exec. Vice-President & 10/10/96
- ------------------------------ Chief Financial Officer
Marvin Grossman (Principal Financial and
Accounting Officer)
21
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Accountants................................................................... F-2
Financial Statements:
Consolidated Balance Sheets as of June 30, 1996 and 1995.......................................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1996, 1995 and 1994............ F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years Ended June 30,
1996, 1995 and 1994............................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995 and 1994............ F-6
Notes to Consolidated Financial Statements........................................................ F-7-F-22
</TABLE>
All schedules have been omitted because the requested information is not
required, or, because the information required is included in the financial
statements or notes thereto.
F-1
<PAGE>
1880 Century Park
East Telephone 310 553 6030
Century City
West Los Angeles, CA 90067
[LOGO]
[LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
Communications and Entertainment Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of
Communications and Entertainment Corp. and its subsidiaries at June 30, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 10 to the financial statements, the Company has defaulted
on payments due in August and October 1996 relating to notes payable. The
Company has proposed to the noteholders to defer the maturity of the notes and
exchange existing warrants for shares, or to cancel the notes in their entirety
in exchange for shares. Both proposals are subject to registration statements
becoming effective. As of October 6, 1996 several noteholders had accepted the
first proposal and one noteholder had accepted the second proposal; however as
some noteholders have not accepted either of the proposals, the ultimate outcome
of this matter cannot be determined at present.
As discussed in Note 11, the Company is a defendant in various lawsuits. The
Company has filed several counteractions and preliminary hearings and discovery
proceedings on several actions are in progress. The ultimate outcome of the
litigation cannot be determined at present. Not all liabilities that may result
upon adjudication have been accrued in the accompanying financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
has a net capital deficiency and has insufficient working capital to meet its
current obligations and liquidity needs. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
[LOGO]
Los Angeles, California
October 14, 1996
F-2
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
<S> <C> <C>
1996 1995
-------------- -------------
ASSETS:
Cash............................................................................... $ 462,971 $ 43,491
Funds held in joint venture accounts............................................... 3,836,732
Accounts receivable, net of allowances of $53,788 and $288,687..................... 996,574 524,510
Film costs, net.................................................................... 1,000,968 10,655,863
Other assets....................................................................... 27,945 17,702
-------------- -------------
$ 2,488,458 $ 15,078,298
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Liabilities:
Accounts payable and accrued expenses............................................ $ 912,629 $ 1,210,455
Due to producers and participants................................................ 3,760,142 11,119,560
Deferred revenues................................................................ 3,000 520,000
Notes and loans payable.......................................................... 561,500 249,000
-------------- -------------
5,237,271 13,099,015
-------------- -------------
Commitments and contingencies
Shareholders' Equity (Deficit):
Preferred stock, par value $.10; Authorized--10,000,000 shares Issued-- none.....
Class A stock, par value $.01; Authorized--10,000,000 shares Issued-- none.......
Common stock, par value $.01; Authorized--6,666,666 and 40,000,000 shares Issued
and outstanding--2,591,242 and 13,693,218 shares............................... 25,913 136,932
Capital in excess of par value................................................... 25,911,366 25,568,727
Accumulated deficit.............................................................. (28,686,092) (23,726,376)
-------------- -------------
Total shareholders' equity (deficit)............................................. (2,748,813) 1,979,283
-------------- -------------
$ 2,488,458 $ 15,078,298
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:............................................................ $ 1,010,826 $ 1,521,434 $ 14,797,040
------------- ------------- -------------
EXPENSES:
Costs related to revenues.......................................... 1,046,299 4,745,330 13,514,864
Loss on sale of joint venture interests............................ 3,262,478
Selling, general and administrative expenses....................... 1,565,307 3,705,463 5,757,010
------------- ------------- -------------
5,874,084 8,450,793 19,271,874
------------- ------------- -------------
Operating loss..................................................... (4,863,258) (6,929,359) (4,474,834)
OTHER INCOME (EXPENSES):
Interest income.................................................... 1,243 97,399 79,959
Interest expense................................................... (97,701) (19,498) (28,216)
Provision for loss on investment................................... (3,363,829)
------------- ------------- -------------
Loss from continuing operations before provision for income
taxes............................................................ (4,959,716) (6,851,458) (7,786,920)
Benefit for income taxes........................................... 179,000
------------- ------------- -------------
Loss from continuing operations.................................... (4,959,716) (6,851,458) (7,607,920)
Loss from discontinued operations.................................. (458,193) (765,566)
------------- ------------- -------------
Net loss........................................................... $ (4,959,716) $ (7,309,651) $ (8,373,486)
------------- ------------- -------------
------------- ------------- -------------
Loss per share:
Loss from continuing operations.................................... $ (2.17) $ (2.94) $ (3.18)
Loss from discontinued operations.................................. (0.20) (0.32)
------------- ------------- -------------
Net loss......................................................... $ (2.17) $ (3.14) $ (3.50)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding*........................ 2,283,611 2,331,579 2,391,550
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
* Shares outstanding for all periods have been adjusted to give effect to a 1
for 6 reverse stock split on March 18, 1996.
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A STOCK COMMON STOCK
------------------------ -------------------------
AMOUNT AMOUNT CAPITAL IN TREASURY
($.01 PAR ($.01 PAR EXCESS OF ACCUMULATED STOCK
SHARES VALUE) SHARES VALUE) PAR VALUE DEFICIT AT COST
----------- ----------- ------------ ----------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances--June 30, 1993.... 2,554,132 $ 25,541 13,436,974 $ 134,370 $ 27,934,663 $ (8,043,239) $ (1,264,986)
Purchase of 402,200
shares of treasury
stock.................. (616,815)
Treasury shares retired
and cancelled.......... (977,000) (9,770) (1,872,031) 1,881,801
Conversion of Class A
stock.................. (213,429) (2,134) 136,055 1,360 774
Net loss................. (8,373,486)
----------- ----------- ------------ ----------- ------------- -------------- ------------
Balances--June 30, 1994.... 2,340,703 23,407 12,596,029 125,960 26,063,406 (16,416,725) --
Conversion of Class A
stock.................. (254,148) (2,541) 162,012 1,620 921
Cancellation of
unexchanged shares..... (520,740) (5,207) (62,973) (630) 5,837
Automatic conversion of
Class A stock to
Common................. (1,565,815) (15,659) 998,150 9,982 5,677
Dividend of shares of
subsidiary............. (507,114)
Net loss................. (7,309,651)
----------- ----------- ------------ ----------- ------------- -------------- ------------
Balances--June 30, 1995.... -- -- 13,693,218 136,932 25,568,727 (23,726,376) --
One-for-six reverse stock
split.................. (11,409,029) (114,090) 114,090
Issuance of shares to
officers in payment of
notes.................. 307,053 3,071 228,949
Cash payments in lieu of
fractional shares on
conversion of Class A
stock.................. (400)
Net loss................. (4,959,716)
----------- ----------- ------------ ----------- ------------- -------------- ------------
Balances--June 30, 1996.... -- -- 2,591,242 $ 25,913 $ 25,911,366 $ (28,686,092) --
----------- ----------- ------------ ----------- ------------- -------------- ------------
----------- ----------- ------------ ----------- ------------- -------------- ------------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balances--June 30, 1993.... $ 18,786,349
Purchase of 402,200
shares of treasury
stock.................. (616,815)
Treasury shares retired
and cancelled..........
Conversion of Class A
stock..................
Net loss................. (8,373,486)
-------------
Balances--June 30, 1994.... 9,796,048
Conversion of Class A
stock..................
Cancellation of
unexchanged shares.....
Automatic conversion of
Class A stock to
Common.................
Dividend of shares of
subsidiary............. (507,114)
Net loss................. (7,309,651)
-------------
Balances--June 30, 1995.... 1,979,283
One-for-six reverse stock
split..................
Issuance of shares to
officers in payment of
notes.................. 232,020
Cash payments in lieu of
fractional shares on
conversion of Class A
stock.................. (400)
Net loss................. (4,959,716)
-------------
Balances--June 30, 1996.... $ (2,748,813)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED JUNE 30,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations....................................... $(4,959,716) $(6,851,458) $(7,607,920)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Loss on sale of joint venture interest................................ 3,262,478
Amortization of film costs............................................ 634,179 2,149,723 1,465,593
Additions to film costs............................................... (185,401) (72,259) (3,978,027)
Other depreciation and amortization................................... 44,307 187,219 94,539
Provision for loss on investment...................................... 3,363,829
Equity in losses of subsidiary held for sale.......................... 64,605
Gain on sale of shares of subsidiary.................................. (5,062)
Issuance of shares of subsidiary stock in payment of legal fees....... 155,905
Issuance of shares of stock to officers in payment of deferred
compensation........................................................ 232,020
Cash payments in lieu of fractional shares............................ (400)
Decrease (increase) in assets net of sale of joint venture interest:
Funds held in joint venture accounts................................ 352,723 (1,799,603) (1,586,376)
Accounts receivable, net............................................ (406,331) 9,998,736 4,134,846
Other............................................................... (5,500) 258,007 98,023
(Decrease) increase in liabilities net of sale of joint venture
interest:
Accounts payable and accrued expenses............................... (199,628) (576,731) 221,572
Issuance of note in payment of legal fees........................... 70,000
Due to producers and participants................................... (115,701) (4,616,323) 2,671,157
Deferred revenues................................................... 3,000 38,875 (1,144,621)
---------- ---------- ----------
Net cash used in continuing operations.................................... (1,343,970) (998,366) (2,267,385)
---------- ---------- ----------
Discontinued operations:
Net loss................................................................ (458,193) (765,566)
Amortization............................................................ 393,588 368,971
---------- ---------- ----------
Total from discontinued operations........................................ -- (64,605) (396,595)
---------- ---------- ----------
Net cash used in operations............................................... (1,343,970) (1,062,971) (2,663,980)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of loans relating to lending activities....................... 393,588 1,421,172
Acquisition of fixed assets............................................... (6,550) (10,633) (26,092)
Investment in Global Intellicom, Inc...................................... (1,049,002)
Proceeds from the sale of Global Intellicom, Inc. shares.................. 326,440
Proceeds on sale of joint venture interest................................ 1,500,000
Costs relating to investment.............................................. (119,961)
---------- ---------- ----------
Net cash provided by (used in) investing activities....................... 1,493,450 (339,607) 1,275,119
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of Senior Notes................................ 270,000
Net repayment of debt relating to finance subsidiary lending activities... (187,217)
Purchase of treasury stock................................................ (616,815)
---------- ---------- ----------
Net cash provided by (used in) financing activities....................... 270,000 -- (804,032)
Net increase (decrease) in cash............................................. 419,480 (1,402,578) (2,192,893)
Cash at beginning of period................................................. 43,491 1,446,069 3,638,962
---------- ---------- ----------
Cash at end of period....................................................... $ 462,971 $ 43,491 $1,446,069
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest................................................................ $ 10,778 $ 19,498 $ 20,260
---------- ---------- ----------
---------- ---------- ----------
Income taxes............................................................ $ 0 $ 3,200 $ 11,196
---------- ---------- ----------
---------- ---------- ----------
NON CASH INVESTING AND FINANCING ACTIVITIES:
Dividend of shares of Global Intellicom, Inc.............................. $ (507,114)
----------
----------
Receipt of film assets in settlement of loans receivable from ATC II,
Inc..................................................................... 393,588
----------
----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and majority owned or controlled joint ventures.
All significant intercompany accounts have been eliminated.
In March 1989, the Company entered into a joint venture pursuant to which
the Company and a non-affiliated entity co-financed and co-produced a theatrical
motion picture entitled "Q&A", in which the Company had a 50.01% ownership
interest. In March 1990, the Company entered into two 50% joint ventures (in
which the Company exercised contractual control) with the same entity to acquire
the foreign distribution rights of and distribute two motion pictures, "Switch"
and "Guilty By Suspicion". In December 1991, the Company entered into a 50%
joint venture (in which the Company exercised control) with the same entity to
acquire the foreign distribution rights of and to distribute the motion picture
"This Boy's Life". The assets, liabilities, revenues and expenses of the joint
ventures have been included in the consolidated financial statements of the
Company. Minority interests in operations and in net assets in these joint
ventures have been included in film costs and due to producers and participants
in the consolidated statements of operations and of financial condition,
respectively. In January 1996, the Company sold its interests in the joint
ventures (See Note 4).
Certain reclassifications have been made to prior year amounts to conform to
the current year presentation.
b) REVENUE RECOGNITION:
Revenues from foreign theatrical, home video, television and pay television
licensing contracts are recognized when the film is available for exhibition by
the licensee and when certain other conditions are met. Revenues from domestic
theatrical distribution of films are recognized as the films are exhibited.
Virtually all of the Company's revenues for the fiscal year ended June 30,
1996 and approximately 62% of the revenues for the fiscal year ended June 30,
1995, were from foreign distribution rights. For fiscal 1996, approximately
50.2% of revenues were derived from one picture. One picture accounted for
approximately 28.3 % of revenues for the year ended June 30, 1995. For the year
ended June 30, 1994, four movies, all of which were produced by HBO, accounted
for 23.5%, 21.3%, 19.3% and 16.8% of revenues.
c) FUNDS HELD IN JOINT VENTURE ACCOUNTS:
Funds held in joint venture accounts represent cash in accounts which
require signatures of both joint venture partners for withdrawals. Sufficient
balances are maintained in the accounts to cover estimated obligations for
residuals and profit participations relating to motion pictures produced under
the joint ventures.
d) FILM COSTS:
Film costs include (1) cost of production, (2) investment in distribution
rights, (3) marketing and distribution expenses, and (4) development costs. Film
costs are amortized, and estimated residual and participation costs are accrued,
on an individual film basis in the ratio that the current year's gross film
revenues bear to management's estimate of total ultimate gross film revenues
from all sources.
Film costs are stated at the lower of cost or estimated net realizable value
on an individual film basis. Ultimate revenue and cost forecasts for films are
periodically reviewed by management and revised when
F-7
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
warranted by changing conditions. When estimates of total revenues and costs
indicate that a film will result in an ultimate loss, additional amortization is
provided to fully recognize such loss.
e) PROPERTY AND EQUIPMENT:
Depreciation of property and equipment is provided by the straight-line
method over their estimated useful lives of up to eight years.
Maintenance and repairs are expensed as incurred. The cost of renewals and
betterments are capitalized. When assets are sold or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and any
resultant gain or loss is included in current year operations.
f) EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share are computed using the weighted average number of
common shares outstanding during the respective periods, adjusted for the
dilutive effect, if any, of outstanding stock options and warrants. On March 6,
1996, the Board of Directors announced a one-for-six reverse stock split (the
"Reverse Stock Split") which became effective on March 18, 1996. For comparative
purposes, the number of weighted average common shares outstanding and loss per
share reported in the accompanying consolidated statements of operations, and
share data included in the notes to the consolidated financial statements, have
been adjusted to reflect the effect of the Reverse Stock Split for all periods
presented.
g) USE OF ESTIMATES:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in financial
statements. Actual results could differ from those estimates.
h) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of cash, accounts receivable, accounts payable and
accrued expenses approximates fair value because of their short-term maturity.
i) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In March 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). This
Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles to be disposed of and goodwill related
to those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. FAS 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company will
apply this Statement beginning in fiscal 1997. The adoption of FAS 121 is not
expected to have a material effect on the financial statments of the Company.
In October 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("FAS 123"). This statement establishes methods of accounting for
stock-based compensation plans. FAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company expects to continue to apply Accounting
Principles Board Opinion 25 for measurement of stock compensation and will
provide the disclosure required by FAS 123 beginning in fiscal 1997. The
adoption of FAS 123 is not expected to have a material effect on the financial
statements of the Company.
F-8
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGE IN MANAGEMENT CONTROL:
In January 1995, a group of shareholders of the Company (the "CECO
Shareholders Committee") launched an effort to change the senior management and
Board of Directors of the Company.
Pursuant to a settlement agreement (the "Settlement Agreement") dated as of
March 31, 1995, among the members of the CECO Shareholders Committee, the
Company, the Company's subsidiary, Odyssey Entertainment Ltd. ("Odyssey"),
Global Intellicom, Inc. and each of the directors of the Company at the time of
signing, a change in the entire Board of Directors occurred on April 12, 1995.
3. RESULTS OF OPERATIONS AND MANAGEMENT'S PLANS:
The Company's continued existence is dependent upon its ability to resolve
its liquidity problems. The Company must achieve and sustain a profitable level
of operations with positive cash flows and must continue to obtain financing
adequate to meet its ongoing operation requirements.
Operations for the year ended June 30, 1996 resulted in a loss primarily due
to a loss of approximately $3.3 million on the sale of the Company's interest in
joint ventures relating to four theatrical motion pictures, and due to
insufficient revenues to offset normal expenses.
Since the change in management control in April 1995, new management has
embarked on a program to reverse the unfavorable results by significantly
reducing overhead, taking steps to recapitalize the Company, and acquiring
rights to existing film libraries and new pictures in development or pre-
production.
Overhead has been significantly reduced by closing the New York office and
by making significant reductions in personnel related costs.
In August and October 1995, the Company received net proceeds of $219,250
and $50,750, respectively, from the private placement of an aggregate of
$312,500 principal amount of 12% Senior Unsecured Promissory Notes (See Note
10).
In January 1996, the Company entered into an agreement to sell its interest
in joint ventures relating to four theatrical motion pictures pursuant to which
it received net proceeds of $1,500,000 (See Note 4).
In August 1996, the Company entered into an agreement, pursuant to which the
Company agreed to grant subdistribution rights in, and to sell other
distribution rights to, certain films in the Company's film library. In exchange
for these rights, the Company will receive a total cash consideration of
$1,075,000, payable $500,000 on closing, $275,000 six months after closing, and
$300,000 eighteen months after the closing. In addition, the Company will retain
a continuing right to receive revenues from certain of the films, valued by
management at a minimum of approximately $150,000. Additionally, the purchaser
will provide the Company with a $500,000 revolving line of credit to be secured
by accounts receivable and other contractual rights acquired by the Company. As
part of the transaction, the Company will grant 100,000 stock options,
exercisable over a three year period at the bid price of the Company's common
stock in effect on August 5, 1996 ($.625). The transaction closed on October 7,
1996 (See Note 15).
In September 1996, the Company entered into an agreement with an
unaffiliated third party for the purchase of 1 million shares of the Company's
common stock in consideration for $750,000 cash and warrants to purchase up to 2
million shares of common stock (See Note 15).
During fiscal 1996, the Company acquired rights in twenty one films,
including eleven completed films, nine of which were disposed of in accordance
with the August 1996 agreement discussed above, and
F-9
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESULTS OF OPERATIONS AND MANAGEMENT'S PLANS: (CONTINUED)
ten new films, which will be available for distribution in 1997. Additionally,
the Company has entered into certain "first-look" and "second-look" agreements
with film producers with respect to new film projects. The amount that the
Company has expended with regards to these pictures is minimal. Generally the
films that the company represents are financed by the producers of the film,
through independent bank financing, utilitzing the license agreements generated
by the Company as collateral for production loans. The Company has assumed no
financial obilgation with respect to these pictures as of this date, except for
committments for writing services in the amount of $40,000 of which $20,000 has
already been paid.
4. SALE OF JOINT VENTURE ASSETS:
As of January 2, 1996, the Company entered into an agreement (the
"Agreement") with Regency International Pictures, B.V., its joint venture
partner, to sell its interest in the related joint ventures through which it
held approximately 50% ownership interests in four theatrical motion pictures,
entitled "Q&A," "Switch," "Guilty By Suspicion" and "This Boy's Life." The joint
venture is defined as the distribution agreements related to the aforementioned
four motion pictures. Individual agreements were created to finance, produce and
distribute each picture and to share in revenues generated from the exploitation
of them. Joint venture pictures were accounted for in the same manner as any
other picture that the Company distributed. Pursuant to the Agreement, the
Company received $1,500,000 in exchange for all of its interest in the net
assets and obligations of the joint ventures. In addition, the Company retained
a contingent interest in certain receivables, not to exceed $212,500, and a
contingent interest in future revenues from the pictures.
Results of operations for the fiscal year ended June 30, 1996 reflect
write-downs of approximately $3,262,000 in the carrying value of the Company's
interest in the films as a result of the consummation of the transaction.
5. INVESTMENT IN GLOBAL INTELLICOM, INC.:
On December 8, 1994, the Company acquired 3,300,000 shares of Global
Intellicom, Inc. ("Global") and subsidiaries, a Nevada corporation, for
$1,000,000, representing 66% of Global's 5,000,000 outstanding shares of common
stock. Simultaneously and pursuant to a contract of sale entered into by Tech
Acquisition Corp. ("Tech") (a wholly-owned subsidiary of Global) on October 28,
1994, Global purchased certain net assets of AMCOM Business Centers
Corp.("AMCOM") (a Pennsylvania corporation) subject to certain liabilities and
obligations. On December 8, 1994 Tech changed its name to AMCOM Business Centers
Corp.
AMCOM is a wholesale distributor of computer hardware and related products
and serves customers throughout the United States.
The total purchase price of the net assets of AMCOM was $5,280,000,
$2,224,000 of which was paid to the sellers at closing. The balance of the
purchase price of $3,056,000 is payable by Global in installments equal to 1% of
gross sales effective January 1, 1994 (as defined by agreement) in quarterly
installments through December 1995 and monthly thereafter until the obligation
is satisfied. In addition, Global agreed to reimburse AMCOM stockholders for all
income taxes incurred by them with respect to their distributive share of
AMCOM's taxable income for the period January 1, 1994 through the closing date.
During the quarter ended March 31, 1995, the then Board of Directors of the
Company declared a dividend to its shareholders consisting of 1,700,000 shares
of the common stock of Global, and also
F-10
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT IN GLOBAL INTELLICOM, INC.: (CONTINUED)
delivered 522,641 shares of Global common stock to its former outside counsel in
payment of outstanding legal fees. Further, as of March 31, 1995 the then Board
of Directors entered into the Settlement Agreement with the CECO Shareholder
Committee which, among other things, provided for the sale of the Company's
remaining interests in Global to persons affiliated with the prior Board. The
sale closed on April 12, 1995.
6. DISCONTINUED OPERATIONS:
For the quarter ended December 31, 1994, the Company's investment in Global
was accounted for as a purchase. However, due to the subsequent sale of all of
the Company's interest in Global, the accompanying consolidated financial
statements have been reclassified to reflect the investment in Global as a
discontinued operation.
In March 1994, the Company discontinued the operations of its finance
subsidiary, ComEnt Funding Corp. Accordingly, the consolidated financial
statements have been reclassified to reflect ComEnt Funding as a discontinued
operation for all periods presented. The loss from discontinued operations for
the year ended June 30, 1994 included $368,971 of amortization expense related
to the capitalized costs incurred in connection with the formation of ComEnt
Funding Corp. The remaining assets of ComEnt Funding, comprised primarily of
loans receivable aggregating $393,588 as of June 30, 1994, were written off and
included in discontinued operations in fiscal 1995.
7. FILM COSTS:
Film costs are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
<S> <C> <C>
COMPONENT 1996 1995
- ----------------------------------------------------------------- ------------ -------------
Films released, at cost.......................................... $ 2,750,000 $ 47,320,463
Less accumulated amortization.................................... 1,798,290 36,744,600
------------ -------------
951,710 10,575,863
------------ -------------
Projects in development.......................................... 49,258 80,000
------------ -------------
Total film costs................................................. $ 1,000,968 $ 10,655,863
------------ -------------
------------ -------------
</TABLE>
Based on the Company's estimates of gross revenues as of June 30, 1996,
approximately 60%-70% of unamortized film costs applicable to released and/or
distributable films will be amortized during the three years ending June 30,
1999; approximately 70%-80% will be amortized during the five year period ending
June 30, 2001.
The terms under which the Company licenses films to subdistributors in
foreign markets generally provide for the exploitation of the films in all
media, including theatrical exhibition, video and all forms of television, for a
period of 5 to 7 years; however, the Company may sell rights for certain media
separately. In general, films are first exhibited theatrically for a period of 4
to 6 months, after which they become available for distribution in the home
video markets. The films become available for exhibition on pay or free
television after approximately 18 to 24 months from the initial theatrical
release. After the initial term
F-11
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FILM COSTS: (CONTINUED)
of the license with the subdistributor, the rights revert back to the Company
which may then relicense the rights for distribution in the territory.
8. DISPOSITION OF SUBSIDIARY:
On June 30, 1991, the Company sold all of the issued and outstanding shares
(the "Shares") of its wholly-owned subsidiary, Double Helix to GNG Industries of
New York, Inc. ("GNG"). The Shares were sold to GNG in exchange for a secured,
negotiable promissory note, in the principal amount of $3,600,000. The Note was
recorded on the books of the Company at $3,243,868, which was the value of the
underlying collateral on the books of Double Helix at June 30, 1991.
In April 1993, Double Helix's lending bank sold its outstanding loan
receivable from Double Helix to Carnegie Film Group, Inc. ("Carnegie"). The
Company advanced $350,000 to Carnegie in connection with the transaction. The
loan was senior to the indebtedness of GNG to the Company. In April 1993,
Carnegie foreclosed on the loan and acquired all of the assets of Double Helix.
In September 1993, all of the outstanding shares of Carnegie were acquired
by ATC II, Inc. ("ATC"), a publicly traded company. Simultaneously, the Company
agreed to exchange the Note for 1,000,000 common shares (25,000 after giving
effect to a subsequent 1 for 40 reverse stock split) of ATC and $4,000,000
principal amount of 4% cumulative convertible preferred stock, convertible into
common shares at $1.30 per share. In October 1993, the Company loaned Carnegie
an additional $150,000.
Carnegie defaulted on the $350,000 and the $150,000 loans, and notices of
default and foreclosure were sent in March and April 1994. In May 1994, the
Company filed legal action against ATC, Carnegie and others. In September 1994,
the Company and ATC entered into a settlement agreement whereby ATC agreed to
effect the transfer of Carnegie assets pledged as collateral. The settlement
also included a restructuring of ATC whereby ATC effected a 1 for 40 reverse
stock split and issued the Company 900,000 shares, par value $.01 per share, of
Series B convertible preferred stock paying a 7% cumulative dividend quarterly,
in exchange for the $4,000,000 principal amount of 4% cumulative convertible
preferred stock previously held by the Company. Each share of the Series B
preferred stock is convertible into one share of ATC common stock. The Company
retained the 25,000 shares of ATC common stock in its possession.
Due to a decline in the market value of the common shares and due to the
deterioration of the business of ATC, the Company recorded a provision for loss
on its investment in the amount of $3,363,829 in the year ended June 30, 1994.
