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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
COMMISSION FILE NUMBER 1-10880
BET HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1742995
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
ONE BET PLAZA 1900 W PLACE, N.E., WASHINGTON, D.C. 20018-1211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(202) 608-2000
(REGISTRANT'S PHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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CLASS A COMMON STOCK, $.02 PAR VALUE NEW YORK STOCK EXCHANGE
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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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to the Form 10-K. [_]
As of October 17, 1997, there were 10,055,048 shares of the Registrant's
Class A Common Stock, $.02 par value per share, outstanding. The aggregate
market value of shares held by non-affiliates of the Registrant (based on the
closing price of such shares on the New York Stock Exchange composite tape on
October 17, 1997) was approximately $340,371,000. As of October 17, 1997,
there were 1,831,600 shares and 4,820,000 shares of the registrant's Class B
Common Stock and Class C Common Stock, respectively, outstanding, none of
which were held by non-affiliates of the registrant.
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BET HOLDINGS, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JULY 31, 1997
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference in Part I, Item 1 and Part II, Items 5-8 of this
report (to the extent described herein).
(2) Portions of the registrant's definitive Proxy Statement to be used in
connection with its 1997 Annual Meeting of Shareholders are incorporated
by reference in Part III, Items 10-13, of this report (to the extent
described herein).
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BET HOLDINGS, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JULY 31, 1997
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 9
Item 3. Legal Proceedings.............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............ 11
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters........................................................ 14
Item 6. Selected Consolidated Financial Data........................... 14
Management's Discussion and Analysis of Results of Operations
Item 7. and Financial Condition........................................ 14
Item 7a. Quantitative and Qualitative Disclosures....................... 14
Item 8. Consolidated Financial Statements and Supplementary Data....... 14
Changes in and Disagreements with Accountants on Accounting and
Item 9. Financial Disclosure........................................... 14
PART III
Item 10. Directors and Executive Officers of the Registrant............. 15
Item 11. Executive Compensation......................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management. 15
Item 13. Certain Relationships and Related Transactions................. 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K.............................................................. 16
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PART I
ITEM 1. BUSINESS
A. GENERAL DEVELOPMENT OF BUSINESS
In connection with the initial public offering of its Class A Common Stock,
BET Holdings, Inc. ("BET Holdings") was incorporated in Delaware in July 1991.
As a result of a series of related transactions completed in September 1991,
Black Entertainment Television, Inc. ("BET"), a District of Columbia
corporation formed in 1979, became a wholly owned subsidiary of BET Holdings.
In November 1991, BET Holdings completed its initial public stock offering and
became the first black majority-controlled company listed on the New York
Stock Exchange. Unless the context otherwise requires, as used in this report,
the terms "Registrant" and "Company" means BET Holdings and its consolidated
subsidiaries, including BET. Substantially all of the Company's operations are
conducted by BET through its operation of the Black Entertainment Television
Cable Network ("BET Cable Network"), an advertiser supported basic cable
network.
BET Cable Network commenced operations in 1980 by providing two hours of
programming per week targeted to the interests and concerns of African-
American viewers to affiliated cable system operators serving approximately
3.8 million cable subscribers. In 1984, BET Cable Network began cablecasting
24 hours per day. As of July 31, 1997, BET Cable Network reached over 50.5
million households, as estimated by Nielsen Media Research ("Nielsen"),
providing a broad mix of music videos, off-network situation comedies and
original programming. In October 1997, BET Cable Network began cablecasting to
cable system affiliates located in Canada.
In August 1991, the Company entered the publishing industry when its newly
formed wholly owned subsidiary, Paige Publications, Inc., began publishing
Young Sisters and Brothers (YSB) magazine, a national lifestyle magazine
targeted to black American teenagers and young adults. In September 1996, the
Company announced that it would discontinue publishing YSB magazine.
In December 1991, the Company acquired a 44% interest in Emerge magazine, an
issue-oriented publication providing news, commentary and analysis from the
black American perspective. During its 1995 fiscal year, the Company increased
its ownership in Emerge to 100%.
In July 1993, the Company acquired 81% of the common stock of Avalon
Pictures, Inc. ("Avalon"), which operates Action Pay-Per-View ("Action"), a
cable television network providing movies and other programming on a pay-per-
view basis. During its 1994 fiscal year, the Company completed its acquisition
of Avalon by increasing its ownership interest to approximately 100%.
In January 1996, the Company launched BET On Jazz: The Cable Jazz Channel
("BET On Jazz"), its third cable network. BET On Jazz features a broad range
of jazz-oriented musical programming.
In February 1996, the Company, in a joint venture with the New York Daily
News, began publication of BET Weekend, a Sunday newspaper supplement
published quarterly. During its 1997 fiscal year, the Company increased its
ownership in BET Weekend to 100% and expanded its publication to ten times per
year.
In May 1996, the Company's wholly owned subsidiary, BET Direct, Inc. ("BET
Direct"), launched the Color Code(R) line of skin-care products, which offered
its products for sale in drug stores and other retail outlets in the United
States. In September 1997, the Company announced that it had adopted a plan
for disposal of its Color Code(R) business segment.
In November 1996, the Company and Hilton Hotels executed a Letter of Intent
and announced their intention to form a joint venture to explore the
feasibility of building and developing a gaming facility and related hotel and
recreational facilities in Las Vegas, Nevada, targeted toward serving African-
American patrons. In May 1997, the Company's Board of Directors authorized it
to pursue further financial and site selection analysis in conjunction with
the Letter of Intent.
In December 1996, the Company and Encore Media Corporation formed a joint
venture, BET Movies/Starz!3, LLC, for the purposes of the creation, operation,
programming, packaging, distribution,
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advertising, sales, exhibition and marketing of the BET Movies/Starz!3 cable
television programming service, a pay TV channel within the Starz!-Encore 8
multiplex showcasing Black film artists and targeted to African-American
viewers. Pursuant to the terms of a Term Sheet executed in September 1997, the
venturers agreed to modify the venture such that the Company is not required
to make additional equity contributions to the venture; however, is required
to loan the venture up to $4 million through December 31, 1997.
In December 1996, the Company acquired a 15% interest in LaVan Hawkins
UrbanCityFoods, LLC ("UCF"), a franchisee within the Burger King system, in
consideration for $5 million. The Company is committed to loan UCF up to $10
million, contingent upon achievement of certain operating results by UCF,
which may be converted into an additional ownership interest of up to 30%, in
whole or in part, at the Company's sole discretion.
In January 1997, the Company opened the BET SoundStage restaurant, an
entertainment-themed restaurant targeted to African-American patrons. The
Company subsequently announced its plans to open as many as 20 additional BET
SoundStage restaurants during the next five years.
In February 1997, the Company and Microsoft Corporation formed a joint
venture, MSBET, LLC, for