F-12
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES:
Following is a reconciliation of the statutory federal tax rate, as it
applies to the loss from continuing operations, to the effective rates for the
years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
AMOUNT % AMOUNT % AMOUNT %
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Federal tax (benefit) at statutory rates.... $ (1,686,000) (34.0) $ (2,329,000) (34.0) $ (2,475,000) (34.0)
Vaulation allowance......................... 1,686,000 34.0 2,329,000 34.0 2,296,000 31.5
------------- --------- ------------- --------- ------------- ---------
Total................................... $ -- (--) $ -- (--) $ (179,000) (2.5)
------------- --------- ------------- --------- ------------- ---------
</TABLE>
The tax provision is reflected at the effective annual tax rate for the year
and consists of:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal benefit........................................ $ (--) $ (--) $ (179,000)
State provision........................................ (--) -- --
----------- ----------- -----------
$ (--) $ (--) $ (179,000)
----------- ----------- -----------
</TABLE>
At June 30, 1996, the Company had a federal net operating loss carry
forward, for tax purposes, of approximately $27,000,000, expiring through 2011.
The utilization of approximately $4,900,000 of these losses in future periods is
estimated by the Company to be limited to approximately $350,000 per year (the
"annual earnout limitation").
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which establishes accounting and reporting standards for the effects of
income taxes that result from an enterprise's activities during the current and
preceding years became effective for the Company for its fiscal year ended June
30, 1994. The cumulative effect of adopting SFAS 109 was immaterial and was
recorded in the first quarter of fiscal 1994.
10. NOTES AND LOANS PAYABLE:
Notes and loans payable as of June 30, 1996 and 1995 include $179,000
principal amount of 6% Convertible Subordinated Debentures, due 1997.
In April 1995, the Company issued a note in the principal amount of $70,000
to its outside legal counsel for legal services performed. The note was
repayable in October 1995, together with interest at the rate of 7%. In February
1996 the note holder agreed to extend the due date to December 31, 1996. In
connection with the extension, the Company granted warrants to purchase 16,667
shares of the Company's common stock at an exercise price of $1.88 per share,
exercisable over a three year period. The amount of the note will be reduced, as
of December 31, 1996, by one-half of the amount by which the average closing
price of the stock, for the ten most recent trading days, exceeds the exercise
price of the warrants.
In August and October 1995, the Company received net proceeds of $219,250
and $50,750, respectively, from the private placement of an aggregate of
$312,500 principal amount of 12% Senior Unsecured Promissory Notes (the
"Notes"). The Notes are repayable with interest on the earlier of (a) the
closing of a public offering of the Company's equity securities from which the
Company receives gross proceeds of at least $10,000,000, or (b) one year from
the issuance date. The Company also granted to the purchasers of the Notes an
aggregate of 26,042 warrants (the "Warrants"), 20,833 of which are exercisable
at $2.83 per
F-13
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. NOTES AND LOANS PAYABLE: (CONTINUED)
share and 5,209 of which are exercisable at $2.37 per share. Each of the
Warrants is exercisable at any time beginning one year after the date of
issuance and expiring four years after the date of issuance.
The Notes and interest were not repaid as scheduled. In August 1996, the
Company sent letters to all Note holders requesting extension of the due date to
December 15, 1997. In exchange, the Note holders were offered two alternative
proposals. In the first proposal, existing warrants will be exchanged, subject
to the Company's registration statements becoming effective, for registered
shares of the Company's common stock in an amount equal to 20% of the principal
amount of the Note, with shares valued at $.75 per share. Alternatively, Note
holders can exchange their Notes, subject to the Company's registration
statements becoming effective, for registered shares of the Company's common
stock in an amount equal to 150% of the principal amount of the Note, with
shares valued at the price at the effective date of the registration. In both
proposals the interest on the Notes will be paid when due. As of October 10,
1996, the Company had received elections from Note holders representing $212,500
principal amount of Notes, of which $162,500 elected the first proposal.
Accordingly, the maturity date of those notes have been extended to December 15,
1997. Note holders representing $50,000 principal elected the second proposal to
exchange their notes for shares of the Company's common stock. The remaining
notes for $100,000 have not been paid on their respective due dates, although
the Company have not yet received any indication from those noteholders that
they will not consider one of the two alternative proposals offered. The Company
has paid current interest on all of the notes through the first anniversary date
of the respective notes.
11. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS:
The Company presently leases office space in Los Angeles pursuant to an
operating lease expiring in May 1998, which provides for monthly rental payments
of $5,301. Minimum payments under the lease aggregate $63,612 and $58,311 for
the fiscal years ending June 30, 1997 and 1998, respectively.
The Company is party to a lease at 800 Third Avenue, New York, New York
10022, which will terminate in 1997. The Company vacated such office space
during the year ended June 30, 1995. In September 1995 the landlord filed an
action against the Company (see "Litigation"). Rent expense for the years ended
June 30, 1996, 1995 and 1994 was $38,772, $297,287 and $489,559, respectively.
The Company has entered into various agreements for the distribution of new
pictures. Generally, the films that the Company represent are financed by the
producers of the film, through independent or bank financing, utilizing the
license agreements generated by the Company as collateral for production loans.
The Company has assumed no financial obligations with respect to these pictures
as of this date, except for committments for writing services in the amount of
$40,000, of which $20,000 has already been paid.
LITIGATION:
On December 20, 1990, a suit was filed against the Company seeking the
payment of $300,000 for certain investment banking services allegedly provided.
In October 1991, the Court granted a judgment in favor of the plaintiff. The
judgment is stayed pending the determination of an action brought by the Company
against the plaintiff described below. The Company has posted a
non-collateralized bond pending the results of an appeal. In a separate action,
the Company filed a complaint against the plaintiff claiming that services
alleged to have been performed were never performed and demanding the return of
funds and securities paid by the Company. In October 1994, the plaintiff filed a
voluntary bankruptcy
F-14
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
petition under Chapter 11 of the United States Code. Consequently, the Company's
action has been automatically stayed. The Company has filed a proof of claim.
On or about September 11, 1992, Joseph Duignan brought an action in the
Superior Court of New Jersey, Mercer County, entitled Joseph Duignan v. Double
Helix Films Limited Partnership No. 1, L.P. Double Helix Films, Inc., Cinecom
International Films, Film Gallery, Inc., Stan Wakefield, Jerry Silva, Arthur
Altarac and Anthony Tavone (MIR-l-4262-92). Jerry Silva, the only defendant who
was served, is former Vice Chairman of the Board of Directors of the Company.
Mr. Silva has demanded that the Company indemnify him gainst any expenses,
judgments, and amounts paid in settlement of the action. The Company contends
that it is not required to indemnify Mr. Silva because he breached his fiduciary
duties to the Company.
Mr. Duignan claims that he invested $75,000 to acquire a partnership
interest in Double Helix Films Limited Partnership No. 1 and that Mr. Silva
forged or caused to be forged his signature on a Subscription Agreement dated
July 28, 1986. The Complaint alleges claims for rescission, unjust enrichment
(against Double Helix), conversion, fraud, breach of contract, breach of
fiduciary duty and breach of covenants of good faith and fair dealing (against
Mr. Silva and Double Helix). Mr. Duignan seeks to recover compensatory damages,
including but not limited to, his alleged $75,000 investment, punitive damages
and attorney's fees. Mr. Silva has answered the Complaint.
On December 30, 1994, an individual, who allegedly served as President of
Double Helix Films from about July 1991 until about March 1993, filed action
against the Company, Norman Muller, a former Chairman and CEO of the Company,
and others in which he alleges among other things breach of an oral agreement to
pay him $152,000 (which he allegedly advanced for the benefit of Double Helix)
and to give him 19.5% ownership interest in its corporate successors. He also
alleges a claim for intentional infliction of emotional distress against Mr.
Muller. He seeks to recover unspecified compensatory, punitive, exemplary and
emotional distress damages. The trial date has been set for February 1997. Mr.
Muller has demanded that the Company indemnify him against any expenses,
judgements and amounts paid in settlement. The Company contends that it is not
required to provide indemnification.
In another matter, the alleged former President of Double Helix, filed a
cross complaint in August 1995 against the Company, Double Helix and Norman
Muller in which he seeks indemnification, apportionment of fault and declaratory
relief in connection with another action in which he was named as a defendant.
In addition to compensatory damages, he seeks punitive and exemplary damages,
emotional distress damages and attorney's fees. The Company has answered the
cross-complaint, and a trial date has been set for February 1997.
On or about May 15, 1995, Credit Lyonnais Bank Nederland N.V. and Cinecom
Entertainment Group, Inc. filed a complaint against the Company's subsidiary,
Odyssey Distributors, Ltd. They allege that Odyssey collected but failed to
remit to them assigned distribution proceeds in the amount of $566,283.33 from
the foreign distribution of two pictures. The complaint alleges claims for
breach of contract and breach of fiduciary duty and seeks damages in excess of
$566,283, attorney's fees, an accounting, a temporary restraining order and a
preliminary injunction. In June 1995, the Court denied plaintiffs an attachment
and stayed the action pending arbitration in New York. In September, 1996 the
Court dismissed the Complaint. No arbitration has yet been commenced in this
action.
In August 1995, G.P. Productions, Inc. ("GP") and Greenwich Subject Films,
Inc. ("Greenwich") commenced an action entitled G.P. Productions, Inc., and
Greenwich Studios, Inc. v. Double Helix Films,
F-15
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Inc., Communications and Entertainment, Inc., Krishna Shaw, Gerald Muller and
Norman Muller in the United States District Court, Southern District of Florida
(Case No. 95-1188). Mr. Muller has demanded that the Company indemnify him
against any expenses, judgments and amounts paid in settlement of the action.
The Company contends that, by virtue of Mr. Muller's breaches of fiduciary duty
and violation of his obligations to the Company, it is not required to provide
indemnification.
GP and Greenwich allege that they are the exclusive owners of the films "The
Gallery" and "South Beach". They assert claims for copyright infringement,
unfair competition, breach of contract, accounting, conversion, civil theft,
conspiracy and fraudulent conveyance. The Complaint demands a recall of the
films, an attachment, preliminary and permanent injunctive relief, an
accounting, and unspecified compensatory, punitive and treble damages. The
Company has made a motion to dismiss the action for lack of personal
jurisdiction and lack of venue. The motion is pending.
In September 1995, the agent for the landlord for the premises in New York
City previously occupied by the Company filed a Summons and Verified Complaint
against the Company. The plaintiff alleges that it is due $66,694 from the
Company (plus interest) for rent allegedly owed during the period from April
through September, 1995. The Company vacated the premises on April 12, 1995.
Summary judgment was awarded to the plaintiff and a judgment was entered for
$74,142 in May, 1996. The Company has a motion pending for reconsideration of
the matter on the grounds that the landlord wrongfully refused to consider and
accept a subtenant for the balance of the term of the lease. In July, 1996, the
landlord commenced a second action for $121,000 for rent allegedly owed during
the period from October 1995 through July 1996. The Company has not yet filed an
Answer in this action and is seeking an extension of time in which to answer
pending the resolution of its motion for reconsideration in the prior action.
In October 1995, Canon Financial Services filed a complaint, in which it
claims that it is due $47,499.83, plus damages, pursuant to a lease agreement.
The Company has filed an Answer in this action and plaintiff has made a motion
for summary judgment which is being defended by the Company.
In January 1996, a former director brought an action against the Company on
a promissory note in the amount of $25,000. The plaintiff obtained a summary
judgment but has not yet moved to enforce it. The Company is considering whether
or not it has a claim for indemnification against former management in
connection with the issuance of the note..
In January 1996, an action was filed against the Company in which the
plaintiff seeks damages in the amount of $33,849.98 for legal services rendered.
The complaint was served on the Company in April 1996. The Company has filed an
answer in this action and an arbitration hearing has been scheduled for October
1996.
In March 1996, an action was filed against the Company in which the
plaintiff claims that she is due $17,920.49 pursuant to a promissory note
previously issued to her. The Company has filed a cross-claim seeking offsets
against the amount due and other damages.
On or about March 25, 1996, a class action complaint was filed against the
Company. The complaint seeks damages in connection with the Company's treatment
in its financial statements of the disposition of its subsidiary, Double Helix
Films, Inc., in June 1991. The complaint seeks unspecified damages on behalf of
all persons who purchased shares of the Company's common stock from and after
June 1992. The complaint was served on the Company in July 1996. The Company
made a motion to dismiss the action and a hearing has been scheduled for October
1996. The Company's former Chairman has demanded that
F-16
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
the Company indemnify him against any expenses, judgments and amounts paid in
settlement of the litigation. The Company contends that it is not required to
provide such indemnification.
The Company was advised on October 10, 1996 that Film Bridge International,
Inc. filed a Complaint against the Company in a Los Angeles court on September
18, 1996 seeking declaratory relief with respect to the Joint Venture. The
Company is in the process of seeking restraining orders establishing its rights
in the Joint Venture. The Company has not yet been served in this action.
In the Private Lessons Partnership v. Carnegie Film Group, Inc., Monogram
Pictures Corp., Filmways Entertainment Corp., ATC, Inc., Krishnah Shah, Lonnie
Romati, Gerald Muller, Jerry Minsky and Does 1-100 (California Superior Court,
Los Angeles County, Case No. BC091840), the plaintiff asserted claims for breach
of oral contract, fraud in the inducement and fraudulent conveyance against Mr.
Shah, seeking damages in the amount of $315,000, plus further unspecified
compensatory damages and punitive damages. In August 1995, Mr. Shah filed a
cross-complaint against the Company, Double Helix Films and Norman Muller for
indemnification, apportionment of fault and declaratory relief. In addition to
compensatory damages, he seeks punitive and exemplary damages, emotional
distress damages and attorney's fees. The Company has answered the
cross-complaint and a trial has been scheduled for February 1997.
Management believes that the outcome of aforementioned matters and all other
outstanding litigation will not, after consideration of reserves, have a
materially adverse impact on the financial condition or results of operations of
the Company.
12. SHAREHOLDERS' EQUITY:
On March 6, 1996 the Board of Directors of the Company approved a
one-for-six reverse stock split of the outstanding shares of the Company's
Common Stock (the "Common Stock"). The Reverse Stock Split was effective as of
March 18, 1996 (the "Record Date"). On the Record Date, each six shares of the
Company's then outstanding Common Stock (the "Old Common Stock") were
automatically converted into one share of the new Common Stock, par value $.01
per share (the "New Common Stock").
No fractional shares of New Common Stock were issued. Rather, holders of Old
Common Stock who are entitled to receive fractional shares of New Common Stock
will be rounded up to the nearest whole share of New Common Stock.
The Reverse Stock Split resulted in a net reduction of 11,408,973 in the
number on Common Shares outstanding, including 1,995 shares issuable due to the
rounding up of fractional shares.
Except for the number of shares of Common Stock outstanding after the
Reverse Stock Split, the Old Common Stock and the New Common Stock are
identical.
On February 14, 1995, the then Board of Directors of the Company declared a
dividend payable to holders of record on February 24, 1995 ("the Dividend Record
Date") of the Company's common stock and Class A stock. The dividend consisted
of 1,700,000 shares of common stock, $.01 par value per share, of Global that
were owned by the Company. Holders of the Company's common stock and Class A
Stock received .1233 and .0786 shares, respectively, of Global common stock for
each share of the Company's stock. The dividend was recorded as a reduction of
capital in excess of par value.
The shares of Global common stock were distributed to an escrow agent on the
Dividend Record Date pending registration of the shares. The Securities and
Exchange Commission declared Global's
F-17
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY: (CONTINUED)
registration statement effective as of September 1, 1995 and, accordingly, the
escrow agent was authorized to distribute the dividend shares.
Communications and Entertainment Corp. was originally formed to consummate
the mergers of Double Helix Films, Inc. ("Double Helix") and Odyssey
Entertainment Ltd. pursuant to the Agreement and Plan of Merger dated September
22, 1989 ("the Merger Agreement"). On September 6, 1990 the shareholders of
Double Helix and Odyssey approved the Merger Agreement. Pursuant to the terms of
the Merger Agreement, each share of common stock of Odyssey was convertible into
one share of Class A stock of the Company and each share of Double Helix common
stock was convertible into one share of the Company's common stock. Prior
management's instructions to the transfer agent required that any shares of
Odyssey or Double Helix outstanding at the time of the Merger not tendered to
the Company's transfer agent for exchange by March 31, 1995 should be canceled.
Accordingly, 86,790 shares of the Class A stock and 10,496 shares of the common
stock reserved for exchange were canceled. The par value of the shares canceled,
of $5,837, was transferred to capital in excess of par. Current management is
investigating the basis for prior management's instructions to the transfer
agent.
Additionally, in accordance with the Company's charter, all outstanding
shares of the Company's Class A stock, automatically converted, on March 31,
1995, into shares of the Company's common stock at a rate of .6375 shares of
common stock for each share of Class A stock.
The Company's outstanding 6% Convertible Subordinated Debentures are
convertible into common stock at a price of $75 per share. As of June 30, 1996,
Debentures in the aggregate principal amount of $179,000 can be converted into
an aggregate of 1,522 shares of common stock.
In September 1992, the former Board of Directors approved a stock buyback
program, authorizing the purchase of as many as three million shares of the
Company's common stock from time to time in the open market. Through June 30,
1994, the Company had purchased 162,833 shares with an aggregate cost of
$1,881,801. During the year ended June 30, 1994, the former Board of Directors
authorized the retirement and cancellation of all shares purchased under the
buyback program.
13. STOCK OPTIONS AND WARRANTS:
The number of options and warrants, and exercise prices in the following
paragraphs have been restated to give effect to a 1 for 6 Reverse Stock Split in
March 1996.
The Company has an Incentive Stock Option Plan (The "Option Plan") for its
key employees providing for the granting of options to acquire common stock. The
maximum number of shares of common stock subject to the Option Plan is 75,000,
plus 5% of any increase in the number of issued shares after the effective date
of the Merger, excluding any increase due to stock awards to key employees or as
result of the conversion of Class A stock. The price for the shares covered by
each option will not be less than 100% of the fair market value at the date of
grant (110% for holders of more than 10% of the company's common stock). Options
granted expire ten years from the date of grant (five years for holders of more
than 10% of the Company's common stock).
F-18
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTIONS AND WARRANTS: (CONTINUED)
A summary of options under the plan is as follows:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding, June 30, 1993*....................................... 63,250 $ 5.04-$15.54
Granted........................................................... 19,167 $ 9.00-$13.86
Canceled.......................................................... (22,917) $ 9.00-$15.36
---------
Outstanding, June 30, 1994*....................................... 59,500 $ 5.04-$15.54
Canceled.......................................................... (59,500) $ 5.04-$15.54
---------
Outstanding, June 30, 1995........................................ -0-
---------
Outstanding, June 30, 1996........................................ -0-
</TABLE>
- ------------------------
* All exercisable.
The Company issued an aggregate of 134,854 warrants to the purchasers of
common stock of the Company sold in private placements during fiscal 1992. The
exercise prices range from $18.00 to $25.50 per share. 21,024 of such warrants
were exercised during 1992 at $18.00 per share. During the years ended June 30,
1995, 1994 and 1993, 58,652, 53,500 and 608 warrants, exercisable at $25.50,
$18.00 and 18.00 per share, respectively, expired, unexercised. The balance of
the warrants, exercisable at $18.00 per share, expired unexercised in July 1996.
An additional 70,833 warrants and options were granted during the year ended
June 30, 1992 to outside consultants for services in connection with private
placements. The exercise prices range from $12.00 to $25.50 per share. 8,333 of
such options were exercised in 1992 at $12.00 per share. 4,167 options,
exercisable at $16.50 per share, expired, unexercised, during fiscal 1993. The
balance expired, unexercised, during fiscal 1995.
In fiscal 1992, the Board of Directors approved the grant of options, to
purchase 6,000 shares to the outside directors of the Company, for their
services as directors, at an exercise price of $18.96 per share. An additional
6,000 options were granted during fiscal 1993 to the outside directors, at an
exercise price of $10.08. The options to the directors have not yet been issued.
During the year ended June 30, 1993, 8,333 options were granted outside of
the plan, at an exercise price of $9.00, to an officer in connection with an
employment agreement. Such options expired during fiscal 1995. Additionally,
1,667 options were granted, at an exercise price of $9.00, to a director of the
Company for services rendered. Such options were exercisable as of June 30,
1996.
During fiscal 1993, warrants to purchase 12,500 shares were also granted to
outside consultants, for services rendered, at an exercise price of $13.14 per
share. Warrants to purchase 70,833 shares were granted to outside consultants
for services rendered during fiscal 1994, at exercise prices ranging from $7.50
to $21.00. 66,667 of such warrants, exercisable at $9.00 to $21.00 per share,
expired unexercised during fiscal 1996. The balance of the warrants, were
exercisable at June 30, 1996, at a price of $7.50 per share.
In April 1995, following the change in management control, the Board of
Directors authorized the issuance of 8,333 options to each of five new Directors
and 16,667 options to the president of the
F-19
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTIONS AND WARRANTS: (CONTINUED)
Company. The Board also authorized the issuance of a total of 10,000 options to
two outside consultants for services in connection with the proxy contest. All
such warrants are exercisable for a four year period commencing October 13, 1995
at $3.92 per share.
In August and October 1995, the Company issued an aggregate of 26,041
warrants to purchasers of 12% Senior Unsecured Notes sold in private placement.
The exercises prices ranged from $2.37 to $2.83 per share. None of such warrants
were exercisable as of June 30, 1996. In connection with the private placement,
the Company also issued 33,333 warrants to its outside counsel in consideration
for legal services performed, exercisable during the three year period
commencing one year from the date of issuance, at a price per share of $2.83.
During the year ended June 30, 1996, 769,167 warrants were granted outside
of the Plan to officers and directors, at exercise prices ranging from $1.50 to
$2.83. All such warrants were exercisable as of June 30, 1996.
During fiscal 1996, the Company also granted 16,667 warrants, at an exercise
price of $1.88 per share, to its outside counsel in connection with the
extension of a note. Additionally, warrants to purchase 167,500 shares were
granted to consultants for services rendered during fiscal 1996, at exercise
prices ranging from $.76 to $1.88 per share. All such warrants were exercisable
as of June 30, 1996.
14. RELATED PARTY TRANSACTIONS:
During the years ended June 30, 1994, the Company paid Dorian Industries,
Inc. ("Dorian") $20,833 in consideration of consulting services rendered by N.
Norman Muller, the former Chairman and Chief Executive Office of the Company,
who is a consultant to Dorian.
The firm of Goodkind, Labaton, Rudoff & Sucharow, of which David A. Mortman,
a former Director of the Company was a member, received legal fees from the
Company of $195,000 for the fiscal year ended June 30, 1995. Additionally, it
received an aggregate of 522,641 shares of common stock of Global Intellicom,
Inc., a subsidiary of the Company, valued at $155,905, in consideration of the
cancellation of outstanding legal fees.
The firm of David A. Mortman, P.C. and its predecessor firm, of which David
A. Mortman, a Director of the Company was a member, received legal fees from the
Company of $16,585 and $387,987 during the fiscal years ended June 30, 1995 and
1994, respectively.
Lawrence I. Schneider, a member of the Board of Directors of the Company and
one of three Co-Chairmen in the Office of the Chairman of the Company, is a
principal of Global Capital Resources, Inc., a New York based financial
consulting services firm ("Global Capital"). During the 11 month period from
May, 1995 through March, 1996, Global Capital rendered financial consulting
services to the Company in connection with the change of management control of
the Company. Such services were rendered to the Company at the agreed upon rate
of $15,000 per month. However, in order to conserve the cash resources of the
Company, Global Capital agreed to accept stock options from the Company in lieu
of a cash payment. On March 6, 1996, the Board of Directors of the Company (with
Mr. Schneider abstaining from the voting) authorized the issuance to Global
Capital of stock options to purchase 83,333 shares of Common Stock of the
Company, exercisable over a five-year period at the exercise price of $1.875 per
share (after adjustment for the Reverse Split).
During the fiscal year ended June 30, 1996, the law firm of Herbst &
Greenwald, of which Mr. Greenwald, a director of the Company, is a member,
received fees for legal services rendered to the Company in the amount of
$9,075.
F-20
<PAGE>
COMMUNICATIONS AND ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS:
In August 1996, the Company entered into an agreement, pursuant to which the
Company agreed to grant certain subdistribution rights in and to sell other
distribution rights to, certain films in the Company's film library. In exchange
for these rights, the Company will receive a total cash consideration of
$1,075,000, payable $500,000 on closing, $275,000 six months after closing, and
$300,000 eighteen months after closing. In addition, the Company will retain a
continuing right to receive revenues from certain of the films, valued by
management at a minimum of approximately $150,000. Additionally, the purchaser
will provide the Company with $500,000 revolving line of credit to be secured by
accounts receivable and other contractual rights acquired by the Company. As
part of the transaction, the Company will grant 100,000 stock options,
exercisable over a three year period at the bid price of the Company's common
stock in effect on August 5, 1996 ($.625). The transaction closed on October 7,
1996.
On August 1, 1996, the Board of Directors of the Company offered to
reimburse the members of the CECO Shareholders Committee in kind for all
expenses incurred by such members in connection with the change of management
control of the Company affected in April, 1995. (See "Change in Control"). The
Board offered to reimburse such expenses by issuing stock options to the
committee members in an amount equal to one and one-third times the amount of
such expenses. Robert Miller, a director of the Company, agreed to accept
options to puchase 40,000 shares of the Company's Common Stock, exercisable over
a five-year period at an exercise price of $.75 per share, representing the then
current market price of the Company's Common Stock on the date of grant. In
exchange, Mr. Miller released his claim for reimbursement of approximately
$30,000 of expenses incurred by Mr. Miller in connection with the change of
control. Lawrence I. Schneider, a director of the Company and also a member of
the CECO Shareholders Committee, has not agreed to accept options in lieu of his
claim for reimbursement of expenses in connection with the change of control. No
accrual for these claims was made at June 30, 1996 as the Company does not
expect to pay any amounts to these individuals.
On September 25, 1996, the Company entered into an agreement with an
unaffiliated third party for the purchase of 1,000,000 shares of the Company's
common stock in consideration of $750,000, or $.75 per share, payable all cash
at closing. In addition, the investor will receive 1,000,000 class A warrants
and 1,000,000 class B warrants, each set of warrants being exercisable over a
three year period for the purchase of 1,000,000 shares of common stock at the
respective exercise prices of $.75 and $1.00 per share. The closing of the
transaction is contingent upon (i) shareholder approval of an amendment to the
Company's Articles of Incorporation authorizing an increase in the number of
authorized shares of the Company, and (ii) the effectiveness of a registration
statement filed by the Company on behalf of the investor with respect to the
shares purchased and the shares underlying the warrants. The investor will pay
the first $50,000 of such registration costs.
In September, 1996, the Company reached a verbal understanding with
Paramount, pursuant to which the Company believes that Paramount will agree to
cancel outstanding indebtedness of $2.7 million in full, in exchange for which
the Company agreed to (i) relinquish all further distribution rights to
"Wuthering Heights"; (ii) assign to Paramount all of its rights in any
outstanding distribution agreements for the film, and any receivables to be
generated therefrom; and (iii) guarantee that Paramount will collect a total of
$500,000 in sales revenue from existing distribution agreements no later than
January 15, 1997. The Company anticipates that existing license agreements will
yield at least $450,000 in revenue prior to January 15, 1997 (of which the
Company would have been entitled to retain approximately 20% thereof in
commissions), thereby minimizing the Company's exposure under the guarantee to
Paramount.
F-21
<PAGE>
Exhibit 3.2
CERTIFICATE TO CHANGE
THE NUMBER OF AUTHORIZED SHARES OF STOCK
(Under section 78.207 of The General Corporation Law
of the State of Nevada)
It is hereby certified that:
1. The name of the corporation is Communications and Entertainment Corp.
(the "corporation").
2. The current number of authorized shares, and the par value per share,
of the corporation's class of shares of common stock are as follows: 50,000,000
authorized shares, par value $.01 per share. The number of authorized preferred
shares is 10,000,000, par value $.10 per share.
3. On March 6, 1996, the Board of Directors of the corporation declared a
reverse one-for-six split of the corporation's common stock, to become effective
at 5:00 p.m. on March 16, 1996 (the "Effective Date"). Upon the Effective Date,
the number of authorized shares of the corporation's common stock will be
reduced to 8,333,333 shares. The par value per share of the corporation's
common stock will remain unchanged and will continue to be $.01 per shares. The
number of authorized preferred shares, par value $.10 per share, will remain
unchanged.
4. Upon the Effective Date, one share of the corporation's common stock
will be issued for every six shares outstanding as of the Effective Date,
provided, however, with respect to fractional interests, the corporation will
issue such additional shares of common stock as may be necessary to round up all
fractional interests to one full share of the corporation's common stock.
5. The foregoing changes were effected pursuant to a resolution of the
Board of Directors of the corporation.
6. No approval of the aforesaid changes by any of the stockholders of the
corporation is required.
7. There is no provision in the Articles of Incorporation of the
corporation prohibiting the procedure hereinbefore described.
8. The changes herein certified will be effective at 5:00 p.m. on March 18,
1996.
Signed on March 11, 1996
By: /s/ Stephen R. Greanwald
---------------------------
Stephen R. Greanwald
Chief Executive Officer &
Vice-President
By: /s/ Ira Smith
---------------------------
Ira Smith, Secretary
<PAGE>
ACKNOWLEDGEMENT
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 11th day of March, 1996, personally appeared before me, a Notary
Public for the State and County aforesaid, Stephen R. Greanwald, as Chief
Executive Officer of Communications and Entertainment Corp., the corporation
described in and which executed the foregoing instrument, and he acknowledged
before me that he executed the same in his capacity as Chief Executive Officer
of said corporation and as Vice President of said corporation.
/s/ Howard Kerker
-------------------------
Notary Public
[Notary Seal]
<PAGE>
AMENDED
CERTIFICATE TO CHANGE
THE NUMBER OF AUTHORIZED SHARES OF STOCK
(Under Section 78.207 of The General Corporation Law
of The State of Nevada)
It is hereby certified that:
1. The name of the corporation is Communications and Entertainment Corp.
(the "corporation").
2. The current number of authorized shares of the corporation, and the par
value per share, is as follows: 8,333,333 authorized shares of common stock, par
value $.01 per share; 10,000,000 authorized shares of Class A stock, par value
$.01 per share; and 10,000,000 authorized shares of preferred stock, par value
$.10 per share.
3. On March 6, 1996, the Board of Directors of the corporation declared a
reverse one-for-six split of the corporation's common stock, to become effective
at 5:00 p.m. on March 18, 1996. In connection therewith, the corporation filed a
Certificate under Section 78.207 on March 18, 1996 which erroneously certified
that at the time of filing of such Certificate there were 50,000,000 authorized
shares of common stock (par value $.01 per share) outstanding, when in fact
there were only 40,000,000 authorized shares of common stock (par value $.01 per
share) outstanding, and 10,000,000 authorized shares of Class A stock (par value
$.01 per share) outstanding. Accordingly, as a result of the reverse one-for-six
stock split, the number of authorized shares of the corporation's common stock
will be 6,666,666 shares rather than the 8,333,333 shares reflected in the
Certificate filed on March 18, 1996. The par value per share of the
corporation's common stock will remain unchanged and will continue to be $.01
per share. The number of authorized Class A shares, par value $.01 per share,
will continue to be 10,000,000, and the number of authorized preferred shares,
par value $.10 per share, will continue to be 10,000,000.
4. The foregoing changes were effected pursuant to a resolution of the
Board of Directors of the corporation.
5. No approval of the aforesaid changes by any of the stockholders of the
corporation is required.
6. There is no provision in the Articles of Incorporation of the
corporation prohibiting the procedure hereinbefore described.
7. This Amended Certificate shall be deemed effective upon filing.
<PAGE>
8. This Amended Certificate is being filed to amend and supersede the
Certificate filed on March 18, 1996 pursuant to Section 78.207. The Certificate
filed on March 18, 1996 inadvertently combined the Class A stock and the common
stock. The reverse one-for-six stock split reflected herein and in the
Certificate filed on March 18, 1996 relates only to the authorized class of
common stock, of which there were 40,000,000 shares previously authorized
(rather than 50,000,000 as reflected in the Certificate filed on March 28,
1996).
signed on May 30, 1996
Communications and Entertainment Corp.
By: /s/ Ira N. Smith
----------------------------------------
Ira N. Smith, President
By: /s/ Howard J. Kerker
----------------------------------------
Howard J. Kerker, Secretary
<PAGE>
ACKNOWLEDGEMENT
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 30th day of May, 1996, personally appeared before me, a Notary
Public for the State and County aforesaid, Ira N. Smith, as President of
Communications and Entertainment Corp., the corporation described in and which
executed the foregoing instrument, and he acknowledged before me that he
executed same in his capacity as President of said corporation.
/s/ Howard Kerker
--------------------------
Notary Public
[SEAL]
<PAGE>
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED
OR TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT
WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO SUCH SECURITIES, OR
(ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY
UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO
COMMUNICATIONS AND ENTERTAINMENT CORP. (THE "COMPANY"), OR OTHER COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED DISPOSITION IS
CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE
"BLUE SKY" OR OTHER STATE SECURITIES LAW.
VOID AFTER 5:00 P.M. NEW YORK CITY TIME ON .
COMMUNICATIONS AND ENTERTAINMENT CORP.
COMMON STOCK
PURCHASE WARRANT
The Transferability of this Warrant is
Restricted as Provided in Section 3
Warrants
(Subject to a Reverse Stock Split and Other Adjustments
As Provided in Section 5 Hereof)
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged by COMMUNICATIONS AND ENTERTAINMENT CORP., a Nevada
corporation (the "Company"), is hereby granted the right to purchase, at
the initial exercise price of $. per share (subject to a reverse stock
split and other adjustments as provided in Section 5 hereof), at any time from
until 5:00 P.M. New York City time on , shares (the
"Shares") of the Company's Common Stock, par value $.01 per share (the "Common
Stock").
Each Common Stock Purchase Warrant (the "Warrant") initially is exercisable
at a price of $. per Share payable in cash or by certified or official
bank check in New York Clearing House funds, subject to adjustments as provided
in Section 5 hereof. Upon surrender of this Warrant at the offices of the
Company, with the annexed Subscription Form duly executed, together with payment
of the Purchase Price (as hereinafter defined) for the Shares purchased, the
registered holder of this Warrant (the "Holder") shall be entitled to receive a
certificate or certificates for the Shares so purchased.
1
<PAGE>
1. EXERCISE OF WARRANT.
The purchase rights represented by this Warrant are exercisable at the
option of the Holder, in whole or in part (but not as to fractional shares
underlying this Warrant), during the period in which this Warrant may be
exercised as set forth above. In the case of the purchase of fewer than all the
Shares purchasable under this Warrant, the Company shall cancel this Warrant
upon the surrender hereof and shall execute and deliver to the Holder a new
Warrant of like tenor for the balance of the Shares purchasable hereunder.
2. ISSUANCE OF CERTIFICATES.
Upon the exercise of this Warrant and payment in full for the Shares, the
issuance of a certificate or certificates for Shares underlying this Warrant
shall be made forthwith (and in any event within five (5) business days
thereafter) without charge to the Holder including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall be issued in the name of, or (subject to the Provisions of Section 3.1
hereof) in such names as may be directed by, the Holder; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid. The certificates representing the shares underlying this
Warrant shall be executed by the manual or facsimile signature of the Chairman
or the Chief Executive Officer, and the President or the Secretary of the
Company holding office at the time such Shares are issued.
3. RESTRICTION ON TRANSFER.
Neither this Warrant nor any Share issuable upon exercise hereof has been
registered under the Securities Act of 1933, as amended (the "Act"), and none of
such securities may be offered, sold, pledged, hypothecated, assigned or
transferred except (i) pursuant to a registration statement under the Act which
has become effective and is current with respect to such securities or (ii)
pursuant to a specific exemption from registration under the Act but only upon a
Holder hereof having first obtained the written opinion of counsel to the
Company, or other counsel reasonably acceptable to the Company, that the
proposed disposition is consistent with all applicable provisions of the Act as
well as any applicable "Blue Sky" or other state securities law. Upon exercise,
in part or in whole, of this Warrant, each certificate issued representing the
Shares underlying this Warrant shall bear a legend to the foregoing effect.
2
<PAGE>
4. PRICE.
4.1 INITIAL AND ADJUSTED PURCHASE PRICE. The initial Purchase Price shall
be $. per share. The adjusted Purchase Price shall be the price which shall
result from time to time from any and all adjustments of the initial Purchase
Price in accordance with the provisions of Section 5 hereof.
4.2 PURCHASE PRICE. The term "Purchase Price" herein shall mean the initial
purchase price per Share or the adjusted purchase price per share, depending
upon the context.
5. ADJUSTMENTS OF PURCHASE PRICE AND NUMBER OF SHARES.
In the event that, prior to the issuance by the Company of all of the
Shares issuable upon exercise of this Warrant, there shall be any change in the
outstanding Common Stock by reason of the declaration of stock dividends, or
through a recapitalization resulting from stock splits or combinations, without
the payment to the Company of any compensation therefor in money, services or
property, the remaining Shares still subject to this Warrant and the Purchase
Price thereof shall be appropriately adjusted (but without regard to fractions)
by the Board of Directors of the Company to reflect such change. The Holder of
this Warrant acknowledges that the Board of Directors of the Company declared a
reverse one-for-six split of the Company's Common Stock, par value $.01 per
Share, effective March 18, 1996. If the date of issuance of this Warrant is
prior to March 18, 1996, then upon the effective date of such reverse stock
split, the number of Shares subject to this Warrant shall be divided by six and
the exercise price shall be multiplied by six.
6. MERGER OR CONSOLIDATION.
In case of any consolidation of the Company with, or merger of the Company
with or into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding Common
Stock), the corporation formed by such consolidation or merger shall execute and
deliver to the Holder a supplemental warrant agreement providing that the Holder
shall have the right thereafter (until the expiration of such Warrant) to
receive, upon exercise of his Warrant, the kind and amount of shares of stock
and other securities and property receivable upon such consolidation or merger
by a Holder of the number of shares of Common Stock for which his Warrant might
have been exercised immediately prior to such consolidation, merger, sale or
transfer. Such supplemental warrant agreement shall provide for the adjustments
which shall be identical to the adjustments provided in Section 5. The above
provisions of this Section 6 shall similarly apply to successive consolidations
or mergers.
3
<PAGE>
7. EXCHANGE OR REPLACEMENT OF WARRANT.
This Warrant is exchangeable without expense, upon the surrender hereof by
the registered Holder at the principal executive office of the Company, for a
new Warrant of like tenor and date representing in the aggregate the right to
purchase the same number of Shares as are purchasable hereunder in such
denominations as shall be designated by the Holder hereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and, in case of
loss, theft or destruction, of indemnity or security reasonable satisfactory to
it, and reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant.
8. ELIMINATION OF FRACTIONAL INTERESTS.
The Company shall not be required to issue certificates representing
fractions of Shares on the exercise of this Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intention
of the parties that all fractional interests shall be eliminated.
9. RESERVATION OF SECURITIES.
The Company shall at all times reserve and keep available out of its
authorized Common Stock, solely for the purpose of issuance upon the exercise of
this Warrant, such number of Shares as shall be issuable upon the exercise
hereof. The Company covenants and agrees that, upon the exercise of this Warrant
and payment of the Purchase Price therefor, all Shares issuable upon such
exercise shall be duly and validly issued, fully paid and non-assessable.
10. NOTICES TO WARRANT HOLDERS.
Nothing contained in this Warrant shall be construed as conferring upon the
Holder hereof the right to vote or to consent or to receive notice as a
shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or as having any rights whatsoever as a
shareholder of the Company.
4
<PAGE>
11. NOTICES.
All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be personally delivered,
telegraphed or sent by certified, registered, or express mail, postage prepaid,
and shall be deemed given when so delivered personally, telegraphed or, if
mailed, five days after the date of deposit in the United States mails, as
follows:
(a) If to the Company, to:
Communications and Entertainment Corp.
380 Lexington Avenue, Suite 2500
New York, New York 10019
Attn: Stephen R. Greenwald, CEO
With a copy to:
Howard J. Kerker, Esq.
45 West 45th Street
New York, New York 10036
(b) If to the registered Holder, to the address of such Holder as shown on
the books of the Company.
12. SUCCESSORS.
All covenants, agreements, representations and warranties contained in this
Warrant shall bind the parties hereto and their respective heirs, executors,
administrators, distributees, successors and assigns.
13. HEADINGS.
The headings in this Warrant are inserted for purposes of convenience only
and shall have no substantive effect.
14. LAW GOVERNING.
This Warrant is delivered in the State of New York and shall be construed
and enforced in accordance with, and governed by, the laws of the State of New
York, without giving effect to conflicts of laws principles. Each of the Company
and the Holder hereby agrees that any dispute or controversy arising out of this
Warrant shall be adjudicated in a court located in New York City, and hereby
submits to the exclusive jurisdiction of the courts of the State of New York
located in New York, New York and of the federal
courts in the Southern District of New York, and irrevocably waives
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<PAGE>
any objection each now or hereafter may have respecting the venue of such action
or proceeding brought in such a court or respecting the fact that such court is
an inconvenient forum, and consents to the service of process in any such action
or proceeding by means of registered or certified mail, return receipt
requested.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
corporate name by a duly authorized officer and has caused its corporate seal to
be affixed hereto on the date first above written.
Dated: , 1996
COMMUNICATIONS AND ENTERTAINMENT CORP.
By
------------------------------------
Stephen R. Greenwald
Title: Chief Executive Officer
6
<PAGE>
SUBSCRIPTION FORM
(To be Executed by the Registered Holder
in Order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the right to
purchase Shares represented by this Warrant in accordance with
the conditions hereof and herewith makes payment of the Purchase Price of such
Shares in full.
Date:
--------------------
----------------------------
(Signature)
----------------------------
(Print Name)
----------------------------
(Social Security Number or
Taxpayer's Identification
Number)
7
<PAGE>
AGREEMENT
AGREEMENT made this 6th day of March, 1996, by and between
Communications and Entertainment Corp., a Nevada corporation having a principal
place of business at 1900 Avenue of the Stars, Los Angeles, California 90067
(the "Company"), and Stephen R. Greenwald, having a principal place of business
at 380 Lexington Avenue, New York, New York 10019 ("Greenwald").
WHEREAS, Greenwald executed an agreement with the Company on October
1, 1995 (the "1995 Agreement"), pursuant to which Greenwald agreed to serve as
one of three co-chairmen in the Office of the Chairman of the Company, and as
Chief Executive Officer of the Company, for a three year period commencing on
October 1, 1995 and terminating on October 1, 1998; and
WHEREAS, the Company and Greenwald have agreed to terminate the 1995
Agreement and, in lieu thereof, to enter into this management agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM. The term of this management agreement (the "Agreement") shall
commence as of April 1, 1996 (the "Effective Date") and shall continue in effect
until October 1, 1998, unless otherwise earlier terminated as provided herein
(the "Term").
2. SERVICES. During the Term, Greenwald agrees to serve the Company in
the capacities of co-chairman in the Office of the Chairman of the Company, and
as Chief Executive Officer of the Company ("CEO"). Greenwald agrees to provide
such services, and devote such time, as may be reasonably required by the Board
of Directors of the Company to perform his respective services of Co-Chairman of
the Board and CEO of the Company in connection with the performance of the
following duties, or such other duties and requirements as may be reasonably
promulgated by the Board of Directors of the Company from time to time:
(a) Working to create and develop a strategic plan to define and
implement the Company's objectives and, in connection therewith, to create
viable action, business and financial plans which will provide the Company with
a sound program to achieve its objectives;
1
<PAGE>
(b) Increasing the Company's film libraries through all manner of
acquisition including the purchase of existing libraries;
(c) Developing ancillary businesses to complement the Company's film
distribution business while achieving maximum sales of the Company's existing
library;
(d) With respect to the activities of the CEO, assuming the daily
overall organizational, business and operating responsibilities of the Company;
and
(e) Performing such other duties as may be reasonably requested by
the Board of Directors of the Company from time to time, including, but not
limited to, services on behalf of any subsidiary or affiliate of the Company.
Anything to the contrary contained or implied herein notwithstanding,
Greenwald shall be free to engage in any other business activities which are not
in direct conflict or competition with the Company's principal business or
activities.
3. LOCATION. Greenwald shall perform his duties hereunder primarily in
New York City; provided, however, that Greenwald shall be available for travel
throughout the United States and the rest of the world at such times as such
travel shall appear in the reasonable judgment of Greenwald and the Co-Chairmen
of the Company to be in the best interests of the Company. Any such travel shall
be for the benefit of the Company and at the Company's sole cost and expense.
Although Greenwald shall be permitted to travel first class on all air travel
required in connection with the performance of his duties for the Company,
Greenwald will make every reasonable effort to fly business class whenever
practical.
4. CONFIDENTIALITY. Greenwald acknowledges that the services to be
rendered by him under this Agreement are special and unique, and that by reason
of such services he will acquire confidential information and trade secrets
relating to the Company. Greenwald agrees that all information relating to the
business of the Company which is of a secret or confidential nature, including
the Company's data bases, proprietary programs, contractual terms, offers,
financial information, administrative procedures, negotiations with third
parties and strategic, financial and business plans, is and shall remain the
sole property of the Company, and that Greenwald shall not, either during the
Term of this Agreement or thereafter, disclose or use for his benefit or for the
benefit of third parties, any such information so long as it is secret and non-
public or otherwise not in the public domain.
2
<PAGE>
5. COMPENSATION. In consideration of the services to be rendered by
Greenwald hereunder, the Company shall pay to Greenwald the following management
fees, incentive management fees, and additional compensation, and Greenwald
agrees to accept the same as full compensation for his services:
5.1. MANAGEMENT FEE. Subject to the limitations, terms and conditions
set forth on Exhibit A hereto, the Company shall pay the following management
fee to Greenwald:
(a) During the period between the date of this Agreement and
September 30, 1996, the sum of Fifteen Thousand ($15,000) Dollars per month,
payable monthly in advance on the first day of each month;
(b) During the period between October 1, 1996 and September 30,
1997, the sum of Twenty Thousand ($20,000) Dollars per month, payable monthly in
advance on the first day of each month; and
(c) During the period between October 1, 1997 and September 30,
1998, the sum of Twenty-Five Thousand ($25,000) Dollars per month, payable in
advance on the first day of each month.
5.2 INCENTIVE MANAGEMENT FEE. With respect to each twelve month period
during the Term of this Agreement (counting the period between October 1, 1995
and September 30, 1996 as the first twelve month period during the Term), an
incentive bonus plan shall be established and paid as follows: In the event the
annual budget and income projections as created by the Board of Directors and
the Office of the Chairman is met for a particular twelve month period, then
Greenwald shall be entitled to receive one-third of two (2%) percent of the
budgeted gross income for such twelve month period, and an additional one-third
of five (5%) percent of the gross income, if any, in excess of the budgeted
gross income. Such incentive management fee, if any, shall be paid to Greenwald
within thirty days after the end of the particular twelve month period for which
such incentive management fee was earned.
5.3 ADDITIONAL COMPENSATION. In addition to any warrants or options
which may have been granted to Greenwald in his individual capacity as a member
of the Board of Directors of the Company, the Company hereby agrees to grant to
Greenwald (or to his assignee, G&H Media, Ltd.) 1,200,000 pre-split (or 200,000
post-split) options to purchase common stock of the Company, par value $.01 per
share, at an exercise price of $.3125 per share (on a pre-split basis), or
$1.875 per share (on a post-split basis), exercisable for a five-year period
commencing on March 6, 1996 and
3
<PAGE>
terminating on March 5, 2001, such options to vest in full immediately and not
to be subject to dilution of any kind.
6. REIMBURSEMENT OF EXPENSES. Greenwald shall be reimbursed for all
expenses reasonably incurred by him in connection with the performance of his
duties on behalf of the Company, upon presentation to the Company of appropriate
documentation and receipts therefor. The Company may, from time to time, advance
travel and related expenses to Greenwald in connection with the performance of
his duties hereunder.
7. BENEFITS. Greenwald shall be entitled to participate in any medical
and dental insurance, hospitalization, sick leave, disability insurance, and
401(k) tax savings benefits, upon the same terms and subject to the same
qualifications, as those presently available to the Company's other senior
officers.
8. VACATION. Greenwald shall be entitled to four weeks of paid
vacation each year during the Term of this Agreement, to be taken at such time
or times as shall be mutually agreeable to Greenwald and the Company.
9. EARLIER TERMINATION. Notwithstanding the provisions of Paragraph 1
hereof, the Term may be earlier terminated by the Company "for cause" upon the
occurrence of any of the following ("Earlier Termination"): (a) Greenwald's
death, (b) Greenwald's inability by reason of physical or mental disability to
continue to substantially perform his duties for a period of 120 consecutive
days or for an aggregate of 180 days in any consecutive twelve month period, (c)
Greenwald's conviction for a criminal act involving fraud, dishonesty or moral
turpitude, (d) Greenwald's commission of an act of embezzlement or
misappropriation of funds or property of the Company, (e) chronic alcoholism or
drug use after refusing treatment, (f) habitual absenteeism without medical
documentation, (g) engaging in conduct that is detrimental to the business or
reputation of the Company, its subsidiaries and affiliates after having been
provided written notice from the Company instructing Greenwald to cease such
conduct, and/or (h) in the event of a material breach of this Agreement by
Greenwald which is not cured within ten (10) days following the Company's
written notice to Greenwald of such material breach. In the event of Earlier
Termination pursuant to subparagraph (a) or (b) of this Paragraph 9, Greenwald
or his estate shall be entitled to receive continued compensation hereunder for
the greater of twelve months following the date of such Earlier Termination or
the balance of the Term. In all other instances of Earlier Termination under
this Paragraph 9, Greenwald shall be entitled to receive continued compensation
hereunder for a period of ninety (90) days following the date of such Earlier
Termination.
4
<PAGE>
10. STATUS. At all times during the Term of this Agreement the
relationship between Greenwald and the Company shall be one of independent
contractor and not one of employer and employee, provided, however, Greenwald
shall have authority to bind the Company pursuant to authority granted to
Greenwald by the terms of this Agreement or as otherwise granted to him by the
Board of Directors of the Company from time to time.
11. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be entirely performed in such State.
12. SEVERABILITY. In the event that any term or condition of this
Agreement shall for any reason be held by a court of competent jurisdiction to
be invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not effect any other term or condition of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or
unenforceable term or condition had never been contained herein.
13. ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding between the parties with respect to the subject matter hereof, and
supersedes all previous agreements, arrangements and understandings between the
parties including, but not limited to, the 1995 Agreement which shall be deemed
terminated in all respects upon the Effective Date. Any modification or
amendment to this Agreement will be effective only if in writing and signed by
the parties hereto.
IN WITNESS WHEREOF, this Agreement has been executed by each of the
parties as of the date and year first above written.
Communications and Entertainment Corp.
By:
--------------------------------------
Ira N. Smith, Co-Chairman
--------------------------------------
Stephen R. Greenwald
5
<PAGE>
AGREEMENT
AGREEMENT made this 6th day of March, 1996, by and between
Communications and Entertainment Corp., a Nevada corporation having a principal
place of business at 1900 Avenue of the Stars, Los Angeles, California 90067
(the "Company"), and Lawrence Schneider, having a principal place of business at
450 Park Avenue, New York, New York 10022 ("Schneider").
WHEREAS, Schneider executed an agreement with the Company on October
1, 1995 (the "1995 Agreement"), pursuant to which Schneider agreed to serve as
one of three co-chairmen in the Office of the Chairman of the Company, for a
three year period commencing on October 1, 1995 and terminating on October 1,
1998; and
WHEREAS, the Company and Schneider have agreed to terminate the 1995
Agreement and, in lieu thereof, to enter into this management agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM. The term of this management agreement (the "Agreement") shall
commence as of April 1, 1996 (the "Effective Date") and shall continue in effect
until October 1, 1998, unless otherwise earlier terminated as provided herein
(the "Term").
2. SERVICES. During the Term, Schneider agrees to serve the Company in
the capacity of co-chairman in the Office of the Chairman of the Company.
Schneider agrees to provide such services, and devote such time, as may be
reasonably required by the Board of Directors of the Company to perform his
services of Co-Chairman of the Company in connection with the performance of the
following duties, or such other duties and requirements as may be reasonably
promulgated by the Board of Directors of the Company from time to time:
(a) Working to create and develop a strategic plan to define and
implement the Company's objectives and, in connection therewith, to create
viable action, business and financial plans which will provide the Company with
a sound program to achieve its objectives;
1
<PAGE>
(b) Increasing the Company's film libraries through all manner of
acquisition including the purchase of existing libraries;
(c) Developing ancillary businesses to complement the Company's film
distribution business while achieving maximum sales of the Company's existing
library; and
(d) Performing such other duties as may be reasonably requested by the
Board of Directors of the Company from time to time, including, but not limited
to, services on behalf of any subsidiary or affiliate of the Company.
Anything to the contrary contained or implied herein notwithstanding,
Schneider shall be free to engage in any other business activities which are not
in direct conflict or competition with the Company's principal business or
activities.
3. LOCATION. Schneider shall perform his duties hereunder primarily in
New York City; provided, however, that Schneider shall be available for travel
throughout the United States and the rest of the world at such times as such
travel shall appear in the reasonable judgment of Schneider and the Co-Chairmen
of the Company to be in the best interests of the Company. Any such travel shall
be for the benefit of the Company and at the Company's sole cost and expense.
Although Schneider shall be permitted to travel first class on all air travel
required in connection with the performance of his duties for the Company,
Schneider will make every reasonable effort to fly business class whenever
practical.
4. CONFIDENTIALITY. Schneider acknowledges that the services to be
rendered by him under this Agreement are special and unique, and that by reason
of such services he will acquire confidential information and trade secrets
relating to the Company. Schneider agrees that all information relating to the
business of the Company which is of a secret or confidential nature, including
the Company's data bases, proprietary programs, contractual terms, offers,
financial information, administrative procedures, negotiations with third
parties and strategic, financial and business plans, is and shall remain the
sole property of the Company, and that Schneider shall not, either during the
Term of this Agreement or thereafter, disclose or use for his benefit or for the
benefit of third parties, any such information so long as it is secret and non-
public or otherwise not in the public domain.
5. COMPENSATION. In consideration of the services to be rendered by
Schneider hereunder, the Company shall pay to Schneider the following management
fees, incentive management fees, and additional compensation, and Schneider
agrees to accept the same as full compensation for his services:
2
<PAGE>
5.1. MANAGEMENT FEE. Subject to the limitations, terms and conditions
set forth on Exhibit A hereto, the Company shall pay the following management
fee to Schneider:
(a) During the period between the date of this Agreement and
September 30, 1996, the sum of Fifteen Thousand ($15,000) Dollars per month,
payable monthly in advance on the first day of each month;
(b) During the period between October 1, 1996 and September 30,
1997, the sum of Twenty Thousand ($20,000) Dollars per month, payable monthly in
advance on the first day of each month; and
(c) During the period between October 1, 1997 and September 30,
1998, the sum of Twenty-Five Thousand ($25,000) Dollars per month, payable in
advance on the first day of each month.
5.2 INCENTIVE MANAGEMENT FEE. With respect to each twelve month period
during the Term of this Agreement (counting the period between October 1, 1995
and September 30, 1996 as the first twelve month period during the Term), an
incentive bonus plan shall be established and paid as follows: In the event the
annual budget and income projections as created by the Board of Directors and
the Office of the Chairman is met for a particular twelve month period, then
Schneider shall be entitled to receive one-third of two (2%) percent of the
budgeted gross income for such twelve month period, and an additional one-third
of five (5%) percent of the gross income, if any, in excess of the budgeted
gross income. Such incentive management fee, if any, shall be paid to Schneider
within thirty days after the end of the particular twelve month period for which
such incentive management fee was earned.
5.3 ADDITIONAL COMPENSATION. In addition to any warrants or options
which may have been granted to Schneider in his individual capacity as a member
of the Board of Directors of the Company, the Company hereby agrees to grant to
Schneider 1,200,000 pre-split (or 200,000 post-split) options to purchase common
stock of the Company, par value $.01 per share, at an exercise price of $.3125
per share (on a pre-split basis), or $1.875 per share (on a post-split basis),
exercisable for a five-year period commencing on March 6, 1996 and terminating
on March 5, 2001, such options to vest in full immediately and not to be subject
to dilution of any kind.
6. REIMBURSEMENT OF EXPENSES. Schneider shall be reimbursed for all
expenses reasonably incurred by him in connection with the performance of his
duties on behalf of the
3
<PAGE>
Company, upon presentation to the Company of appropriate documentation and
receipts therefor. The Company may, from time to time, advance travel and
related expenses to Schneider in connection with the performance of his duties
hereunder.
7. BENEFITS. Schneider shall be entitled to participate in any medical
and dental insurance, hospitalization, sick leave, disability insurance, and
401(k) tax savings benefits, upon the same terms and subject to the same
qualifications, as those presently available to the Company's other senior
officers.
8. VACATION. Schneider shall be entitled to four weeks of paid
vacation each year during the Term of this Agreement, to be taken at such time
or times as shall be mutually agreeable to Schneider and the Company.
9. EARLIER TERMINATION. Notwithstanding the provisions of Paragraph 1
hereof, the Term may be earlier terminated by the Company "for cause" upon the
occurrence of any of the following ("Earlier Termination"): (a) Schneider's
death, (b) Schneider's inability by reason of physical or mental disability to
continue to substantially perform his duties for a period of 120 consecutive
days or for an aggregate of 180 days in any consecutive twelve month period, (c)
Schneider's conviction for a criminal act involving fraud, dishonesty or moral
turpitude, (d) Schneider's commission of an act of embezzlement or
misappropriation of funds or property of the Company, (e) chronic alcoholism or
drug use after refusing treatment, (f) habitual absenteeism without medical
documentation, (g) engaging in conduct that is detrimental to the business or
reputation of the Company, its subsidiaries and affiliates after having been
provided written notice from the Company instructing Schneider to cease such
conduct, and/or (h) in the event of a material breach of this Agreement by
Schneider which is not cured within ten (10) days following the Company's
written notice to Schneider of such material breach. In the event of Earlier
Termination pursuant to subparagraph (a) or (b) of this Paragraph 9, Schneider
or his estate shall be entitled to receive continued compensation hereunder for
the greater of twelve months following the date of such Earlier Termination or
the balance of the Term. In all other instances of Earlier Termination under
this Paragraph 9, Schneider shall be entitled to receive continued compensation
hereunder for a period of ninety (90) days following the date of such Earlier
Termination.
10. STATUS. At all times during the Term of this Agreement the
relationship between Schneider and the Company shall be one of independent
contractor and not one of employer and employee, provided, however, Schneider
shall have authority to bind the Company pursuant to authority granted to
Schneider by the terms of this Agreement or as otherwise granted to him by the
Board of Directors of the Company from time to time.
4
<PAGE>
11. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be entirely performed in such State.
12. SEVERABILITY. In the event that any term or condition of this
Agreement shall for any reason be held by a court of competent jurisdiction to
be invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not effect any other term or condition of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or
unenforceable term or condition had never been contained herein.
13. ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding between the parties with respect to the subject matter hereof, and
supersedes all previous agreements, arrangements and understandings between the
parties including, but not limited to, the 1995 Agreement which shall be deemed
terminated in all respects upon the Effective Date. Any modification or
amendment to this Agreement will be effective only if in writing and signed by
the parties hereto.
IN WITNESS WHEREOF, this Agreement has been executed by each of the
parties as of the date and year first above written.
Communications and Entertainment Corp.
By:
--------------------------------------
Stephen R. Greenwald, CEO
--------------------------------------
Lawrence Schneider
5
<PAGE>
AGREEMENT
AGREEMENT made this 6th day of March, 1996, by and between
Communications and Entertainment Corp., a Nevada corporation having a principal
place of business at 1900 Avenue of the Stars, Los Angeles, California 90067
(the "Company"), and Ira N. Smith, having a principal place of business at 421
West 54th Street, New York, New York 10019 ("Smith").
WHEREAS, Smith executed an agreement with the Company on October 1,
1995 (the "1995 Agreement"), pursuant to which Smith agreed to serve as one of
three co-chairmen in the Office of the Chairman of the Company, for a three year
period commencing on October 1, 1995 and terminating on October 1, 1998; and
WHEREAS, the Company and Smith have agreed to terminate the 1995
Agreement and, in lieu thereof, to enter into this management agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. TERM. The term of this management agreement (the "Agreement") shall
commence as of April 1, 1996 (the "Effective Date") and shall continue in effect
until October 1, 1998, unless otherwise earlier terminated as provided herein
(the "Term").
2. SERVICES. During the Term, Smith agrees to serve the Company in the
capacity of co-chairman in the Office of the Chairman of the Company. Smith
agrees to provide such services, and devote such time, as may be reasonably
required by the Board of Directors of the Company to perform his services of Co-
Chairman of the Company in connection with the performance of the following
duties, or such other duties and requirements as may be reasonably promulgated
by the Board of Directors of the Company from time to time:
(a) Working to create and develop a strategic plan to define and
implement the Company's objectives and, in connection therewith, to create
viable action, business and financial plans which will provide the Company with
a sound program to achieve its objectives;
1
<PAGE>
(b) Increasing the Company's film libraries through all manner of
acquisition including the purchase of existing libraries;
(c) Developing ancillary businesses to complement the Company's film
distribution business while achieving maximum sales of the Company's existing
library; and
(d) Performing such other duties as may be reasonably requested by
the Board of Directors of the Company from time to time, including, but not
limited to, services on behalf of any subsidiary or affiliate of the Company.
Anything to the contrary contained or implied herein notwithstanding,
Smith shall be free to engage in any other business activities which are not in
direct conflict or competition with the Company's principal business or
activities.
3. LOCATION. Smith shall perform his duties hereunder primarily in New
York City; provided, however, that Smith shall be available for travel
throughout the United States and the rest of the world at such times as such
travel shall appear in the reasonable judgment of Smith and the Co-Chairmen of
the Company to be in the best interests of the Company. Any such travel shall be
for the benefit of the Company and at the Company's sole cost and expense.
Although Smith shall be permitted to travel first class on all air travel
required in connection with the performance of his duties for the Company, Smith
will make every reasonable effort to fly business class whenever practical.
4. CONFIDENTIALITY. Smith acknowledges that the services to be
rendered by him under this Agreement are special and unique, and that by reason
of such services he will acquire confidential information and trade secrets
relating to the Company. Smith agrees that all information relating to the
business of the Company which is of a secret or confidential nature, including
the Company's data bases, proprietary programs, contractual terms, offers,
financial information, administrative procedures, negotiations with third
parties and strategic, financial and business plans, is and shall remain the
sole property of the Company, and that Smith shall not, either during the Term
of this Agreement or thereafter, disclose or use for his benefit or for the
benefit of third parties, any such information so long as it is secret and
non-public or otherwise not in the public domain.
5. COMPENSATION. In consideration of the services to be rendered by
Smith hereunder, the Company shall pay to Smith the following management fees,
incentive management fees, and additional compensation, and Smith agrees to
accept the same as full compensation for his services:
2
<PAGE>
5.1. MANAGEMENT FEE. Subject to the limitations, terms and conditions
set forth on Exhibit A hereto, the Company shall pay the following management
fee to Smith:
(a) During the period between the date of this Agreement and
September 30, 1996, the sum of Fifteen Thousand ($15,000) Dollars per month,
payable monthly in advance on the first day of each month;
(b) During the period between October 1, 1996 and September 30,
1997, the sum of Twenty Thousand ($20,000) Dollars per month, payable monthly in
advance on the first day of each month; and
(c) During the period between October 1, 1997 and September 30,
1998, the sum of Twenty-Five Thousand ($25,000) Dollars per month, payable in
advance on the first day of each month.
5.2 INCENTIVE MANAGEMENT FEE. With respect to each twelve month period
during the Term of this Agreement (counting the period between October 1, 1995
and September 30, 1996 as the first twelve month period during the Term), an
incentive bonus plan shall be established and paid as follows: In the event the
annual budget and income projections as created by the Board of Directors and
the Office of the Chairman is met for a particular twelve month period, then
Smith shall be entitled to receive one-third of two (2%) percent of the budgeted
gross income for such twelve month period, and an additional one-third of five
(5%) percent of the gross income, if any, in excess of the budgeted gross
income. Such incentive management fee, if any, shall be paid to Smith within
thirty days after the end of the particular twelve month period for which such
incentive management fee was earned.
5.3 ADDITIONAL COMPENSATION. In addition to any warrants or options
which may have been granted to Smith in his individual capacity as a member of
the Board of Directors of the Company, the Company hereby agrees to grant to
Smith 1,200,000 pre-split (or 200,000 post-split) options to purchase common
stock of the Company, par value $.01 per share, at an exercise price of $.3125
per share (on a pre-split basis), or $1.875 per share (on a post-split basis),
exercisable for a five-year period commencing on March 6, 1996 and terminating
on March 5, 2001, such options to vest in full immediately and not to be subject
to dilution of any kind.
6. REIMBURSEMENT OF EXPENSES. Smith shall be reimbursed for all
expenses reasonably incurred by him in connection with the performance of his
duties on behalf of the Company, upon
3
<PAGE>
presentation to the Company of appropriate documentation and receipts therefor.
The Company may, from time to time, advance travel and related expenses to Smith
in connection with the performance of his duties hereunder.
7. BENEFITS. Smith shall be entitled to participate in any medical and
dental insurance, hospitalization, sick leave, disability insurance, and 401(k)
tax savings benefits, upon the same terms and subject to the same
qualifications, as those presently available to the Company's other senior
officers.
8. VACATION. Smith shall be entitled to four weeks of paid vacation
each year during the Term of this Agreement, to be taken at such time or times
as shall be mutually agreeable to Smith and the Company.
9. EARLIER TERMINATION. Notwithstanding the provisions of Paragraph 1
hereof, the Term may be earlier terminated by the Company "for cause" upon the
occurrence of any of the following ("Earlier Termination"): (a) Smith's death,
(b) Smith's inability by reason of physical or mental disability to continue to
substantially perform his duties for a period of 120 consecutive days or for an
aggregate of 180 days in any consecutive twelve month period, (c) Smith's
conviction for a criminal act involving fraud, dishonesty or moral turpitude,
(d) Smith's commission of an act of embezzlement or misappropriation of funds or
property of the Company, (e) chronic alcoholism or drug use after refusing
treatment, (f) habitual absenteeism without medical documentation, (g) engaging
in conduct that is detrimental to the business or reputation of the Company, its
subsidiaries and affiliates after having been provided written notice from the
Company instructing Smith to cease such conduct, and/or (h) in the event of a
material breach of this Agreement by Smith which is not cured within ten (10)
days following the Company's written notice to Smith of such material breach. In
the event of Earlier Termination pursuant to subparagraph (a) or (b) of this
Paragraph 9, Smith or his estate shall be entitled to receive continued
compensation hereunder for the greater of twelve months following the date of
such Earlier Termination or the balance of the Term. In all other instances of
Earlier Termination under this Paragraph 9, Smith shall be entitled to receive
continued compensation hereunder for a period of ninety (90) days following the
date of such Earlier Termination.
10. STATUS. At all times during the Term of this Agreement the
relationship between Smith and the Company shall be one of independent
contractor and not one of employer and employee, provided, however, Smith shall
have authority to bind the Company pursuant to authority granted to Smith by the
terms of this Agreement or as otherwise granted to him by the Board of Directors
of the Company from time to time.
4
<PAGE>
11. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be entirely performed in such State.
12. SEVERABILITY. In the event that any term or condition of this
Agreement shall for any reason be held by a court of competent jurisdiction to
be invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not effect any other term or condition of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or
unenforceable term or condition had never been contained herein.
13. ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding between the parties with respect to the subject matter hereof, and
supersedes all previous agreements, arrangements and understandings between the
parties including, but not limited to, the 1995 Agreement which shall be deemed
terminated in all respects upon the Effective Date. Any modification or
amendment to this Agreement will be effective only if in writing and signed by
the parties hereto.
IN WITNESS WHEREOF, this Agreement has been executed by each of the
parties as of the date and year first above written.
Communications and Entertainment Corp.
By:
-------------------------------------
Stephen R. Greenwald, CEO
-------------------------------------
Ira N. Smith
5
<PAGE>
EXHIBIT A
Due to the financial condition of the Company, it is acknowledged that the
Company may not be in a position to fully pay the management fee set forth in
Section 5.1 of the Agreement when due (the "Management Fee"), and therefore it
is agreed as follows:
1. At the end of each calendar quarter during the Term (including for this
purpose the quarter ending March 31, 1996), the Company's "current assets", as
hereinafter defined, shall be determined. "Current assets" shall mean the total,
on the last day of the quarter in question, of: (i) cash or cash equivalents on
hand; plus (ii) contract and/or accounts receivable due the Company which are
due and collectible within the following twelve months. The Company's Chief
Executive Officer or Chief Financial Officer shall certify to the Board the
amount of the Company's current assets within 10 days after the end of each
quarter.
2. With respect to each calendar quarter during the Term, the following
percentage of the Management Fee shall be paid:
(a) 0% if the current assets as of the end of the previous calendar quarter
are less than $500,000; or
(b) 33 1/3% if the current assets as of the end of the previous calendar
quarter are more than $500,000 but less than $1,000,000; or
(c) 66 2/3% if the current assets as of the end of the previous calendar
quarter are more than $1,000,000 but less than $1,500,000; or
(d) 100% if the current assets as of the end of the previous calendar
quarter are more than $1,500,000.
3. Any portion of the Management Fee otherwise due which is not paid as a
result of the conditions imposed under Paragraph 2 of this Exhibit A shall
accrue (the "Shortfall"). At the end of each calendar quarter the Company shall
issue a promissory note for the Shortfall (the "Note"), which Note shall be due
and payable within twelve months of the date of issue, and which shall bear
interest at two percentage points per annum over the prime rate of interest in
New York on the date of issue.
4. Each Note issued hereunder shall provide that the holder shall have the
option, at any time prior to payment in full of the Note, to exchange any
portion or all of the then remaining balance of such Note for newly issued
common stock of the Company. Such exchange shall be based on the outstanding
principal and interest on the Note on the date of the exchange and the average
closing bid price of the Company's common stock for the most recent ten days in
which stock traded. Any such stock, when issued, shall carry the most favorable
anti-dilution, "piggyback" registration and such other rights as may then, or
thereafter, apply to any other issued common stock of the Company and/or to any
options or warrants to purchase stock of the Company.
<PAGE>
Exhibit 10.19
ODYSSEY [LOGO]
DISTRIBUTORS LTD
Film Bridge/Odyssey
Joint Venture
March 11, 1996
1) FORMAT: Joint acquisition and sales venture between Film Bridge and
ComEnt, which will be renamed Odyssey Pictures.
2) NAME: The Film Bridge/Odyssey Joint Venture (Film Bridge/Odyssey or FBO).
3) TITLES COVERED: A) All Odyssey library titles (i.e. 1492; EARTH GIRLS ARE
EASY; PELLE THE CONQUEROR; ROSENCRANTZ AND GUILDENSTERN ARE DEAD;
MR. FROST; DISTURBED; FIRE, ICE AND DYNAMITE; RHAPSODY IN AUGUST; MONEY and
SNIPER); B) DDLC titles after expiration of John Matthew's deal (i.e.
RAGTIME; CONAN THE BARBARIAN; DUNE; HALLOWEEN II AND III; THE DEAD ZONE;
AMITYVILLE II AND III and BEYOND THE REEF; C) All individual film titles
acquired or projects developed unilaterally by Odyssey (such as UP, DOWN &
SIDEWAYS and TRACKS OF GLORY) that are acceptable to FBI; D) All individual
film projects acquired jointly (such as FAST BREAK, THE FIFTH FREEDOM or
CRIMES OF FASHION; E) All projects developed unilaterally by FBI that are
acceptable to Odyssey (such as THE FIFTH FREEDOM).
4) FIRST LOOK: ODY and FBI will show prospective projects for sale, pickup or
development to the JV first. If the other partner declines, the offering
partner is free to complete the project unilaterally outside the joint
venture.
5) TERM: Two Years. Planned to be extended in one-year segments with renewal
options exercised 60 days prior to end of term.
6) FUNCTIONS: FBI: Primarily sales, marketing and delivery. ODY: Primarily
acquisition financing and development. Both partners will participate
in acquisitions. ODY will be the partner responsible for raising sufficient
capital to make the joint venture's theatrical projects viable.
1900 AVENUE OF THE STARS, LOS ANGELES, CALIFORNIA 90067
TEL: (310) 556-3656 - FAX: (310) 556-5640
<PAGE>
-Page Two-
7) ASSETS: All newly-developed projects, reps and pickups (i.e. licenses)
will be in the name of the joint venture. ODY will report all FBO revenues,
costs and profit in its financial statements with FBI accounted for as a
participant.
8) EXIT: Either party may withdraw with 60 days' written notice. After such
withdrawal, each venturer will retain an interest in each FBO film as if
the venture had continued unless one party is bought out by the other under
mutually agreeable terms. Each venturer may be owed unrecouped expenses or
advance or other income earned from a film and whichever is owed the most
can elect to retain future sales rights (including commissions), with the
other remaining as an equity partner.
9) EXPENSES AND ADVANCES: The JV will pay all marketing and sales expenses.
In the event that the JV has insufficient cash, ODY will advance 65% of
expenses (marketing et al.) and FBI will advance 35% as required. Expenses
are recouped pari-passu before revenues and commissions on gross receipts.
10) FEES: The JV will seek to maximize its commission and fee revenue to the
greatest extent possible. Revenue and commission splits are as follows:
A) (ODY library): 50/50
B) DDLC: 60/40
C) All current acquisitions (includes CRIMES OF FASHION, THE FIFTH
FREEDOM and FAST BREAK): 50/50. All future acquisitions: a schedule of
50/50 for the first $2M, 60/40 on the next $1M, 70/30 on the next
$500,000 and 80/20 on all above, on an annual basis. The schedule
repeats at the beginning of each 12-month period beginning with the JV
inception date.
11) EXCLUSIVITY: Neither party will enter into any other agreements without
written approval from the other.
<PAGE>
-Page Three-
12) SALES: Licenses would be entered into in the name of the JV.
13) BANKING: The JV will establish its own accounts. Two signatures required
(one from each venturer) on amounts over $5,000 unless such amounts are
included in the pre-approved annual budget. The JV will transfer all net
proceeds from ODY library and DDLC sales (less expenses and commissions)
upon delivery of materials.
14) OPERATIONS: FBI is the operating partner on a daily basis: prepares
budgets and estimates, etc. FBI will develop a 12-month or annual budget
which will be approved by both partners. Any expenditure that would
increase budgeted annual expenses by more than 15% must be approved in
advance by both partners.
15) WARRANTS: FBI will be granted 25,000 warrants to purchase ComEnt common
stock at an exercise price of $1.86.
This deal memo generally defines our understanding of the agreement between
Odyssey (ComEnt) and Film Bridge. It is our understanding and intent to enter
into a more formal agreement, which is currently in preparation and will
replace this memo.
Communications & Entertainment Film Bridge International
Corp. (Odyssey) by by Ellen S. Wander, President
Stephen R. Greenwald, CEO
/s/ Stephen R. Greenwald /s/ Ellen S. Wander
- ------------------------- ------------------------
cc: Howard Kerker, Esq.
<PAGE>
Exhibit 10.20
COMMUNICATIONS AND ENTERTAINMENT
CORPORATION, a Nevada corporation
1875 Century Park East, Suite 2130
Table of Contents
Page
----
1. PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
4. RENT ADJUSTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. SECURITY DEPOSIT. . . . . . . . . . . . . . . . . . . . . . . . . . 4
6. USE, NUISANCE OR HAZARD . . . . . . . . . . . . . . . . . . . . . . 4
7. ALTERATION AND IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . 5
8. LESSEE'S REPAIRS. . . . . . . . . . . . . . . . . . . . . . . . . . 5
9. NO LIENS BY LESSEE. . . . . . . . . . . . . . . . . . . . . . . . . 6
10. LESSOR'S REPAIRS. . . . . . . . . . . . . . . . . . . . . . . . . . 6
11. BUILDING SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . 6
12. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . 6
13. SUBSTITUTED PREMISES. . . . . . . . . . . . . . . . . . . . . . . . 8
14. INDEMNIFICATION: INSURANCE. . . . . . . . . . . . . . . . . . . . . 8
15. DAMAGE OR DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . 9
16. EMINENT DOMAIN. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
17. DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
18. REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
19. ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 10
20. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
21. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . 11
22. HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
23. INSPECTIONS AND ACCESS. . . . . . . . . . . . . . . . . . . . . . . 11
24. NAME OF BUILDING. . . . . . . . . . . . . . . . . . . . . . . . . . 11
25. SURRENDER OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . 12
26. WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
27. SALE BY LESSOR: LESSOR'S LIABILITY. . . . . . . . . . . . . . . . . 12
28. NO LIGHT AND AIR EASEMENT . . . . . . . . . . . . . . . . . . . . . 12
29. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
30. ESTOPPEL CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . 12
31. RIGHT TO PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . 12
32. LESSOR'S DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . 13
33. EXECUTION OF LEASE BY LESSOR. . . . . . . . . . . . . . . . . . . . 13
34. PARKING FACILITIES. . . . . . . . . . . . . . . . . . . . . . . . . 13
35. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
36. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
EXHIBITS
Exhibit Description
------- -----------
A PREMISES DESCRIPTION . . . . . . . . . . . . . . . . . . . A
B DESCRIPTION OF LAND. . . . . . . . . . . . . . . . . . . . B
C STANDARDS FOR UTILITIES AND SERVICES . . . . . . . . . . . C
D RULES AND REGULATIONS. . . . . . . . . . . . . . . . . . . D
E ESTOPPEL CERTIFICATE . . . . . . . . . . . . . . . . . . . E
F PARKING FACILITIES . . . . . . . . . . . . . . . . . . . . F
<PAGE>
LEASE AGREEMENT
(California Standard Form Office Lease)
THIS LEASE AGREEMENT, dated May 9, 1996, is by and between 1875/1925 CENTURY
PARK EAST COMPANY, a California general partnership (herein called
"Lessor"), and COMMUNICATIONS AND ENTERTAINMENT CORPORATION, a Nevada
corporation (herein called "Lessee").
WITNESSETH:
In consideration of the mutual covenants and agreements set forth herein,
Lessor and Lessee agree as follows:
1. PREMISES.
1.1 Lessor hereby leases to Lessee, and Lessee hereby Leases from
Lessor, those certain premises (the "Premises") consisting of the office
space cross-hatched on Exhibit "A" and located in an office building located
at 1875/1925 Century Park East, Los Angeles, California 90067 (the
"Building"). Lessee acknowledges that this Lease is made subject to all
existing liens, encumbrances, deeds of trust, and other matters of record,
and to zoning, building and fire ordinances and all governmental statutes,
rules and regulations relating to the use or occupancy of the Premises.
1.2 Any changes or improvements to the Premises shall be made at
Lessee's sole cost and expense, with the reasonable approval and under the
direction of Lessor and employing the services of Lessor's contractor and in
accordance with any other applicable provisions of this Lease.
1.3 Lessee acknowledges that neither Lessor nor any agent or employee
of Lessor has made any representation or warranty with respect to the
Premises, the Building or the Land or with respect to the suitability of the
Premises for Lessee's intended use unless such are expressly set forth in this
Lease. Lessee further acknowledges that no representations or warranties as to
the state of construction or repair of the Premises, nor promises to alter,
remodel, improve, repair, decorate or paint the Premises, have been made by
Lessor, unless such are expressly set forth in Paragraph 10 of this Lease.
2. TERM. See Rider "A"
2.1 The term of this Lease (the "Term") shall commence on the
"Commencement Date" (as hereinafter defined), and shall continue for a
period of two (2) years following the Commencement Date (or, if the
Commencement Date is a day other than the first day of a calendar month, the
term shall commence on the first day of the first full calendar month
following the Commencement Date), unless otherwise terminated in accordance
with the provisions of this Lease. For purposes of this Lease:
(a) The "Commencement Date" shall be June 1, 1996.
(b) Lessee, at Lessee's option, and its contractors,
subcontractors, and agents, shall be permitted to enter the Leased
Premises following the full execution of the Lease and prior to the
anticipated Commencement Date, with no obligation to pay rent, (but
subject to all of the terms, covenants and conditions of the Lease), and
without commencing the rental period set forth in Paragraph 3.1, for the
purpose of installing leasehold improvements, fixtures, equipment and
furniture, provided that such entry will not*
2.2 If Lessor, through no fault of Lessee, cannot deliver possession of
the Premises to Lessee on the Commencement Date, such delay shall not affect
the validity of this Lease, nor shall Lessor be liable to Lessee for any loss
or damage resulting therefrom, but there shall be a proportionate reduction
of rent covering the period between the Commencement Date and the time when
Lessor can deliver possession. No such delay shall operate to extend the
Term.
3. RENT
3.1 Lessee agrees to pay to Lessor as annual rental for the Premises
the sum of Sixty-three thousand six hundred seven and 68/100 Dollars
($63,607.68), payable in monthly installments of $5,300.64 (the "Rental"),
in advance, on or before the first day of each calendar month during the
entire Term. **Lessee shall pay to Lessor the sum of $5,300.64 representing
Rental payable hereunder for the first full calendar month of the Term.
3.2 In addition to the foregoing Rental, Lessee shall pay as rent,
prior to delinquency, all personal property taxes assessed against and levied
upon any trade fixtures, furnishings, or equipment and all other personal
property contained in the Premises (collectively, the "Personal Property"),
and Lessee shall cause the Personal Property to be assessed and billed
separately from the property of Lessor.
3.3 If the improvements in the Premises, whether installed and/or paid
for by Lessor or Lessee and whether or not affixed to the real property so as
to become a part thereof, are assessed for real property tax purposes at a
valuation higher than the valuation at which the improvements conforming to
Lessor's Standard Installations on other space in the Building are assessed,
then the real property taxes and assessments levied against Lessor or the
property by reason of such excess assessed valuation shall be deemed to be
taxes levied against personal property of Lessee and shall be governed by the
provisions of Paragraph 3.2 of the Lease. If the records of the County
Assessor are available and sufficiently detailed to serve as a basis for
determining whether said improvements are assessed at a higher valuation than
Lessor's Standard Installation, such records shall be binding on both Lessor
and Lessee. If the records of the County Assessor are not
available or sufficiently detailed to serve as a basis for making said
determination, the actual cost of construction shall be used.
3.4 In addition to the Rental, Lessee agrees to pay to Lessor as rent
all "Rent Adjustments" as provided in Paragraph 4, below.
3.5 Lessee agrees to pay to Lessor as rent upon demand (but not more
frequently than monthly) all charges for any services, goods or materials
furnished by Lessor at Lessee's request which are not required to be
furnished by Lessor under this Lease without separate charge or reimbursement.
* be prior to the existing tenant's vacating of the Premises.
** Prior to June 1, 1996.
1
<PAGE>
3.6 The Rental and all taxes, fees, costs, expenses, and all other
monetary payments which are attributable to, payable by or the responsibility
of Lessee under this Lease constitute "rent" within the
meaning of California Civil Code Section 1951(a). Any rent for any fractional
month shall be prorated based on a thirty (30) day month, and for any
fractional year shall be prorated based on a three hundred sixty (360) day
year. All rent payable by Lessee to Lessor under this Lease shall be paid to
Lessor in lawful money of the United States of America at Lessor's office
located in the Building, or to such other person or at such other place as
Lessor may from time to time designate in writing. All rent shall be paid
without prior demand, deduction, setoff or counterclaim.
4. RENT ADJUSTMENTS.
4.1
4.2 If, during any calendar year during the Term, the "Building
Operating Costs" (as hereinafter defined) shall exceed those of the calendar
year 1996 (the "Base Year"), Lessee shall pay to Lessor, in addition to the
Rental and all other payments due under this Lease, an amount (the "Rent
Adjustment") equal to Lessee's "Proportionate Share" (as hereinafter
defined) of such excess Building Operating Costs subject to the following
terms and conditions:
(a) "Net Rentable Area" means, with respect to both the Premises
and the Building, the respective measurements of floor area above the plaza
level of the Building as may from time to time be subject to lease by
Lessee and other tenants of the Building, respectively, as designated by
Lessor or Lessor's representative, applied on a consistent basis throughout
the Building. As of the effective date of this Lease, the Net Rentable
Area of the Premises is hereby agreed to be 2,948 Net Rentable square feet
(3,272 rentable square feet), and the Net Rentable Area of the Building is
agreed to be 747,168 square feet.
(b) "Proportionate Share" means a fraction, the numerator of
which is the Net Rentable Area of the Premises, and the denominator of
which is the Net Rentable Area of the Building, as determined by Lessor
from time to time.
(c) The term "Building Operating Costs" shall include:
(i) All taxes, assessments, water and sewage charges and
other similar governmental charges levied on or attributable to the
Building, the Land, and the roads, walks, plaza, landscaped areas,
common areas, improvements and facilities thereon (collectively, the
"Property"), or its operation, including, but not limited to, real
property taxes or assessments levied or assessed against the
Property, personal property taxes or assessments levied or assessed
against the Property, and any tax measured by gross rentals received
from the Property, together with any costs incurred by Lessor
(including attorneys' fees) in contesting any such taxes, assessments
or charges; but excluding any net income, franchise, capital stock,
estate or inheritance taxes imposed by the State or Federal
Government or by any agency, branch or department thereof; provided
that if at any time during the Term there shall be levied, assessed
or imposed on Lessor or the Property by any governmental entity, any
general or special, ad valorem or specific, excise, capital levy or
other tax, assessment, levy or charge directly on the rent received
under this Lease or other leases affecting the Property and/or
any license fee, excise or franchise tax, assessment, levy or charge
measured by or based, in whole or in part, upon such rents, and/or
transfer, transaction, or similar tax, assessment, levy or charge
based directly or indirectly upon the transaction represented by this
Lease or other leases affecting the Property, and/or occupancy, use,
per capita or other tax, assessment, levy or charge based directly
or indirectly upon the use or occupancy of the Premises or the
Property, then all such taxes, assessments, levies and charges shall
be deemed to be included in the term "Building Operating Costs." If
the assessed valuation or the taxes, assessments and charges
attributable to the Property shall not be based upon a completed
building with at least ninety-five percent (95%) of the Net Rental
Area of the Building occupied, then such taxes, assessments and
charges shall be increased to reflect what such taxes, assessments
and charges would have been payable if the Building had been
completed and ninety-five (95%) of the Net Rental Area of the
Building had been occupied.
(ii) All costs incurred by Lessor in maintaining, managing and
operating the Property including, but not limited to, the following:
cost of utilities, supplies, insurance (including public liability
and property damage, rent continuation, and fire and extended
coverage insurance for the full replacement cost of the Property),
cost of services of independent contractors, cost of compensation
(including employment taxes and fringe benefits) of all persons who
perform regular duties connected with the day-to-day operation,
maintenance, repair and overhaul of the Property, including without
limitation engineers, janitors, painters, floor waxers, window
washers, watchmen and gardeners, costs incurred by Lessor for
management of the Property, rental expenses for or a reasonable
allowance for depreciation of personal property used in the
maintenance, operation and repair of the Property, costs and expenses
paid of
2
<PAGE>
incurred by Lessor, and attributable or allocable to the Property, and any
other costs and expenses to be incurred by Lessor under this Lease and not
reimbursed by tenants, but excluding costs incurred by Lessor in
maintaining, managing and operating the "Parking Facilities" (as defined in
Paragraph 35, below). If the Building does not have a least ninety-five
percent (95%) of the Net Rentable Area of the Building occupied during the
Base Year or any "Comparison Year" (as hereinafter defined), then the costs
and expenses under this subparagraph (ii) shall be increased to reflect
what such costs would have been for such year if they had been calculated
on the basis of ninety-five percent (95%) occupancy of the Net Rentable
Area of the Building during such year.
(iii) The term Building Operating Costs shall mean the sum of
subparagraphs (i) and (ii), above, on an annualized basis.
(d) The term "Building Operating Costs" shall exclude:
Notwithstanding Article 4.2 (C) ii to the contrary, the following shall be
excluded from the operating cost:
1) Bad debt expenses and interest, principal, points and fees on debts
(except in connection with the financing of items which may be included in
Operating Expenses) or amortization in any mortgage or mortgages or any
other debt instrument encumbering the Building or the Real Property
(including the Land on which the Building is situated);
2) marketing costs, including leasing commissions, attorneys' fees in
connection with the negotiation and preparation of letters, deal memos,
letters of intent, leases, subleases and/or assignments, space planning
costs, and other costs and expenses incurred in connection with the
leasing, subleasing and/or assignment negotiations and transactions with
present or prospective tenants or other occupants of the Building,
including attorneys' fees and other costs and expenditures incurred in
connection with disputes with present or prospective tenants or other
occupants of the Building;
3) costs, including permit, license and inspection costs, incurred with
respect to the installation of other tenants' or occupants' improvements
made for tenants or other occupants in the Building or incurred in
renovating or otherwise improving, decorating, painting or redecorating
vacant space for tenants or other occupants in the Building;
4) the cost of providing any service directly to and paid directly by
any tenant;
5) any costs expressly excluded from Operating Expenses elsewhere in
this Lease;
6) cost of any items (including, but not limited to costs incurred by
Lessor for the repair or damage to the Building) to the extent Lessor
receives reimbursement from insurance proceeds (such proceeds to be
deducted from Operating Expenses in the year in which received) or from a
third party (such proceeds to be credited to Operating Expenses in the year
in which received, except that any deductible amount under any insurance
policy shall be included within Operating Expenses);
7) rentals and other related expenses for leasing a HVAC system,
elevators, or other items (except when needed in connection with normal
repairs and maintenance of the Building) which if purchased, rather than
rented, would constitute a capital improvement not included in Operating
Expenses pursuant to this Lease;
8) costs incurred by Lessor for alterations (including structural
additions), repairs, equipment and tools which are of a capital nature
and/or which are considered capital improvements or replacements under
generally accepted accounting principles, consistently applied, except as
specifically included in Operating Expenses pursuant to the terms of this
Lease;
9) expenses in connection with services or other benefits which are not
offered to Lessee or for which Lessee is charged for directly but which are
provided to another Lessee or occupant of the Building, without charge;
10) costs incurred by Lessor due to the violation by Lessor or any Lessee
of the terms and conditions or any Lease of space in the Building;
11) Lessor's general corporate overhead and general and administrative
expenses;
12) advertising and promotional expenditures, and costs of sign in or
on the Building identifying the owner of the Building or other tenants'
signs;
13) tax penalties incurred as a result of Lessor's negligence, inability
or unwillingness to make payments or file returns when due;
14) costs arising from Lessor's charitable or political contributions;
15) cost of installing, maintaining and operating any specialty service
operated by Lessor including without limitation, any luncheon club or
athletic facility, or the repair thereof;
16) the amounts of the management fee paid or charged by Lessor in
connection with the management of the Building and the common areas to the
extent such management fee is in excess of the average management fees
customarily paid or charged by lessors of other first-class office
buildings in Century City, California area;
17) costs necessitated by or resulting from the negligence of Lessor, or
any of its agents, employees or independent contractors including, but not
limited to, tax penalties incurred as a result of Lessor's negligence,
inability or unwillingness to make payments or file returns when due;
18) the amounts of the parking management fee paid by Lessor in
connection with the management of the Real Property parking facility to the
extent such parking
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management fee is in excess of parking management fees customarily paid by
lessors of Comparable Buildings;
19) any ground lease rental;
20) costs of capital acquisition of sculptures, paintings or other objects
of art, but specifically excluding any type of art program being operated
in the Building by Lessor to the extent the costs for such art program do
not exceed Fifteen Thousand Dollars ($15,000.00) during any Expense Year;
and
21) any compensation paid to clerks, attendants or other person in the
parking garage of the Building or wherever Lessee is granted its parking
privileges (provided, however, if Lessor provides such parking free of
charge to Lessee, these expenses may be included as a part of Operating
Expenses.)
(e) The Rent Adjustment shall be payable by Lessee to Lessor in
accordance with the following:
(i) On or before the first day of April of each calendar year
commencing with the second calendar year following the Base Year and
continuing until and including the calendar year following expiration of
the Term, Lessor shall furnish to Lessee a written statement (the "Rent
Adjustment Statement") showing in reasonable detail the Building Operating
Costs for the previous calendar year (the "Comparison Year"), and the Rent
Adjustment payable by Lessee.
(ii) In addition to Lessee's regular Rental payment, Lessee shall pay
to Lessor on the first day of the month following delivery of each Rent
Adjustment Statement an amount equal to the sum of: (A) the Rent
Adjustment, reduced by the amount of any previous "Advance Rent Adjustment
Payments" (as hereinafter defined) previously paid by Lessee for the
Comparison Year, and (B) an amount equal to one-twelfth (1/12) of the Rent
Adjustment (the "Advance Rent Adjustment Payment") multiplied by the number
of Rental payment dates that have elapsed during the current calendar year,
reduced by the amount of any previous Advance Rent Adjustment Payments, if
any, previously paid by Lessee for the current year. Lessee shall continue
to pay to Lessor an amount equal to the most recently determined Advanced
Rent Adjustment Payment on each succeeding Rental payment date until (Y)
receipt of a subsequent Rent Adjustment Statement, or (Z) expiration or
termination of this Lease.
(iii) Lessee shall have a period of thirty (30) days following receipt
of Rent Adjustment Statement within which to inspect at Lessor's main
office, during normal business hours, Lessor's books and records concerning
such charges. If Lessee shall not have availed itself of such inspection,
Lessee shall be deemed to have accepted as final and determinative the
amount shown as payable on the Rent Adjustment Statement. If Lessee shall
dispute the accuracy of the information set forth in Lessor's books and
records with respect to the Rent Adjustment Statement, Lessee shall
nevertheless pay the additional amount shown to be due as above provided
in accordance with the Rent Adjustment Statement; provided that within
sixty (60) days after receipt of the Rent Adjustment Statement, Lessee may
institute legal proceedings against Lessor in a court of competent
jurisdiction to collect and recover any overpayment of additional rent
resulting from the errors in the books and records of Lessor; and provided,
further, that Lessee shall promptly serve Lessor with a copy of the
complaint filed in any such proceeding. Lessee shall be precluded from
contesting the Rent Adjustment, except by a suit or action filed within
such sixty (60) day period.
5. SECURITY DEPOSIT.
Concurrently with the execution of this Lease, Lessee shall deposit with
Lessor the sum of Five thousand three hundred and 64/100 Dollars ($5,300.64)
(the "Deposit"), which shall be held by Lessor, without obligation for
interest, as security for the full and faithful performance of Lessee's
covenants and obligations under this Lease, it being expressly understood and
agreed that the Deposit is not an advance Rental deposit or a measure of
Lessor's damages in case of Lessee's default. Upon the occurrence of any
"Event of Default" (as defined in Paragraph 17, below) by Lessee, Lessor may,
form time to time, without prejudice to any other remedy provided herein or
provided by law, use the Deposit to the extent necessary to make good any
arrears of sums payable by Lessee under this Lease, and any other damage,
injury, expense or liability caused by such default; and Lessee shall pay to
Lessor on demand (but not more frequently than monthly) the amount so applied
in order to restore the Deposit to its original amount, and Lessee's failure
to do so shall be a default under this Lease. Although the Deposit shall be
deemed the property of Lessor, any remaining balance of the Deposit shall be
returned by Lessor to Lessee at such time after termination of this Lease
that all of Lessee's obligations under this Lease have been fulfilled.
6. USE, NUISANCE OR HAZARD.
6.1 The Premises shall be used for general office purposes only and no
other purpose. Lessee shall not do or permit anything to be done in or about
the Premises which will in any way obstruct or interfere with or infringe on
the rights of other occupants of the Building, or injure or annoy them, or
use or allow the Premises to be used or any improper, immoral, or
objectionable purposes; nor shall Lessee cause , maintain or permit any
nuisance in, on or about the Property or commit or suffer to be committed any
waste in, on or about the Property. Lessor shall not be liable to Lessee for
any other occupant's failure to so conduct itself.
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6.2 Lessee shall not do or permit to be done in or about the Property
nor bring, keep or permit to be brought or kept therein, anything which is
prohibited by or will in any way conflict with any law, statute, ordinance or
governmental rule or regulation now in force or which may hereafter be
enacted or promulgated, or which is prohibited by any standard form of fire
insurance policy or will in any way increase the existing rate of or affect
any fire or other insurance upon the Building or any part thereof or any of
its contents, or cause a cancellation of any insurance policy covering the
Building or any part thereof or any of its contents. Lessee shall comply with
all governmental laws, ordinances and regulations applicable to the Premises,
and the requirements of any board of fire underwriters or other similar body
now or hereafter instituted, with any order, directive or certificate of
occupancy issued pursuant to any law, ordinance or regulation by any public
officer insofar as the same relates to or affects the condition, use or
occupancy of the Premises, including but not limited to, requirements of
structural changes related to or affected by Lessee's acts, occupancy or use
of the Premises, all at Lessee's sole expense. The judgment of any court of
competent jurisdiction or the admission of Lessee in any action against
Lessee, whether or not Lessor is a party to such action, shall be conclusive
in establishing such violation between Lessor and Lessee.
6.3 Lessee shall not (either with or without negligence) cause or
permit the escape, disposal or release of any biologically or chemically
active or other hazardous substances, or materials. Lessee shall not allow
the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for
the storage and use of such substances or materials, nor allow to be brought
into the Building any such materials or substances except to use in the
ordinary course of Lessee's business, and then only after written notice is
given to Lessor of the identity of such substances or materials. Without
limitation, hazardous substances and materials shall include those described
in the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq.,
any applicable federal, state or local laws and the regulations adopted under
these acts. If any lender or governmental agency shall ever require testing
to ascertain whether or not there has been any release of hazardous
materials, then the reasonable costs thereof shall be reimbursed by Lessee to
Lessor upon demand as additional charges if such requirement applies to the
Premises. In addition, Lessee shall execute affidavits, representations and
the like from time to time at Lessor's request concerning Lessee's best
knowledge and belief regarding the presence of hazardous substances or
materials on the Premises. In all events, Lessee shall indemnify Lessor in
the manner elsewhere provided in this Lease from any release of hazardous
materials on the Premises occurring while Lessee is in possession, or
elsewhere if caused by Lessee or persons acting under Lessee. The within
covenants shall survive the expiration or earlier termination of the Lease
Term.
7. ALTERATION AND IMPROVEMENTS.
7.1 Lessee, at its sole cost and expense, shall have the right to make
alterations, additions, or improvements to the interior of the Premises
(collectively, "Improvements"), if such Improvements are normal for general
office use, do not adversely affect the utility of the Premises for future
tenants, do not alter the exterior appearance of the Building, are not of
structural nature, and are not otherwise prohibited under this Lease;
provided that no such Improvements shall be made without Lessor's prior
written consent, and all such Improvements shall be made in conformity with
the requirements of Paragraph 7.2, below.
7.2 Any Improvements to be installed by Lessee during the Term, shall
only be done in compliance with the following:
(a) No such work shall proceed without Lessor's prior written
approval of (i) Lessee's contractor, and (ii) certificates of insurance
from a company or companies approved by Lessor, furnished to Lessor by
Lessee's contractor, for public liability and automobile liability and
property damage insurance with limits of not less than
$500,000/$1,000,000/$250,000, endorsed to show Lessor as an additional
insured and for workmen's compensation as required.
(b) All such work shall be done in conformity with a valid building
permit or other permits or licenses when and where required, and any work
not acceptable to any governmental authority or agency having or exercising
jurisdiction over such work, or not reasonably satisfactory to Lessor,
shall be promptly replaced at Lessee's expense. Notwithstanding any failure
by Lessor to object to any such work, Lessor shall have no responsibility
therefor.
(c) Lessee shall reimburse Lessor for any expense incurred by Lessor
by reason of faulty work done by Lessee or its contractors, or by reason of
inadequate cleanup.
(d) Lessee or its subcontractors will in no event be allowed to
install plumbing, mechanical, electrical wiring or fixtures, or partitions
over 5'10'' in height.
(e) All work by Lessee shall be diligently and continuously pursued
from the date of its commencement through its completion.
7.3 Non-standard installations made by or for Lessee whether temporary
or permanent in character, made either by Lessor or Lessee, and all Personal
Property attached to the Building (including floor coverings) shall be
Lessor's property at the end of the Term and shall remain on the Premises
without compensation to Lessee; provided that, at the option of Lessor
exercisable by written notice to Lessee, Lessee shall, at Lessee's sole
expense, within thirty (30) days after such notice, remove from the Premises
any or all such Lessee's improvements and Personal Property and repair all
damage to the Premises caused by such removal. All other Personal Property
shall be removed by Lessee on or before the end of the Term; provided that
Lessee shall repair all damages caused by such removal.
8. LESSEE'S REPAIRS.
Lessee shall, at all times during the Term and at Lessee's sole cost and
expense, keep the Premises in good and sanitary condition and repair. All
damage or injury to the Premises or the Property caused by the act or
negligence of Lessee or Lessee's Employees shall be promptly repaired by
Lessee, at Lessee's sole cost and expense, to the satisfaction of Lessor.
Lessor may make any repairs which are not promptly made by Lessee and charge
Lessee for the cost thereof as rent. Lessee shall be solely responsible for the
design and function of all Lessee's improvements, whether or not installed by
Lessor at Lessee's request.
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Lessee waives all rights to make repairs at the expense of Lessor, or to deduct
the cost thereof from rent. Subject to the provisions of Paragraph 7, above,
Lessee shall upon the expiration or termination of this Lease surrender to
Lessor the Premises and all alterations, additions and improvements thereto in
the same condition as when received, ordinary wear and tear excepted.
9. NO LIENS BY LESSEE.
Lessee shall at all times keep the Premises, the Building and the Property
free from any liens arising out of any work performed or allegedly performed,
materials furnished or allegedly furnished or obligations incurred by or for
Lessee. At any time Lessee either desires or is required to make any
Improvements, Lessor may, in addition to the provisions of Paragraph 7, above,
require Lessee, at Lessee's sole cost and expense, to obtain and provide to
Lessor a lien and completion bond in a form and by a surety acceptable to Lessor
and in amount no less than the estimated cost of such Improvements to insure
Lessor against liability from mechanics' and materialmen's liens and to insure
completion of the work, and may require such additional items or assurances as
Lessor in its sole discretion may deem reasonable or desirable. Lessee agrees
to indemnify and hold Lessor harmless from and against any and all claims for
mechanics' materialmen's or other liens in connection with any Improvements,
repairs, or any work performed, materials furnished or obligations incurred by
or for Lessee. Lessor reserves the right to enter the Premises for the purpose
of posting such notices of non-responsibility as may be permitted by law, or
desired by Lessor.
10. LESSOR'S REPAIRS.
10.1 Subject to Lessee's obligation to pay rent under this Lease, Lessor
shall maintain and repair the structural elements and the public and common
areas of the Building as the same may exist from time to time, except for damage
or wear and tear which is the result of omission, negligence or willful
misconduct of Lessee or Lessee's Employees. Lessor shall have no obligations to
make repairs under this Paragraph 10 until a reasonable time after receipt of
written notice of the need for such repairs. In no event shall rent be abated,
nor shall Lessor have any liability for interruption or interference in Lessee's
business, on account of Lessor's failure to make repairs under this Paragraph
10.
10.2 Lessor and its agents, contractors and employees shall have the right
to enter the Premises at all reasonable times for the purpose of making such
alterations, additions, improvements or repairs to the Premises or the Building
as Lessor may deem necessary or desirable without liability except for the
failure of Lessor to exercise due care of Lessee's property.
11. BUILDING SERVICES.
11.1 Subject to Lessee's obligation to pay rent under this Lease and the
provisions of Exhibit "C", Lessor shall furnish the Premises with (a)
electricity, (b) heating, ventilation and air conditioning, (c) water, (d) non-
attended elevator service, (e) lighting replacement for building standard
lights, (f) toilet room supplies, (g) janitorial service, and (h) exterior
window washing.
11.2 Lessee agrees to pay on demand as rent for all excessive or
additional building services and expenses ("Additional Services") related to the
use of the Premises, and Lessor shall be entitled to impose and collect charges
for Additional Services. In the event Lessee desires to contest the charges
levied by Lessor under this Paragraph 11.2, Lessee may, as its sole remedy, have
Lessor install in the Premises a switch and metering system. In either event,
the cost of any such meters and of the installation, maintenance, repair and
replacement thereof shall be paid for by Lessee as rent, and Lessee agrees to
pay Lessor as rent, promptly upon demand (but not more frequently than monthly),
for all such Additional Services consumed as shown by said meters, at the rates
charged for such services by the local public or private utility furnishing the
same, if applicable, plus any additional expense incurred in keeping accounts of
the Additional Services so consumed.
11.3 No interruption or malfunction of any building services shall
constitute an eviction or disturbance of Lessee's use and possession of the
Premises or Property or breach by Lessor of any of its obligations hereunder or
render Lessor liable for damages or entitle Lessee to be relieved from any of
its obligations under this Lease. In the event of any such interruption,
however, Lessor shall use reasonable diligence to restore such service.
12. ASSIGNMENT AND SUBLETTING.
12.1 Lessee may not (a) sell, assign, transfer, or hypothecate the whole
or any part of its interest under the Lease, (b) sublet the whole or any part of
the Premises, or (c) allow the occupancy of the whole or any part of the
Premises by another, without in each case obtaining the prior written consent of
Lessor, which consent shall not be unreasonably withheld. If Lessee is a
corporation, unincorporated association, trust, general or limited partnership,
or other business entity, the sale, assignment, transfer or hypothecation of any
stock or other ownership interest of such entity which from time to time in the
aggregate exceeds twenty-five percent (25%) of such interest (including but not
limited to the conversion of such entity to or from a limited liability company
or any other entity intended to limit the liability of the individual partners
or members of Lessee) shall be deemed an assignment subject to the provisions of
this Paragraph 12. Notwithstanding any permitted assignment or subletting,
Lessee shall at all times (including any extended Term provided for under the
Lease) remain directly, primarily and fully responsible and liable for the
payment of rent and for compliance with all obligations under the terms,
provisions and covenants of this Lease. Upon the occurrence of an "Event of
Default" (as defined in Paragraph 17, below) if the Premises or any part thereof
are then sublet, Lessor, in addition to any other remedies herein provided or
provided by law, may at its option collect directly from any sublessee(s) all
rents becoming due to Lessee under such sublease and apply such rent against any
sums due to Lessor from Lessee hereunder, and no such collection shall be
construed to constitute a novation or release of Lessee from the further
performance of Lessee's obligations under the Lease. Any sale, assignment,
transfer or hypothecation of Lessee's interest under this Lease, and any
proposed subletting or occupancy of the Premises not in compliance with this
Paragraph 12 shall be void and shall, at the option of Lessor and upon notice to
Lessee, terminate this Lease. This Lease shall not be assignable by operation
of law, except that if Lessee is a natural person, this Lease shall be binding
upon and inure to the benefit of the estate of Lessee.
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12.2 In the event Lessee desires to sublet all or any portion of the
Premises, Lessee shall give not less than ninety (90) days' prior written notice
thereof to Lessor setting forth the name of the proposed subtenant and its type
of business, the term, rental rate, use of the Premises, and any other relevant
particulars of the proposed subletting. In addition to Lessor's right of
approval pursuant to paragraph 12.1, above, Lessor shall have the option, in the
event of any proposed subletting to cancel this Lease as to the affected portion
of the Premises as of the proposed effective date of the subletting set forth in
Lessee's notice. The option shall be exercised, if at all, by Lessor giving
Lessee written notice thereof within sixty (60) days following Lessor's receipt
of Lessee's written request. Upon any such cancellation Lessee shall pay to
Lessor all amounts, as estimated by Lessor, payable by Lessee to such
termination date with respect to that portion of any obligations, costs or
charges which are the responsibility of Lessee under this Lease allocable to the
affected portion of the Premises. Further, upon any such cancellation Lessor
and Lessee shall have no further obligations or liabilities to each other with
respect to the affected portion of the Premises, except with respect to
obligations or liabilities which have accrued as of such cancellation date (in
the same manner as if such cancellation date were the date originally fixed for
the expiration of the Term). Without limitation, Lessor may lease the Premises
to the prospective sublessee, without liability to the Lessee. Lessor's failure
to exercise said cancellation right as herein provided shall not be construed as
Lessor's consent to the proposed subletting. Any sublease shall contain
language whereby the subtenant expressly assumes all applicable obligations of
Lessee under this Lease, and shall provide that Lessor will be entitled to
enforce such obligations directly against the subtenant as though Lessor were a
party to the sublease.
12.3 Lessee shall in no event assign less than its entire interest in this
Lease. In the event Lessee desires to assign all (but not less than all) of its
interest under this Lease, Lessee shall give not less than ninety (90) days'
prior written notice thereof to Lessor setting forth the name of the proposed
assignee and its type of business, the terms of the assignment, the proposed use
of the Premises, and any other relevant particulars of the proposed assignment,
including without limitation, evidence satisfactory to Lessor that the proposed
assignee will immediately occupy and thereafter use the entire Premises for the
remaining Term of this Lease. At the time of giving notice, Lessee shall also
submit to Lessor tax returns and financial statements of the proposed assignee
for the two most recent completed fiscal years of the proposed assignee, and a
bank reference or bank statements for the most recent twelve months. Lessee
shall upon demand furnish such supplemental information as Lessor may reasonably
request concerning the proposed assignee. Lessor may, as a condition of giving
its consent to such assignment, require an additional security deposit, personal
guarantee or other protection from Lessee or the proposed assignee if, in
Lessor's reasonable opinion, such conditional requirement is necessary to
protect Lessor's interest under the Lease. If Lessee is in default under the
Lease at the time of the proposed assignment or sublease, Lessor may as a
condition of its consent to such proposed assignment or sublease require Lessee
to cure any defaults then exiting. In addition to Lessor's right of approval
pursuant to Paragraph 12.1, above, Lessor shall have the option, in the event of
any proposed assignment, to cancel this Lease as of the proposed effective date
of the assignment set forth in Lessee's notice. The option shall be exercised,
if at all, by Lessor giving Lessee written notice thereof within sixty (60) days
following Lessor's receipt of Lessee's written request. Upon any such
cancellation, Lessee shall pay to Lessor all amounts, as estimated by Lessor,
payable by Lessee to such termination date with respect to any obligations,
costs or charges which are the responsibility of Lessee under this Lease.
Further, upon any such cancellation, Lessor and Lessee shall have no further
obligations or liabilities to each other under this Lease, except with respect
to obligations or liabilities which have accrued as of such cancellation date
(in the same manner as if such cancellation date were the date originally fixed
for the expiration of the Term). Without limitation, Lessor may lease the
Premises to the prospective assignee, without liability to the Lessee. Lessor's
failure to exercise said cancellation right as herein provided shall not be
construed as Lessor's consent to the proposed assignment.
12.4 At the time of giving notice of any proposed sublease or assignment,
Lessee shall pay to Lessor the following fee to cover handling charges for each
assignment or sublease Lessor is requested to approve:
Amount of Square Footage
-------------------------
To Be Assigned or Subleased Fee
--------------------------- ---
1 - 599 $125.00
600 - 999 $200.00
1,000 - 2,999 $350.00
3,000 - 9,999 $550.00
10,000 or more $1,000.00
Payment of these handling charges shall be deemed a condition precedent for
Lessor's consent to any proposed sublease or assignment. The fee shall be non-
refundable, whether or not Lessor consents to the proposed sublease or
assignment. Lessor's receipt of such fee shall not impose upon Lessor any
obligation to consent to any proposed sublease or assignment.
12.5 Within a reasonable time following its review of all documentation to
be submitted by Lessee hereunder, Lessor may by written notice to Lessee elect
to (1) consent to the proposed sublease or assignment, or (2) reasonably
disapprove of the proposed sublease or assignment, setting forth in writing
Lessor's grounds for doing so. Such grounds may include, without limitation,
Lessee's failure to pay the fee provided in Paragraph 12.4, above, a material
increase in the impact upon the common areas of the Building or the parking
facilities, a material increase in the demands for Building Services supplied by
Lessor, a reputation for financial reliability on the part of the proposed
assignee which is deemed unsatisfactory by Lessor, or the type of business in
which the proposed sublessee or assignee is or will be engaged is inconsistent
with the character and high quality reputation of the Building, in the
reasonable judgment of Landlord, or conflicts with a use for which another
tenant in the Building has an exclusive right. No delay in Lessor's review of
the documentation or consideration of the proposed sublease or assignment shall
constitute a consent by Lessor. If Lessor consents to the proposed sublease or
assignment, Lessee shall pay to Lessor as additional rent, within five (5)
business days following the due date of such sums: (a) fifty percent (50%) of
the amount by which (i) the rent payable by such assignee, sublessee or
sublessees to Lessee throughout the term exceeds (ii) the rent to otherwise
payable by Lessee to Lessor under this Lease; plus (b) fifty percent (50%) of
all other consideration payable for the assignment or sublease of this Lease,
including, but not limited to, key money and excess Security Deposit. This
covenant shall survive the expiration of the Term of this Lease. In addition,
Lessee shall provide Lessor with a copy of the executed sublease or assignment
promptly following full execution of the document. Any sublease or assignment
consented to by Lessor shall not be subsequently modified or
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amended without Lessor's prior written consent. The consent of Lessor to any
sublease or assignment shall not constitute a consent to any subsequent sublease
or assignment pertaining to the Lease, whether by Lessee or by any sublessee,
assignee or other transferee.
12.6 Notwithstanding anything to the contrary contained in the Lease,
Lessee shall have the right, without prior consent of Lessor but with reasonable
prior notice to Lessor, to assign this Lease or sublet the whole or any part of
the Premises to a subsidiary or affiliate of Lessee provided that: (1) Lessee
has controlling interest (i.e., more than 50%) of such subsidiary or affiliate;
(2) Lessee shall remain fully liable during the unexpired Term of this Lease;
and (3) any such assignment, sublease, or transfer shall be subject to all of
the terms, covenants and conditions of this Lease and such assignee, sublessee
or transferee shall expressly assume the obligations of Lessee under the Lease
by a document reasonably satisfactory to Lessor. Lessee shall also upon demand
provide Lessor with documentation establishing to Lessor's reasonable
satisfaction that the assignee, sublessee or transferee is in fact a subsidiary
or affiliate of Lessee.
12.7 Lessor shall have the right to sell, transfer, or assign any of its
rights and obligations under this Lease.
13. SUBSTITUTED PREMISES.
Lessor reserves the right, upon not less than sixty (60) days' prior
written notice to Lessee, to substitute for the Premises if the same contains
5,000 square feet of Net Rentable Area or less, some other premises within the
Building having substantially equivalent Net Rentable Area as the Premises,
provided that Lessor shall pay all expenses reasonably incurred in removing
Lessee's property to such new location, and upon the expiration of such written
notice of not less than sixty (60) days, such other premises shall be
substituted for the Premises for all purposes under this Lease.
14. INDEMNIFICATION; INSURANCE.
14.1 Lessee shall, with respect to its activities pursuant to this Lease,
including, without limitation, Lessee's activities at the Property and the
Premises (including, without limitation, Lessee's or Lessee's Employees' use of
the Premises, the conduct of Lessee's business, any activity, work or things
done, permitted or suffered by Lessee in or about the Premises or the Property,
Lessee's or Lessee's Employees' nonobservance or nonperformance of any statute,
law, ordinance, rule or regulation, or any actual or alleged negligence of the
Lessee or Lessee's Employees), defend, indemnify, forever save and hold Lessor,
Lessor's agents, contractors, licensees, employees, directors, officers,
partners, trustees and invitees, and each of them (collectively "Lessor's
Employees") harmless from and against any and all damages, claims, losses,
demands, litigation, costs, expenses (including, without limitation, reasonable
attorneys' fees and costs), obligations, liens, liabilities, actions and causes
of action, threatened or actual, awards, fines or judgments arising by reason of
the death or bodily injury to persons, injury to property, or other loss, damage
or expense of any kind, including any of the same resulting from Lessor's or
Lessor's Employees' alleged or actual act or omission, regardless of whether
such act or omission is active or passive; provided, however, the Lessee shall
not be obligated to defend Lessor or Lessor's Employees with respect to damages
which are due to the sole negligence or willful misconduct of Lessor or Lessor's
Employees, or any of them.
14.2 Throughout the term of this Lease, Lessee shall maintain and keep in
full force and effect Commercial General Liability Insurance, including
Contractual Coverage, on an occurrence basis in an amount not less than
$1,000,000 per occurrence and not less than $2,000,000 in the aggregate. Prior
to the Commencement Date and thereafter throughout the term of this Lease as
necessary, Lessee shall provide to Lessor Certificate(s) of insurance evidencing
such liability coverage, which Certificate(s) shall contain an endorsement
naming 1875/1925 Century Park East Company, Watt Management Company and Teachers
Insurance and Annuity Association as additional insureds. Said insurance shall
provide for notice to Lessor not less than thirty (30) days prior to expiration
or cancellation thereof or default thereunder. Lessor shall have the right to
require an increase of the above liability limits if Lessor deems them to be
inadequate in light of then-existing industry standards applicable to comparable
office lease practice in the Century City area. Nothing contained in this
Paragraph 14.2 shall be deemed to limit in any way the liability of Lessee
and/or Lessee's Employees under 14.1, above.
14.3 Throughout the term of this Lease, Lessee shall maintain on all its
Personal Property and Lessee's Total Improvements a policy of Property Insurance
providing all risk coverage including Fire and Extended Coverages, and Special
Form. Prior to the Commencement Date, and thereafter throughout the term of
this Lease as necessary, Lessee shall provide to Lessor Certificate(s) of
Insurance evidencing such coverage. Said insurance shall provide for notice to
Lessor not less than thirty (30) days prior to expiration or cancellation
thereof or default thereunder.
14.4 Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons, in, upon or about
the Premises from any cause and Lessee hereby waives all claims in respect
thereof against Lessor. Lessor and Lessor's Employees shall not be liable for
any damage to property entrusted to Lessor or Lessor's Employees, nor for loss
of or damage to any property by theft or otherwise, nor for any injury or damage
to persons or property resulting from any cause whatsoever, unless caused by or
due to the gross negligence of Lessor or Lessor's agents or employees. Lessor
and Lessor's Employees shall not be liable for any latent defect in the Premises
or in the Building. Lessee shall give prompt notice to Lessor in case of fire
or accidents in the Premises or in the Building.
14.5 In addition to and cumulative of any statutory lien in favor of
Lessor, upon any default by Lessee under this Lease, Lessee shall be deemed to
have granted to Lessor a lien and security interest on all merchandise and
Personal Property placed in, on or about the Premises by Lessee to secure the
performance by Lessee of all of its obligations under this Lease. Upon request
of Lessor, Lessee agrees to execute a California Form UCC-1 relating to this
security interest.
14.6 Lessee and Lessor each hereby waive any and all rights of recovery
against the other, or against the officers, employees, agents, and
representatives of the other, for loss of or damage to such waiving party or its
property or the property of others under its control to the extent that such
loss or damage is insured against under any valid and collectible insurance
policy in force at the time of such loss or damages. Lessee shall, upon
obtaining the policies of insurance required hereunder, give notice to the
insurance carrier or carriers that the foregoing mutual waiver of subrogation is
contained in this Lease.
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15. DAMAGE OR DESTRUCTION.
15.1 Subject to the provisions of Paragraphs 15.2 and 15.3, below, in
the even the Building or the Premises are wholly or partially destroyed by
fire or other casualty covered by fire and extended coverage insurance
maintained by Lessor, Lessor shall repair or restore (or cause the repair or
restoration of) the Building or the Premises to substantially the same
condition as prior to such destruction, and this Lease shall continue in full
force and effect; provided that in the event Lessor reasonably determines
that either the Building or the Premises are destroyed to the extent of more
than one-third (1/3) of their replacement cost (exclusive of footings and
foundations), or if such destruction occurs in the last twenty-four (24)
months of the Term, Lessor shall have the right in its sole and absolute
discretion to terminate this Lease by giving Lessee written notice within
sixty (60) days after the occurrence of such destruction of its intention to
terminate this Lease. In the event the Building or the Premises is wholly or
partially destroyed by any other cause, Lessor shall have the right in its
sole and absolute discretion to terminate this Lease by giving Lessee written
notice within sixty (60) days after the occurrence of such destruction of its
intention to terminate this Lease. If Lessor does not terminate this Lease,
Lessor shall diligently pursue repair and restoration to completion, and if
the destruction is so extensive as to render the Premises unusable, then the
rent shall be reduced in the same proportion as the Net Rental Area of the
Premises rendered unusable bears to the Net Rentable Area of the Premises
until and to the extent that the unusable portion shall be restored by
Lessor, but Lessee shall in no event be entitled to compensation or damages
on account of annoyance or inconvenience in making said repairs, or on
account of construction or on account of termination of this Lease.
15.2 If such damage or destruction occurs as a result of the
negligence or willful conduct of Lessee or Lessee's Employees, Lessee shall
forthwith undertake to repair or restore such damage or destruction at
Lessee's sole cost and expense, and this Lease shall continue in full force
and effect; provided that Lessee shall be relieved of its obligation pursuant
to this Paragraph 15.2 to the extent that insurance proceeds are collectible
by Lessor in accordance with Paragraph 14.5, above.
15.3 Lessor shall not be required to repair any damage to any Personal
Property or Lessee's Total Improvements, and in each case Lessee shall
restore all such Personal Property and Lessee's Total Improvements. Lessor or
Lessor's Employees shall have no responsibility for contents placed or kept
in the Premises or the Property by Lessee or Lessee's Employees.
15.4 This Paragraph 15 shall be Lessee's sole and exclusive remedy in
the event of the damage or destruction, and hereby waives the benefit of
California Civil Code PARAGRAPHS 1932(2) and 1933(4).
16. EMINENT DOMAIN.
16.1 If the whole of the Premises or more than twenty-five percent
(25%) of the Building shall be taken under the power of eminent domain, this
Lease shall automatically terminate as of the date of final judgement in such
condemnation, or as of the date possession is taken by the condemning
authority, whichever is earlier. A sale by Lessor under threat of
condemnation shall constitute a "taking" for the purpose of this Paragraph
16. No award for any partial or entire taking shall be apportioned and Lessee
hereby assigns to Lessor any award which may be made in such taking or
condemnation, together with any and all rights of Lessee now or hereafter
arising in or to the same or any part thereof, including, without
limitation, any award or compensation for the value of all or any part of the
leasehold estate; provided that nothing contained herein shall be deemed to
give Lessor any interest in or to require Lessee to assign to Lessor any
award made to Lessee for the taking of Personal Property installed by and
belonging to Lessee and/or the interruption of or damage to Lessee's business
so long as it does not diminish the Lessor's award. In the event of a partial
taking which does not result in a termination of this Lease, the Rental shall
be reduced proportionately based on the portion of the Premises rendered
unusable, and Lessor shall restore the Premises or the Building to the extent
of available condemnation proceeds.
16.2 This Paragraph 16 shall be Lessee's sole and exclusive remedy in
the event of a taking or condemnation. Each party hereto hereby waives the
benefit of California Code of Civil Procedure Section 1265.130.
16.3 Upon termination of this Lease pursuant to this Paragraph 16,
Lessee and Lessor hereby agree to release each other from any and all
obligations and liabilities with respect to this Lease except such
obligations and liabilities which arise or accrue prior to such termination.
17. DEFAULTS.
17.1 Each of the following shall be deemed an "Event of Default" by
Lessee and a material breach of the Lease:
(a) Lessee shall fail to pay the Rental or any other sum payable
by Lessee hereunder, as and when due.
(b) Lessee shall fail to observe, keep or perform any of the
other terms, covenants, agreements or conditions under this Lease,
including, without limitation, the "Rules" (as defined in Paragraph 21,
below), that Lessee is obligated to observe or perform for a period of
ten (10) days after written notice by Lessor; provided that if the
nature of Lessee's default is such that it cannot be cured solely by
the payment of money and that more than ten (10) days are reasonably
required for its cure, then Lessee shall not be in default hereunder if
it shall commence the correction of such default so specified within
said ten (10) day period and diligently prosecutes the same to
completion.
(c) Lessee shall vacate or abandon the Premises and shall not
continue to pay the rent as set forth herein;
(d) (i) Lessee (or a general partner of Lessee, if Lessee is a
partnership) shall make an assignment for benefit of creditors; or
(ii) A custodian, trustee, receiver or agent is appointed
or takes possession of substantially all of the property of
Lessee (or a general partner of Lessee); or
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(iii) Lessee (or a general partner of Lessee) becomes
"insolvent" as that term is defined in Section 101(26) of the
"Revised Bankruptcy Act" (Title 11 of the United Stated Code;
11 U.S.C. Section 101 et seq.); or
(iv) Lessee (or a general partner of Lessee) shall (A) file
a petition with the bankruptcy court under the Revised Bankruptcy
Act, or (B) otherwise, file any petition or apply to any tribunal
for appointment of a custodian, trustee or receiver of Lessee (or
of a general partner of Lessee) or commence any proceeding
relating to Lessee (or a general partner of Lessee) under any
bankruptcy or reorganization statute or under any arrangement,
insolvency, readjustment of debt, dissolution or liquidation law
of any jurisdiction, whether now or hereafter in effect; or
(v) Any petition is filed against Lessee (or a general
partner of Lessee) under the Revised Bankruptcy Act and either
(A) the bankruptcy court orders relief against Lessee (or a
general partner of Lessee) under the chapter of the Revised
Bankruptcy Act under which the petition was filed, or (B) such
petition is not dismissed by the bankruptcy court within thirty
(30) days of the date of filing; or
(vi) Any petition or application of the type described in
subparagraph (v)(B), above, is filed against Lessee (or a general
partner of Lessee), or any proceeding of the type described in
subparagraph (v)(B), above, is commenced, and either (A) Lessee
(or a general partner of Lessee) by any act indicates its
approval thereof, consent thereto, or acquiescence therein, or
(B) an order is entered appointing any such custodian, trustee,
receiver or agent, adjudicating Lessee (or a general partner of
Lessee) bankrupt or insolvent, or approving such petition or
application in any such proceeding, and any such order remains in
effect for more than thirty (30) days.
(e) Any guarantor of this Lease shall default under any guaranty
of this Lease, or shall or attempts to repudiate or revoke any such
guaranty or any obligation under such guaranty; or the occurrence of any
event described in Paragraph 17(d), above, with respect to any guarantor
of this Lease (as if Paragraph 17(d) referred to such guarantor in place
of "Lessee").
18. REMEDIES.
Upon the occurrence of an Event of Default hereunder, Lessor may at any
time thereafter, without notice or demand except as stated hereafter and
without limiting Lessor in the exercise of any other right or remedy which
Lessor may have by reason of such default or breach:
(a) Enter upon and take possession of the Premises. In such
event, Lessor shall have the right to remove all persons and property
from the Premises and store such property in a public warehouse or
elsewhere at the cost and risk of and for the account of Lessee, and all
such persons shall quit and surrender possession of the Premises to
Lessor. Lessee hereby waives all claims for damages which may be caused
by the entry of Lessor and taking possession of the Premises or removing
and storing the furniture and property and hereby agrees to indemnify and
save Lessor harmless from any loss, costs, damages or liability
occasioned thereby, and no such entry shall be considered or construed to
be a forcible entry. Should Lessor elect to enter, as hereby provided, or
should Lessor take possession pursuant to legal proceedings or pursuant
to any notice provided by law, Lessor may terminate this Lease pursuant
to Paragraph 18(b), below.
(b) Terminate this Lease and Lessee's right to possession of the
Premises at any time. Acts of maintenance, efforts to relet the Premises,
or the appointment of a receiver on Lessor's initiative to protect
Lessor's interest under this Lease shall not constitute a termination of
Lessee's right to possession. On termination of this Lease, Lessor may
recover from Lessee (i) the worth at the time of the award of the unpaid
rent that had been earned at the time of termination; (ii) the worth at
the time of the award of the amount by which the unpaid rent that would
have been earned after the date of termination until the time of award
exceeds the amount of the loss of rent for the same period that Lessee
proves could have been reasonably avoided; (iii) the worth at the time
of the award of the amount by which the unpaid rent for the balance of
the Term after the time of award exceeds the amount of the loss of rent
for the same period that Lessee proves could have been reasonably avoided;
and (iv) any other amount, and court costs, necessary to compensate Lessor
for all detriment proximately caused by Lessee's default. "The worth at
the time of the award," as used in (i) and (ii) of this Paragraph, is to
be computed by allowing interest at the rate of ten percent (10%) per
annum. "The worth at the time of the award," as referred to in (iii) of
this Paragraph is to be computed by discounting the amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time
of the award, plus one percent (1%).
(c) Continue this Lease in full force and effect, and this Lease
will continue in effect as long as Lessor does not terminate Lessee's right
to possession, and Lessor shall have the right to collect rent when due.
(d) Pursue any other remedy now or hereafter available to Lessor
under the laws on judicial decisions of the State of California.
19. ATTORNEYS' FEES.
If either Lessor or Lessee commences or engages in, or threatens to
commence or engage in, an action by or against the other party arising out of
or in connection with this Lease or the Premises, including but not limited
to any section for recovery of rent due and unpaid, to recover possession or
for damages for breach of this Lease, the prevailing party shall be entitled
to have and recover from the losing party reasonable attorneys' fees and
other costs incurred in connection with the action and in preparation
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for said action. If Lessor becomes involved in any action, threatened or
actual, by or against anyone not a party to this Lease, but arising by reason
of or related to any act or omission of Lessee or Lessee's Employees, Lessee
agrees to pay Lessor's reasonable attorneys' fees and other costs incurred in
connection with the action and in preparation for said action.
Lessor and Lessee hereby waive their respective right to trial by jury
of any cause of action, claim, counterclaim or cross-complaint in any action,
proceeding and/or hearing brought by either Lessor against Lessee or Lessee
against Lessor on any matter whatsoever arising out of, or in any way
connected with, this Lease, the relationship of Lessor and Lessee, Lessee's
use or occupancy of the Premises, or any claim of injury or damage, or the
enforcement of any remedy under any law, statute, or regulation, emergency or
otherwise, now or hereafter in effect.
20. SUBORDINATION.
This Lease and the rights of Lessee hereunder shall be and are hereby
made subject and subordinate at all times to any ground lease of the Property
and/or the Building now or hereafter existing and all amendments, renewals,
modifications, supplements and spreaders thereto and extensions thereof, and
to the lien of any first deed of trust now or hereafter existing against the
Property and/or the Building and/or the ground leasehold estate, and to all
advances made or hereafter to be made upon the security thereof. Lessee
agrees to execute and deliver such further instruments subordinating this
Lease to any such ground lease or to the lien of any such first deed of trust
as may be requested in writing by Lessor from time to time. Lessee
acknowledges that its title is and always shall be subordinate to the title
of the owner of the Property and the Building and nothing herein contained
shall empower Lessee to do any act which can, shall or may encumber the title
of the owner of the Property or the Building. In the event of the
cancellation or termination of any such ground lease in accordance with its
terms or by the surrender thereof, whether voluntary, involuntary or by
operation of law, or by summary proceedings, or the foreclosure of any such
first deed of trust by voluntary agreement or otherwise, or the commencement
of any judicial action seeking such foreclosures, Lessee, at the request of
the then Lessor, shall attorn to and recognize such ground lessor,
beneficiary or purchaser in foreclosure as Lessee's Lessor under this Lease.
Lessee agrees to execute and deliver at any time upon request of such ground
Lessor, beneficiary purchaser, or their successors, any instrument to further
evidence such attornment. Lessee hereby waives its right, if any, to elect to
terminate this Lease or to surrender possession of the Premises in the event
of any such ground lease termination or first deed of trust foreclosure.
Lessee also agrees that any beneficiary under a first deed of trust may, at
its option, unilaterally elect to partially subordinate, by an instrument in
form and substance satisfactory to such beneficiary, such first deed of trust
to this Lease. Lessee, in such case, agrees to execute with reasonable
promptness and to deliver to Lessor any such subordination instrument
confirming such subordination. Any failure or refusal by Lessee to execute
such instrument shall in no way affect the validity or enforceability of such
subordination.
21. RULES AND REGULATIONS.
Lessee shall faithfully observe and comply with the Building rules and
regulations, a copy of which is attached hereto as Exhibit "D", and all
reasonable non-discriminatory modifications and additions thereto from time to
time put into effect by Lessor (the "Rules"). Lessor shall not be
responsible to Lessee for the non-performance of any of said Rules by any
other occupant of the Property.
22. HOLDING OVER.
Should Lessee hold over after the expiration or sooner termination of
this Lease with Lessor's prior written consent, such possession by Lessee
shall be deemed to be a month-to-month tenancy subject to each and all terms
and conditions of this Lease as applicable to a month-to-month tenancy, and
such tenancy shall be terminable upon not less than thirty (30) days' notice
given by either Lessor or Lessee at any time. During such holding over,
Lessee shall pay in advance monthly rent equal to the greater amount of: a)
the product of the rentable area times the Base Rent per square foot of
rentable area being quoted generally by Lessor to prospective lessees, or b)
the rental rate established under the Lease for the last month of the Term of
the Lease, plus fifty percent (50%). In addition, Lessee shall pay any
Additional Rent as set forth in Paragraph 3.2 and Paragraph 4 and any other
charges payable under the Lease during the period in which Lessee holds over.
The foregoing provisions of this Section are in addition to and do not affect
Lessor's right to re-enter the Premises or any other rights of Lessor under
the Lease or as otherwise provided by law. The terms and conditions of
Lessee's holding over may be changed by Lessor upon not less than thirty (30)
days' notice. If Lessee fails to surrender the Premises upon the expiration
or sooner termination of this Lease despite demand to do so by Lessor, Lessee
shall indemnify and hold Lessor harmless from all losses or liability,
including without limitation, any claim made by any succeeding lessee
founded on or resulting from such failure to surrender, any loss of rent
from prospective Lessees, and any attorneys' fees and legal costs incurred
by Lessor, whether or not a legal action is filed. The parties agree that if
Lessee holds over without Lessor's prior written consent, Lessee shall be
liable for the rental value of the Premises, which shall be deemed to be
1 1/2 times the Base Rent and Additional Rent payable for the last month
of the Lease term.
23. INSPECTIONS AND ACCESS.
Lessor may enter the Premises at reasonable hours to (a) inspect the
same, (b) exhibit the same to prospective purchases, lenders or tenants, (c)
determine whether Lessee is complying with all its obligations hereunder, (d)
supply janitorial service and any other ser
vice to be provided by Lessor to
Lessee hereunder, (d) post notices of nonresponsiblity, and (f) make repairs
or do any work required of Lessor or permitted under the provisions of this
Lease or make repairs or do any work for the benefit of any adjoining space
or utility services or make repairs, alterations or additions to any other
portion of the Building; provided that all such work shall be done as
promptly as reasonably possible and so as to cause as little interference to
Lessee as reasonably possible. If Lessee shall not be personally present to
open and permit an entry into the Premises at any time when such an entry by
Lessor is necessary or permitted hereunder, Lessor may enter by means of a
master key without liability to Lessee except for any failure to exercise
due care for Lessee's property, and without affecting this Lease. If during
the last year of the Term, Lessee shall have removed substantially all of its
property therefrom, Lessor may immediately enter and alter, renovate, and
redecorate the Premises without reducing or abating any rent or incurring any
liability to Lessee.
24. NAME OF BUILDING.
Lessee shall not use the name, insignia, or logotype of the Building
for any purpose. Lessee shall not use any picture of the Building in its
advertising, stationery or any other manner. Lessor expressly reserves the
right at any time to change said name without in any manner being liable to
Lessee therefor.
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25. SURRENDER OF PREMISES.
The voluntary or other surrender of this Lease by Lessee, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Lessor, terminate all or any existing subleases or subtenancies, or may, at
the option of Lessor, operate as an assignment to it of Lessee's interest in
any or all such subleases or subtenancies.
26. WAIVER.
The waiver by Lessor of any term, covenant, agreement or condition
herein contained shall not be deemed to be a waiver of any subsequent breach
of the same or any other term, covenant, agreement or condition herein
contained, nor shall any custom or practice which may grow up between the
parties in the administration of this Lease be construed to waive or to
lessen the right of Lessor to insist upon the performance by Lessee in strict
accordance with all of the terms, covenants, agreements and conditions of
this Lease. The subsequent acceptance of rent hereunder by Lessor shall not
be deemed to be a waiver of any preceding breach by Lessor of any term,
covenant, agreement or condition of this Lease, other than the failure of
Lessee to pay the particular rent so accepted, regardless of Lessor's
knowledge of such preceding breach at the time of acceptance of such rent.
27. SALE BY LESSOR; LESSOR'S LIABILITY
27.1 In the event the original Lessor hereunder, or any successor,
shall sell or convey its interest in the Property, Lessee agrees to attorn to
such new owner. In the event of such sale, Lessor shall transfer to the new
owner the balance of the Deposit, if any, remaining after lawful deductions
and, after notice to Lessee, shall be relieved of all liability with respect
to the Deposit.
27.2 The term "Lessor" as used in this Lease so far as covenants or
obligations on the part of Lessor are concerned shall be limited to mean and
include only the owner or owners at the time in question of the Lessee's
interest in a ground lease of the Land on which the Building and the Premises
are located, or if no such ground lease exists, the owner or owners of fee
title to the Land. In the event of any transfer or conveyance by any,
of its interest, such Lessor shall be automatically freed and relieved from
all liability and obligations accruing or to be performed from and after the
date of such transfer or conveyance. The covenants and obligations contained
in this Lease on the part of Lessor shall be binding on lessor, its
successors and assigns, only during the periods during which it is a Lessor.
27.3 In the event Lessor is a trust or general or limited partnership,
Lessor's liability respecting the performance of any covenants or obligations
on the part of Lessor contained in this Lease shall be limited to the assets
of the trust or partnership, and Lessee shall have no right to proceed
against or recover from any trustee or partner of Lessor, individually or
collectively.
28. NO LIGHT AND AIR EASEMENT.
Any diminution or shutting off of light or air by any structure which
may be erected on lands adjacent to or in the vicinity of the Building shall
in no way affect this Lease, abate rent or otherwise impose any liability on
Lessor.
29. FORCE MAJEURE.
Lessor shall not be chargeable with, liable for, or responsible to
Lessee for anything or in any amount for any failure to perform or delay
caused by fire, earthquake, explosion, flood, hurricane, the elements, acts
of God or the public enemy, action, restrictions, limitations, or
interference of governmental authorities or agents, war, invasion,
insurrection, rebellion, riots, strikes or lockouts or any other cause
whether similar or dissimilar to the foregoing which is beyond the reasonable
control of Lessor and any such failure or delay due to said causes or any of
them shall not be deemed a breach of or default in the performance of this
Lease.
30. ESTOPPEL CERTIFICATES.
Lessee shall at any time and from time to time upon not less than three
(3) days prior written notice from Lessor execute, acknowledge and deliver to
Lessor a statement (an "Estoppel Certificate") in writing in the form of
Exhibit "E". Any such Estoppel Certificate may be relied upon by any
prospective purchaser or Lender upon the security of the fee interest or
leasehold estate in the Land or Property.
31. RIGHT TO PERFORMANCE.
All covenants and agreements to be performed by Lessee under any of the
terms of this Lease shall be performed by Lessee at Lessee's sole cost and
expense. If Lessee shall fail to pay any sum of money required to be paid by
it hereunder, or shall fail to perform any other act on its part to be
performed hereunder, and such failure shall continue for ten (10) days after
written notice thereof to Lessee (provided that no notice shall be required
in cases of emergency), Lessor may, but shall not be obligated so to do,
without waiving or releasing Lessee from any obligations of Lessee, make
any such payment and perform any other act on Lessee's part to be made or
performed as provided in this Lease. All sums so paid by Lessor and all costs
incidental thereto (including reasonable attorneys' fees), together with
interest thereon, shall be payable by Lessee on demand, and Lessee hereby
covenants to pay any and all such sums as rent.
If Lessee fails to pay when due any Rental or other amounts or charges which
Lessee is obligated to pay under the Terms of this Lease, the unpaid amounts
shall bear interest at the maximum rate then allowed by law. Lessee
acknowledges that the late payment of any Monthly Installments of Rental or
other charges will cause Lessor to lose the use of that money and incur costs
and expenses not contemplated under this Lease, including without limitation,
administrative and collection costs and processing and accounting expenses,
the exact amount of which is extremely difficult to ascertain. Therefore, in
addition to interest, if any such installment is not received by Lessor
within ten (10) days from the date it is due, Lessee shall pay Lessor a late
charge equal to ten percent (10%) of such installment. Lessor and Lessee
agree that this late charge represents a reasonable estimate of such costs
and expenses and is fair compensation to Lessor for the loss suffered from
such nonpayment by Lessee. Acceptance of any interest or late charge shall
not constitute a waiver of Lessee's default with respect to such nonpayment
by Lessee nor prevent Lessor from exercising any other rights or remedies
available to Lessor under this Lease.
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32. LESSSOR'S DEFAULT.
32.1 Lessor shall not be deemed to be in default in the performance of
any obligation required by it under this Lease unless and until it has failed
to perform such obligation within thirty (30) days after written notice by
Lessee to Lessor, specifying wherein Lessor has failed to perform such
obligation; provided that if the nature of Lessor's obligation is such that
more than thirty (30) days are required for its performance, Lessor shall not
be in default if Lessor commences to cure the default within such 30-day
period and thereafter diligently prosecutes the same to completion.
32.2 Lessor hereby waives and relinquishes any right which Lessee may
have to terminate this Lease or withhold rent on account of any damage,
condemnation, destruction or state of disrepair of the Premises (including,
without limiting the generality of the foregoing, those rights under
California Civil Code Sections 1932, 1933(4), 1941.1 and 1942). Lessee's
remedy for a breach of this Lease shall be limited to any action for damages,
injunctive relief or specific performance of this Lease.
32.3 Lessee agrees to give all beneficiaries under first deeds of
trust, by registered mail, a copy of any notice of default served upon
Lessor, provided that prior to such notice Lessee has been notified, in
writing (by way of Notice of Assignment of Rents and Leases, or otherwise),
of the address of such beneficiaries. Lessee further agrees that if Lessor
shall have failed to cure such default within the time provided for in this
Lease, then before Lessee pursues its other remedies, such beneficiaries
shall have (but not the obligation) an additional thirty (30) days within
which to cure such default, or if such default cannot be cured
within that time, then such additional time as may be necessary, provided
that if within such thirty (30) days, such beneficiary has commenced and is
diligently pursuing the remedies necessary to cure such default (including
but not limited to commencement of foreclosure proceedings, if necessary to
effect such cure).
33. EXECUTION OF LEASE BY LESSOR.
The submission of this document or examination and negotiation does not
constitute an offer to lease, or a reservation of, or option for, the
Premises; and this document becomes effective and binding only upon execution
and delivery hereof by Lessee and Lessor. No act or omission of any employee
or agent of Lessor or of Lessor's broker shall alter, change or modify any of
the provisions of this Lease.
34. PARKING FACILITIES.
So long as Lessee complies with the terms, provisions and conditions of
this Lease, Lessor shall maintain and operate, or cause to be maintained and
operated, automobile parking facilities as they may exist from time to time
(the "Parking Facilities") in, adjacent to or within a reasonable distance
from the Building. Lessee's privileges suring such time with respect to the
Parking Facilities shall be in accordance with the provisions of Exhibit "F".
As used in this Lease, the term "Parking Facilities" shall be deemed to refer
only to the structures or improvements constructed exclusively for automobile
parking, and shall not include elevators, ramps, roadways and other routes
for pedestrian and vehicular access to the Parking Facilities.
35. NOTICES.
All notices and demands which may or are required to be given by either
party to the other hereunder shall be deemed to have been fully given when
made in writing and deposited in the United States mail, certified or
registered, postage prepaid, and addressed as follows: To Lessee, to ___
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
or to the Premises; to Lessor, to Building Manager, 1875 Century Park East,
Los Angeles, California 90067 with a copy to Lessor at 2716 Ocean Park
Boulevard, P.O. Box 2114, Santa Monica, CA. 90406, Attention: General
Counsel, and a copy to Teachers Insurance and Annuity Association of America,
730 Third Avenue, New York, New York 10017, Attention: Mortgage Loan
Department, or to such other place or places as Lessor may from time to time
designate in a notice to Lessee.
36. MISCELLANEOUS.
36.1 If Lessee is a corporation, each individual executing this Lease
on behalf of Lessee represents and warrants that he/she is duly authorized to
execute and deliver this Lease on behalf of Lessee in accordance with a duly
adopted resolution of Lessee's Board of Directors, and that this Lease is
binding upon Lessee in accordance wit its terms, and Lessee shall,
concurrently with execution of this Lease, deliver to Lessor a certified copy
of a resolution of its Board of Directors authorizing the execution of this
Lease. If Lessee is a partnership or trust, each individual executing this
Lease on behalf of Lessee represents and warrants that he/she is duly
authorized to execute and deliver this Lease on behalf of Lessee in
accordance with the terms of such entity's partnership agreement or trust
agreement, respectively; and that this Lease is binding upon Lessee in
accordance with its terms, and Lessee shall, concurrently with execution of
this Lease, deliver to Lessor such certificates or written assurances as
Lessor may reasonably request authorizing the execution of this Lease.
36.2 This Lease contains the entire agreement between the parties
respecting the Lease of the Premises and all matters covered or mentioned
herein. This Lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
36.3 The illegality, invalidity or unenforceability of any provision of
this Lease shall in no way impair or invalidate any other provision of this
Lease, and such remaining provisions shall remain in full force and effect.
36.4 All provisions, whether covenants or conditions, on the part of
Lessee shall be deemed to be both covenants and conditions.
36.5 Other than NONE ("Broker"), Lessee hereby warrants and represents
that it has not employed or dealt with any other broker or finder in
connection with this Lease. Lessee hereby agrees to hold Lessor harmless from
any and all claims of any other broker or finder on account of a brokerage
commission or finder's fee in connection with the negotiation or executions
of this Lease.
36.6 The words "Lessor" and "Lessee" as used herein shall include the
plural as well as the singular. Words used in masculine gender include the
feminine and neuter. If there be more than one Lessee, the obligations
hereunder imposed upon Lessee shall be joint and several. The paragraph
headings of this Lease are not a part of this
13
<PAGE>
Lease and shall have no effect upon the construction or interpretation of any
part hereof. The terms, covenants, conditions and agreement herein contained
shall, subject to the provisions of Paragraphs 12 and 27, above, apply to and
bind the heirs, successors, legal representatives and assigns of the parties
hereto. This Lease shall be governed by and construed pursuant to the laws of
the State of California.
36.7 All exhibits attached to this Lease are hereby incorporated by
this reference and made of a part hereof. In the event of variation or
discrepancy, the duplicate original hereof (including exhibits, if any) held
by Lessor shall control.
36.8 Lessor and Lessee agree that in all events this Lease shall not be
recorded by Lessee.
36.9 Subject to the provisions of Paragraph 29, above, time shall be of
the essence of this Lease and of each of the provisions hereof.
36.10 No remedy or election given by any provision of this Lease shall
be deemed exclusive unless so indicated, but it shall, whenever possible, be
cumulative with all other remedies in law or equity.
36.11 Any obligation of Lessor under this Lease may be fulfilled by an
agent, employee or independent contractor of Lessor.
IN WITNESS WHEREOF, the parties have executed this Lease on the day and
year first above written.
"LESSEE" COMMUNICATIONS AND ENTERTAINMENT CORPORATION,
a Nevada corporation
By:
------------------------------
Its: CEO
------------------------
By: /s/ JAY GEHLIN
------------------------------
Its: CFO
------------------------
"LESSOR"
1875/1925 CENTURY PARK EAST COMPANY,
a California general partnership
By: Watt Family Properties, Inc. dba
Watt Management Company
Its Agent
By: /s/ AUSTIN M. REYNOLDS
--------------------------
Vice President
14
<PAGE>
This entire rider ("Rider") is attached to and made a part of that Lease
Agreement and Exhibits A-F (the "Lease") dated the 9th day of May, 1996 by
and between 1875/1925 CENTURY PARK EAST COMPANY ("Lessor") and COMMUNICATIONS
AND ENTERTAINMENT CORPORATION ("Lessee"). In the event of any inconsistencies
between the terms and provisions of the Riders and those of the Lease, the
Rider shall control.
RIDER A
LEASE SUBSTITUTION
This Lease is subject to Lessor and SeraCare, Inc. executing a lease for
Suite 1970 at 1925 Century Park East which subsequently shall cancel the
lease for Suite 2130 at 1875 Century Park East by and between American Blood
Institute, Inc. and Lessor. In the event that Lessor and SeraCare, Inc. do
not execute a lease for Suite 1970 then this Lease for Suite 2130 by and
between Communications and Entertainment Corporation shall be null and void.
15
<PAGE>
1875 Century Park East
[FLOOR PLAN]
21ST FLOOR
EXHIBIT A
COMMUNICATIONS AND ENTERTAINMENT CORPORATION
1875 Century Park East
Suite 2130
2,948 Net Rentable square feet
(3,272 rentable square feet)
<PAGE>
EXHIBIT B
DESCRIPTION OF LAND
PHASE I PARCEL
That portion of Parcel B in the City of Los Angeles, County of Los Angeles,
State of California, as shown on Parcel Map L.A. No. 3247 filed in Book 69,
Pages 93 and 94 of Parcel Maps in the Office of the County Recorder of said
County, and those portions of Lots 4 and 5 of Tract No. 30364, in said City,
County and State, as per Map recorded in Book 803 pages 63 and 64 of Maps, in
said County Recorder's Office.
PHASE II PARCEL
Those portions of Lots 4 and 5 of Tract No. 30364, in the City of Los Angeles,
County of Los Angeles, State of California, as per Map recorded in Book 803
Pages 63 and 64 of Maps, in the Office of the County Recorder of said County,
lying northeasterly of the southeasterly prolongation of that certain course in
the southwesterly boundary of Parcel B of Parcel Map L.A. No. 3247, in said
City, County and State, filed in Book 69 Pages 93 and 94 of Parcel Maps in said
County Recorder's Office.
EXHIBIT B
<PAGE>
EXHIBIT "C"
STANDARDS FOR UTILITIES AND SERVICES
The following are the Standards for Utilities and Services. Lessor
reserves the right to adopt such reasonable non-discriminatory modifications
and additions hereto as it deems appropriate.
As long as Lessee is not in default under any of the terms, covenants,
conditions, provisions or agreements of this Lease, Lessor shall, subject to
limitations and provisions hereinafter set forth in this Exhibit C:
(a) Provide automatic elevator facilities.
(b) Provide to the Premises, on Monday through Friday from 8 A.M.
to 6 P.M., and on Saturdays from 8 A.M. to 1 P.M., (and at other times for a
reasonable additional charge to be fixed by Lessor), heating, ventilation,
and air conditioning (HVAC), when in the judgment of Lessor it may be
required for the comfortable occupancy of Premises for general office
purposes. Lessor shall not be responsible for room temperatures if the
Premises are used for other than general office purposes.
(c) Furnish to the Premises, during the times specified in
Paragraph (b) hereof, electric current for routine lighting and the operation
of general office machines such as typewriters and computers, which use 110
volt electric power, not to exceed the reasonable capacity of Building
standard office lighting and receptacles, and not in excess of limits imposed
by governmental authority. Lessee agrees, should its electrical installation
or electrical consumption be in excess of the aforesaid use or extend beyond
the times specified in Paragraph (b), to reimburse Lessor for the excess
utilities as provided in Paragraph 11.2 of the Lease.
(d) Furnish water for drinking fountains and restrooms provided by
Lessor.
(e) Provide janitorial services to the Premises Monday through
Friday (except state and federal holidays), provided the same are used
exclusively as offices, and are kept reasonably in order by Lessee. If
Premises are not used exclusively as offices, they shall be kept clean and in
order by Lessee, at Lessee's expense, and to the satisfaction of Lessor, and
by persons approved by Lessor. Lessee shall pay to Lessor the cost of removal
of any of Lessee's refuse and rubbish, to the extent that the same exceeds
the refuse and rubbish usually attendant upon the use of the Premises for
general office purposes.
No electrical equipment, air conditioning or heating units, or
plumbing additions shall be installed, nor shall any changes to the Building
HVAC, electrical or plumbing systems be made without prior written approval
of Lessor, which consent shall be subject to Lessor's sole and absolute
discretion. Lessee shall pay any additional cost on account of any increased
support to the floor load or additional equipment required for such
installations, and such installations shall otherwise be made in accordance
with Paragraph 7.2 of the Lease.
Lessee will not, without prior written consent of Lessor, use any
apparatus, machine or device in the Premises, including, without limitation,
duplicating machines, electronic data processing machines, punch card
machines and machines using current in excess of 110 volts, which will in any
way increase the amount of electricity or water usually furnished or supplied
for use of the Premises as general office space.
Lessee agrees to abide by all regulations and requirements which
Lessor may prescribe for the proper functioning of the Building HVAC,
electrical and plumbing systems. Lessee shall comply with all laws, statutes,
ordinances and governmental rules and regulations now in force or which may
hereafter be enacted or promulgated in connection with building services
furnished to the Premises.
Lessor reserves the right to reduce, interrupt or cease service of
the heating, air conditioning, ventilation, elevator, plumbing, and electric
systems, when necessary, by reason of accident, emergency or governmental
regulations or for repairs, additions, alterations or improvements to the
Premises or the Building until said repairs, additions, alterations or
improvements shall have been completed, and shall further have no
responsibility or liability for failure to supply elevator facilities,
plumbing, ventilating, air conditioning, or utility services, when prevented
from so doing by strike, lockout or accident, or by any cause whatever beyond
Lessor's reasonable control, or by laws, rules, orders, ordinances,
directions, regulations or requirement of any federal, state, county or
municipal authority or any other cause whatsoever, or failure of fuel supply.
C
<PAGE>
EXHIBIT "D"
RULES AND REGULATIONS
1. The sidewalks, entrances, parking areas, elevators, stairways,
corridors, lobbies or halls shall not be obstructed or used for any purpose
other than ingress and egress.
2. No curtains, blinds or shades shall be attached to or hung in, or used
in connection with, any window of the Premises other than Lessor's standard
blinds. The interior of any windows shall not be coated or otherwise
sunscreened.
3. No sign, advertisement, notice or handbill shall be exhibited, painted
or affixed by any Lessee on any part of the Premises, the Building or the
Property. The directory is provided exclusively for the display of the name
and location of Lessees only and Lessor reserves the right to exclude any
other names therefrom. Nothing may be placed on corridor walls or corridor
doors other than Lessor's standard lettering.
4. No Lessee shall mark, paint, drill into, or in any way deface any
part of the Premises, Building or Property.
5. No bicycles, vehicles, birds or animals except for Seeing Eye dogs,
of any kind shall be brought into or kept in or about the Premises or the
Building, and no cooking (except micro wave) shall be permitted by Lessee on
the Premises, except that the preparation of coffee, tea, hot chocolate and
similar items for Lessee and Lessee's Employees shall be permitted provided
power shall not exceed that amount which can be provided by a 30 amp circuit.
No Lessee shall cause or permit any unusual or objectionable odors to be
produced or to permeate the Premises or the Building.
6. The Premises shall not be used for manufacturing or for the storage
of merchandise except as such storage may be incidental to the use of the
Premises for general office purposes. No Lessee shall occupy or permit any
portion of the Premises to be occupied as a medical office, or as a barber or
manicure shop, or as an employment bureau without the express written consent
of Lessor.
7. No Lessee shall make, or permit to be made, any disturbing noises or
interfere with occupants of this Building or those having business there,
whether by the use of any musical instrument, radio, phonograph, unusual
noise, or in any other way.
8. No Lessee nor any of Lessee's Employees shall at any time bring or
keep within the Premises or the Building any inflammable, combustible or
explosive fluid, chemical or substance.
9. No additional locks or bolts of any kind shall be placed upon any of
the doors by Lessee, nor shall any changes be made in existing locks or the
mechanism thereof. Lessee must, upon the termination of its tenancy, restore
to Lessor all keys of stores, offices, and toilet rooms, either furnished to,
or otherwise procured by, Lessee and in the event of the loss of keys so
furnished, Lessee shall pay to Lessor the cost of replacing the same or of
changing the lock or locks opened by such lost key if Lessor shall deem it
necessary to make such changes.
10. The carrying in or out of any safes, freight, furniture, or bulky
matter of any description must take place during the hours which the Lessor
may determine and the moving of safes or other fixtures or bulky or heavy
matter of any kind must be done upon previous notice to the Lessor and under
his supervision, and the persons employed by any Lessee for such work must be
acceptable to the Lessor, but such persons shall not be agents of the Lessor,
and Lessee shall be responsible for all acts of such persons. The Lessor
reserves the right to inspect all safes, freight or other bulky of heavy
articles to be brought into the Building and to exclude from the Building all
safes, freight or other bulky or heavy articles which violate any of these Rules
and Regulations or the Lease of which these Rules and Regulations are a part.
The Lessor reserves the right to prescribe the weight and position of all safes,
freight, furniture or bulky or heavy matter, which must be placed upon supports
approved by Lessor to distribute the weight.
11. No Lessee shall purchase water, ice, janitorial or other like
services, from any person or persons not approved by Lessor.
12. Lessor shall have the right to prohibit any advertising by any
Lessee which, in Lessor's reasonable opinion, tends to impair the reputation
of the Building or its desirability as an office building and upon written
notice from Lessor, Lessee shall discontinue such advertising.
13. Lessor reserves the right to exclude from the Building between the
hours of 7 P.M. and 6 A.M. and at all hours on Sundays and state and federal
holidays all persons who are not authorized by Lessee. Such authorization
shall be in accordance with procedures established by Lessor. Lessor shall in
no case be liable for damages for any error with regard to the admission to
or exclusion from the Building of any person.
14. Any person employed by Lessee to do any work in or about the
Premises shall, while in the Building and outside of the Premises, be subject
to and under the control and direction of the Lessor (but not as an agent or
servant of Lessor), and Lessee shall be responsible for all acts of such
persons.
15. All doors opening onto public corridors shall be kept closed,
except when in use for ingress and egress.
16. Canvassing, soliciting and peddling in the Building are prohibited
and each Lessee shall cooperate to prevent the same.
17. All office equipment of any electrical or mechanical nature shall
be placed by Lessee in the Premises in settings approved by Lessor, to absorb
or prevent any vibration, noise and annoyance.
D
<PAGE>
EXHIBIT "E"
ESTOPPEL CERTIFICATE
Date:
Teachers Insurance and Annuity
Association of America
730 Third Avenue
New York, New York 10017
Re: Address:
Your Appl. # CAL--2588
Century Park East Offices
Los Angeles, California
Gentlemen:
It is our understanding that you have committed to place a mortgage upon and
to acquire an interest in the subject premises and as a condition precedent
thereof have required this certification by the undersigned.
The undersigned, as Lessee, under that certain lease dated , made
with 1875/1925 Century Park East Company, as Lessor, hereby ratifies the said
lease and certifies that the undersigned has entered into occupancy of the
premises described in said lease on and the minimum Rental in
the monthly amount of was payable from that date; that said lease
is in full force and effect and has not been assigned, modified, supplemented
or amended in any way (except by agreement(s) dated ); that
the same represents the entire agreement between the parties as to this
leasing; that the term of said lease expires on ; that
all conditions under said lease to be performed by the Lessor have been
satisfied, including, but without limitation, all cotenancy requirements
thereunder, all required contributions by Lessor to Lessee on account of
Lessee's improvements have been received, and on this date there are no
existing defenses or offsets which the undersigned has against the
enforcement of said lease by the Lessor; that no rent has been paid in
advance and no security (or in the amount of $ ) has been deposited
with Lessor; and that rental for ,19 , has been paid.
Very truly yours,
E
<PAGE>
EXHIBIT "F"
PARKING FACILITIES
So long as the Lease dated May 9, 1996 between 1875/1925 Century Park
East Company ("Lessor") and Communications and Entertainment Corporation
("Lessee") pertaining to Premises located at 1875 Century Park East, Los
Angeles, California remains in effect and Lessee is not in default
thereunder, Lessee and Lessee's designated employees shall be entitled during
the Term thereof upon reasonable prior notice to acquire monthly parking
licenses, privileges or leases for up to 10 automobiles, in the aggregate, at
the monthly rates or charges from time to time applicable to monthly parking
for the particular class of parking. In each case, Lessee (or its designated
employee) shall enter into parking license or rental agreement or other
arrangement then in use by Lessor (or its operator) with respect to such
monthly parking.
A condition of any parking shall be compliance by the parker with garage
rules and regulations and all non-discriminatory modifications and additions
thereto from time to time put into effect by Lessor (and its operator),
including any sticker or other identification system established by Lessor
(and its operator). Lessor (and its operator) shall not be responsible to
Lessee for the non-performance of any of said rules and regulations by any
other parker. The proposed rules for the Parking Facilities are as follows:
RULES AND REGULATIONS
1. Garage hours shall be 6:00 A.M. to 9:00 P.M., Monday through Friday
and 6:00 A.M. to 4:00 P.M. on Saturday, State and federal holidays excepted.
2. Automobiles must be parked entirely within the stall lines on the
floor.
3. All directional signs and arrows must be observed.
4. The speed limit shall be 5 miles per hour.
5. Parking is prohibited in areas not striped for parking.
6. Parking stickers or any other device or form of identification
supplied by Lessor (or its operator) shall remain the property of Lessor (or
its operator). Such parking identification device must be displayed as
requested and may not be mutilated in any manner. The serial number of the
parking identification device may not be obliterated. Devices are not
transferable or assignable and any device in the possession of an
unauthorized holder will be void. There will be a replacement charge to the
Lessee or person designated by Lessee for loss of any parking card.
7. The monthly rate for parking is payable one (1) month in advance and
must be paid by the third business day of each month. Failure to do so will
automatically cancel parking privileges and a charge at the prevailing daily
rate will be due. No deductions or allowances from the monthly rate will be
made for days parker does not use Parking Facilities.
8. Lessee may validate vistor parking by such method or methods as the
Lessor may approve, at the validation rate from time to time generally
applicable to visitor parking.
9. Lessor (and its operator) may refuse to permit any person who
violates the within rules to park in the garage, and any violation of the
rules shall subject the autombile to removal from the garage at the parker's
expense. In either of said events, Lessor (or its operator) shall refund a
prorata portion of the current monthly parking rate and the sticker or any
other form of identification supplied by Lessor (or its operator) will be
returned to Lessor (or its operator).
10. Garage managers or attendants are not authorized to make or allow
any exceptions to these Rules and Regulations.
11. Every parker is required to park and lock his own autombile. All
responsibility for any loss or damage to automobiles or any personal property
therein is assumed by the parker.
12. Loss or theft of parking identification devices from autombiles
must be reported to the garage manager immediately, and a lost or stolen
report must be filed by the parker at that time.
13. The Parking Facilities are for the sole purpose of parking one
automobile per space. Washing, waxing, cleaning or servicing of any vehicle
by the parker or his agents is prohibited.
14. Lessor (and its operator) reserves the right to refuse the issuance
of monthly stickers or other parking identification devices to any Lessee
and/or its employees who refuse to comply with the above Rules and
Regulations and all posted and unposted City, State or Federal ordinances,
laws or agreements.
15. Lessee agrees to acquaint all employees with these Rules and
Regulations.
F
<PAGE>
KINNEVIK MEDIA PROPERTIES, LTD.
153 East 53rd Street
New York, New York 10022
August __, 1996
Communications & Entertainment Corp.
1875 Park East
Los Angeles, California 90067
Gentlemen:
The following shall constitute the essential deal terms agreed upon by and
between Kinnevik Media Properties, Ltd. ("KMP") and Communications &
Entertainment Corp. ("Comment") concerning the acquisition by KMP of various
representation and distribution rights to various motion pictures owned or
controlled by Comment; the waiver by Comment of various representation rights in
favor of KMP and the establishment of a revolving credit facility by KMP in
favor of Comment.
KMP and Comment have agreed as follows:
1. Pictures: The pictures subject to this agreement are as follows:
MR. FROST
SNIPER
EARTH GIRLS ARE EASY
MONEY
PELLE THE CONQUER
FIRE, ICE AND DYNAMITE
RHAPSODY IN AUGUST
ROSENCRANTZ AND GUILDENSTERN
1492 CONQUEST OF PARADISE
DISTURBED
2. Assignment of Rights:
(a) Comment hereby assigns and transfers to KMP all of Comment's
sales representation, agency and distribution rights relating to the
Pictures. In the event such assignment is challenged by a third party
or KMP determines such assignment might adversely affect its rights
hereunder, then, in the alternative, Comment shall be deemed to have
engaged KMP to act as its exclusive sub-distributor or sub-agent for
the
<PAGE>
Pictures. Appropriate Notices of Assignment and sub-distributor or
sub-agent agreements shall be delivered to KMP on execution of a more
definitive agreement embodying the terms contained herein ("The
Definitive Agreement") and executed by the parties. Subject only to
the term limitation set forth in paragraph 3 below, KMP's fees and
term of rights shall be consistent and co-terminus with Comment's
rights to the Pictures.
(b) To the extent Comment has such rights, the rights assigned,
transferred and granted to KMP include the following:
(i) To distribute, market, sell, license and otherwise
exploit and turn to account the Pictures (and to the extent Comment
has such rights, the right to sell or license all remake and sequel
rights to the Pictures), in all media, whether now known or hereafter
developed, including but not limited to, all forms of television
(including pay, broadcast, cable, satellite, pay-per-view, and video
on demand television), home video (including all so-called new media
rights including cassettes, disks, CD-Rom interactive and computer
uses), and all ancillary markets and areas (including non-theatrical,
ships at sea, airlines, etc.) and theatrical rights in all Territories
of the world.
(ii) To manage and administer all outstanding licenses and
agreements currently outstanding for and on behalf of the Pictures.
(iii) To bill, collect and receive all monies, participations,
license fees, royalties, and other payments that are due and owing or
that may become due and owing for and on behalf of the Pictures except
with respect to accounts to be set forth on SCHEDULE C [FILM BRIDGE].
(iv) To amend, renegotiate, modify, settle any and all
outstanding licenses and agreements for and on behalf of the Pictures,
subject to the approval of each Producer/Owner if required in each
instance.
(v) To audit and litigate, in the name of KMP or Comment, as
KMP determines necessary in connection with any of the above. Any
expenses incurred in connection with such activities will be borne by
KMP unless chargeable under the underlying agreements.
(vi) KMP agrees to use its best efforts in connection with the
exercise of the rights assigned
- 2 -
<PAGE>
hereunder to maximize the commercial value of the Pictures.
3. Term: The term of KMP's rights shall be the full term of Comment's
rights as set forth on EXHIBIT A or 25 years, whichever is less. KMP will make
no licenses or commitment without the prior reasonable approval of Comment which
will extend beyond the applicable Term for each of the Pictures.
4. Outstanding Licenses: KMP acknowledges that the Pictures are subject
to the outstanding licenses and distribution agreements specifically identified
on EXHIBIT B. As and when such outstanding licenses and agreements expire or
terminate, all such rights shall be subject to this agreement and KMP's rights
hereunder. Excepting only the accounts receivable specifically identified on
Schedule C, KMP shall have the right to receive all monies, license fees,
royalties, participations, and any and all other revenue sources in connection
with or related to such outstanding licenses and distribution agreements. KMP
shall be obligated, during the Term, to service all such licenses and agreements
set forth in EXHIBIT B (as well as any new licenses entered into after the
Closing Date) and to fulfill all of Comment's performance obligations to third
parties undertaken by KMP in writing in the Definitive Agreements, but except as
specifically provided for herein, KMP shall not be responsible for any existing
indebtedness of Comment. Any costs incurred by KMP shall be recoupable
distribution expenses to the extent so provided in each respective agreement.
KMP agrees not to enter into any licenses that will conflict with any licenses
previously entered into by Comment, unless KMP has settled such licenses in
accordance with Paragraph 6 below.
5. Territory: KMP's rights shall be consistent with the Comment
territorial rights with respect to each Picture.
6. Outstanding Third Party Shares: KMP acknowledges that various monies
are due and payable by Comment to various producers/owners of the Pictures. A
detailed listing of balances owed to producers/owners is set forth on Exhibit D.
With respect to such outstanding balances, KMP and Comment have agreed as
follows:
(a) KMP and Comment will work together in an effort to settle,
renegotiate and otherwise satisfy such obligations;
(b) KMP shall endeavor, without any obligation to do so, at is own
expense and using its own financial resources, to (i) resolve/satisfy
such obligations and (ii)extend or enhance KMP's rights to such
Pictures.
(c) In the event KMP is able to resolve/satisfy such
- 3 -
<PAGE>
obligations and secure an extension/enhancement of its rights then,
except with respect to unrecouped Pictures, KMP may enter into
agreements directly with such producers/owners for such
extension/enhancement of rights at no cost or charge of any kind or
nature to Comment.
(d) Subject to paragraph (e) and (f) below, Comment may not, without
the prior written approval of KMP, resolve, satisfy or settle any
third party claim which would have the effect of terminating,
impairing, limiting or otherwise restricting or diminishing any KMP
rights to the Pictures.
(e) In the event KMP and/or Comment are unable to amicably settle,
resolve or satisfy such obligations to producers/owners and such
producers/owners threaten litigation, termination of rights or
commence litigation, Comment shall so notify KMP in writing, and KMP
shall be given the right in the first instance to either:(i) endeavor
to amicably resolve such matter, or (ii) undertake the defense of any
such claim at its own expense.
(f) Should KMP elect to not resolve or defend any such third party
claim, then in such event the responsibility for the resolution and/or
defense of such matter shall be the sole responsibility of Comment.
In such instance Comment shall have the right to withdraw such Picture
from this agreement and return it to the owners or licensor thereof
without reduction in the Purchase Price.
(g) Appropriate notice provisions shall apply to the foregoing.
(h) The parties acknowledge that KMP is relying on the accuracy of
the producer obligations set forth at Exhibit D. In the event such
obligations are greater than indicated on Exhibit D, then Comment
shall be solely and exclusively responsible for any underestimate of
more than 10% of such sums on a per Picture basis.
7. Unrecouped Positions: Comment has advised KMP that two Pictures,
ROSENCRANTZ AND GUILDENSTERN ARE DEAD and SNIPER remain in unrecouped positions
with respect to payments owed to producers/owners. The amounts of the unrecouped
positions as of the date hereof (the "Unrecouped Balance") are set forth on
Exhibit D. In connection with any licenses of the foregoing two Pictures from
and after the Closing Date, after retention by KMP of its applicable fees and
expenses, Comment shall be paid any
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<PAGE>
receipts to the extent of the Unrecouped Balance, provided however that if
applicable (and before Comment receives any portion of the Unrecouped Balance)
KMP and Comment shall be entitled to retain the balance of receipts generated on
such unrecouped Pictures on a pari passu basis, to the extent of their
respective payments made to Producers/Owners and costs incurred by either party
(attorney's fees; litigation), from and after the Closing Date, in connection
with the matters identified in paragraph 6. After deduction of all the
foregoing amounts in each instance, the balance of any receipts shall be paid to
the appropriate Producer/Owner.
8. Exhibit "E" Titles - Representation Rights: Comment hereby agrees to
waive in favor of KMP various representation/distribution rights it may have in
connection with the titles identified on EXHIBIT E attached hereto. Comment
shall execute the waiver of rights attached hereto as EXHIBIT F.
9. Litigation: Comment hereby represents and warrants that, except as
otherwise provided at EXHIBIT G, there is no threatened or pending litigation
with respect to any of the Pictures. Comment further represents and warrants
that, except as provided in EXHIBIT G, no claims or demands have been made by
the producers/owners of the Pictures, or any other party on their behalf,
whereby such parties are seeking termination of Comment's rights in the Pictures
or to otherwise rescind such rights or seek the return of such rights.
10. Good Standing: Each party represents and warrants to the other that it
is a corporation in good standing and that there is no litigation, pending or
threatened, that would impair their ability to continue as a going concern
except as set forth on Exhibit "G". Comment further represents and warrants
that, except as set forth on Exhibit "G", there have been no claims made by
creditors that if pursued to successful conclusion would force Comment to seek
the protection of the Bankruptcy Courts or otherwise force Comment into
involuntary bankruptcy.
11. Purchase Price: In consideration for the rights herein granted to
KMP, KMP agrees to pay to Comment the sum of $1,075,000 payable as follows:
(a) $500,000 on Closing.
(b) $275,000 six months after Closing;
(c) $300,000 eighteen months after Closing.
Any late payments herein shall be subject to interest at the rate of
20% per annum from the due date thereof.
12. Assumption of Obligations: The parties agree that KMP
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<PAGE>
is not assuming any obligations or indebtedness of Comment or relating to the
Pictures arising out of or relating to any transactions which occurred before
the Closing, except as specifically undertaken in this Agreement. KMP agrees to
observe each and every restriction in connection with the distribution or
exhibition of the Pictures undertaken by Comment and of which KMP has or should
have knowledge (including but not limited to credit requirements and promotional
restrictions).
13. Statements and Payments: At KMP's election, KMP either shall issue to
Comment quarter annual statements within 45 days after the expiration of each
calendar quarter year reflecting sales, costs and collections made on the
Pictures together with payments then due or KMP shall furnish Comment with all
statements to be rendered by Comment to Producers/Owners. At KMP's election,
KMP shall either issue checks as called for by such statements in the names of
the Producers/Owners and deliver them timely to Comment for further delivery to
the Producers/Owners or KMP may deliver such checks directly to the
Producers/Owners. Comment shall have standard audit and inspection rights of
the relevant books and records of KMP, its subsidiaries, affiliates and within
control of KMP as they relate to the Pictures.
14. Revolving Credit: KMP agrees to establish a $500,000 revolving credit
facility in favor of Comment. This credit facility may be drawn upon on
presentment by Comment to KMP of bona fide collateral in accordance with normal
banking transactions. For purposes of determining the validity of the
collateral and other relevant terms concerning such borrowings, including terms
for discounting, present value calculations and such like terms, unless
otherwise agreed by the parties, the terms of KMP's revolving credit facility
with Atlantic Bank of New York shall govern. The initial term of such revolving
credit facility shall be for a period of eighteen months, subject to renewal by
the parties.
15. Warrants: Comment shall grant to KMP warrants to purchase up to
100,000 shares of Comment common stock. The warrants shall be exercisable at the
"bid" price of Comment common stock on August 5, 1996. Appropriate provisions
for anti-dilution shall be contained in the warrant agreement. Comment shall
arrange for "piggyback" registration rights for such warrants, on a "most
favored nations" basis with all other present or future warrant holders,
provided that such "most favored nations" provisions respecting such piggyback
rights shall not apply to the registration of warrants and shares to be issued
thereunder in the registration presently contemplated by Comment in connection
with a private placement. The pro-rata cost of any piggyback rights shall be
KMP's unless otherwise waived by this or any other agreements.
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<PAGE>
16. Closing.
(a) The Closing of this transaction shall take place at 10:00 A.M. on
September 30, 1996 at the offices of KMP, or such other time and
place as agreed to by the parties. Time shall be of the essence
with respect to the Closing Date, provided Comment shall have
fulfilled its closing conditions.
(b) KMP's obligation to close this transaction (and any other
obligations to Comment) shall be subject to: (x) KMP confirming
through its due diligence investigation that the rights being
acquired by KMP hereunder (including, but not limited to the
rights controlled by Comment and the outstanding licenses
relating thereto) are not materially less than the rights
described in the documents previously furnished to KMP; and (y)
KMP having been given access to substantially all the due
diligence materials, including Schedules and Exhibits hereto,
reasonably required to evaluate the rights being acquired herein,
in a timely manner. In the event KMP believes it has not been
given access to necessary due diligence materials, it shall give
the Partnerships written notice specifying such omissions, no
later than September 20, 1996.
(c) Documents Required for Closing:
The parties acknowledge that the following documents shall be required to be
executed, prepared, identified and/or assembled on or before closing:
(i) Mutual execution and delivery of the Definitive
Agreements.
(ii) Assignment of Distribution rights for each of the
Pictures.
(iii) Security Interest (UCC-1) documents for each of the
Pictures.
(iv) Notices of Assignment of all outstanding distribution and
license agreements and the right to receive all revenues,
license fees, royalties and participations therefrom.
(v) Laboratory Access Letters to all masters and foreign
language versions.
(vi) Copies of each agreement pursuant to which
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<PAGE>
Comment obtained its rights or ownership.
(vii) Schedule of all outstanding license and distribution
agreements.
(viii) Schedule of physical materials to be delivered or to
which access will be granted identifying the location,
including substantially all music cue sheets.
(ix) The Schedules and Exhibits referred to herein are being
prepared by Comment and will be attached to the
Definitive Agreements. Drafts of all such Schedules and
Exhibits will be delivered to KMP on or before September
20, 1996.
The following shall be made available to KMP by Comment as soon as
possible after the closing of if they are available:
(x) Any available copyright certificates.
(xi) If available, copies of all financial statements issued
by third parties for and on behalf of the Pictures.
(xii) Copies of the most recent statements issued to the
producers/owners and summary of current accounting
status.
(xiii) Insurance Certificates. If such certificates are not
available, Comment shall cooperate with KMP should KMP
wish to obtain its own E & O insurance.
(xiv) Master tapes, advertising and promotional materials,
scripts and such like items.
17. The following events shall enable Comment to terminate KMP's rights
upon 14 days written notice:
(a) The filing in Bankruptcy of KMP (voluntary or involuntary),
insolvency, or an arrangement for the benefit of creditors.
(b) Any breach of KMP's of its obligations in paragraph 11 which is
not remedied within 30 days written notice.
Upon such termination all rights shall revert to Comment and KMP shall
have no further claim to the Pictures, the proceeds or any other benefits
therefrom or the refund of any
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<PAGE>
sums previously paid to or advanced on behalf of Comment.
18. No preliminary injunctive relief or rights of termination (except as
provided in Paragraph 17 above) may be sought by any party with respect to a
dispute which is remediable by money damages.
19. The parties shall execute any further documents reasonably requested
by any other party.
20. This agreement and the Definitive Agreement shall be construed in
accordance with the Laws of the State of New York applicable to agreements fully
executed and solely to be performed therein. Jurisdiction over any disputes
hereunder shall be in the Courts of the County and State of New York. This
agreement may not be assigned by KMP without the prior approval of Comment, such
approval not to be unreasonably withheld, except that KMP may assign this
agreement without any restriction to a company under common control with KMP or
which acquires substantially all of its assets; provided no such assignment
shall relieve KMP of its obligations hereunder.
Kindly sign below indicating your agreement to the terms and
conditions set forth in this letter. This letter shall constitute a binding
interim agreement until a formal Definitive Agreement is prepared and executed.
Such Definitive Agreement shall contain provisions for representations,
warranties, indemnities, choice of law and such like provisions. Such Definitive
Agreement shall not in any event be inconsistent with any of the terms hereof.
It should be understood, however, that KMP's obligation to enter into a
Definitive Agreement is subject to KMP's satisfactory completion of its due
diligence review; confirmation that the availabilities and rights to the
Pictures are consistent with the information disclosed and the contents of the
Exhibits described above. The parties agree to have such Definitive Agreement
prepared as promptly as possible following the execution hereof.
Yours truly,
KINNEVIK MEDIA PROPERTIES, LTD.
-------------------------------
Joseph E. Kovacs, President
AGREED TO AND ACCEPTED:
COMMUNICATIONS & ENTERTAINMENT CORP.
- -------------------------------------
Title:
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<PAGE>
EXHIBIT E
PICTURES PARTNERSHIPS
-------- ------------
AMITYVILLE II Amityville Associates
AMITYVILLE 3-D Starling Associates
CONAN THE BARBARIAN December Associates
DEAD ZONE Starling Associates
DUNE Dune Associates
HALLOWEEN II Halloween Associates
HALLOWEEN III October Associates
RAGTIME December Associates
SHARK BOY OF BORA BORA Pacific West Associates or commonly owned by
all Partnerships (to be advised)
TRICK OR TREAT Commonly owned by all Partnerships
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<PAGE>
Communications and Entertainment Corp.
1875 Century Park East
Suite 2130
Los Angeles, Cal. 90067
September 6, 1996
Mr. David Somerstein
68-15 Main Street
Flushing, New York 11367
Dear David:
This letter will serve to set forth the mutual understanding and agreement
of Communications and Entertainment Corp. (the "Company") and Mr. David
Somerstein, or his designees ("Investor"), to execute and deliver a stock
purchase agreement (the " Definitive Agreement") for the purchase by Investor of
an equity interest in the Company.
The Definitive Agreement will contain the following terms and provisions,
among others:
1. Investor will purchase 1,000,000 shares of the Company's common stock
for a purchase price of $.75 per share (the "Shares"). The Shares will be issued
and sold in a private placement under Rule 506 of Regulation D under the
Securities Act of 1933, as amended.
2. In consideration of the purchase of the Shares, the Company will issue
to Investor at the closing the following warrants to purchase additional shares
of the Company's common stock:
a) A three-year "A" Warrant to purchase 1,000,000 shares of the Company's
common stock at a purchase price of $.75 per share; and
b) A three-year "B" Warrant to purchase 1,000,000 shares of the Company's
common stock at a purchase price of $1.00 per share.
3. Both the "A" and "B" Warrants will contain the usual anti-dilution terms
and will be exercisable at any time during the term, commencing three months and
five months, respectively, from the date of issuance. The Company will have the
right to call the "A" Warrants at a price of $.01 per Warrant at any time after
12 months from the date of issuance on 30 days notice to Investor, provided that
the average closing bid price of the Company's common stock for the 10-day
trading period immediately preceding the giving of notice is not less than 50%
greater than the exercise price of the
<PAGE>
"A" Warrants (i.e., $1.125). The Company will have the right to call the "B"
Warrants at a price of $.01 per Warrant at any time after 6 months from the date
the "A" Warrants are called on 30 days notice to Investor, provided that the
average closing bid price of the Company's common stock for the 10-day trading
period immediately preceding the giving of notice is not less than 50% greater
than the exercise price of the "B" Warrants (i.e., $1.50).
4. The Definitive Agreement will contain such warranties, representations
and other terms and provisions as are normally attendant to a purchase and sale
transaction of this type.
5. The closing of the Definitive Agreement will be subject to the following
conditions (the "Conditions"):
a) The filing by the Company, and the effectiveness of, a Registration
Statement on Form S-1, or any other appropriate form available to the Company,
under the Securities Act of 1933, as amended, covering the initial 1,000,000
Shares purchased by Investor and the 2,000,000 shares underlying the Warrants
(the "Underlying Shares"); and
b) The approval by the shareholders of the Company of an amendment to the
Company's Certificate of Incorporation authorizing an increase in the number of
authorized shares of the Company's Common Stock to the extent necessary to
accommodate the number of Shares and Underlying Shares which may be issued to
Investor pursuant to the Definitive Agreement and the Warrants.
6. Investor agrees to bear the first $50,000 of registration costs for the
Shares and the Underlying Shares, including attorneys' fees, accounting fees,
filing fees, and printing, transfer agent and related costs and fees. The
Company will bear the cost of all registration costs in excess of the first
$50,000 of such costs. Notwithstanding the foregoing, if either one of the
closing Conditions set forth in Paragraph 5 above is not satisfied by the
Company, then the Company shall reimburse Investor for all registration costs
advanced by Investor hereunder. Upon the execution and delivery of this letter,
Investor agrees to advance $25,000 to counsel for the Company to initiate the
registration process (the "Advance"). Subject to the $50,000 limitation noted
above, Investor will advance an additional $25,000 to counsel upon filing of the
registration statement, which filing is anticipated to be approximately 60 days
after the execution of this agreement. Counsel to the Company has agreed that
its total legal fees in connection with the registration will not exceed
$75,000.
7. Following the closing, the Company will consult with Investor regarding
the selection of a mutually agreeable public relations firm to represent the
Company.
<PAGE>
8. Investor will have the right to participate in all meetings of the Board
of Directors on a non-voting basis, provided, however, if Investor requests to
be a member of the Board of Directors, the Company will use its best efforts to
either appoint Investor to the Board of Directors or nominate Investor for
election to the Board together with management's slate of Directors.
Please indicate your approval of the foregoing by countersigning a copy of
this letter in the space provided below and returning same to the Company (at
421 West 54th Street, New York, New York 10019, attn: Ira N. Smith), together
with a check in the amount of $25,000, payable to Company counsel, Howard J.
Kerker, P.C., representing the Advance.
Very truly yours,
Communications and Entertainment Corp.
By: Ira N. Smith, President
Accepted and Agreed:
- ---------------------
David Somerstein
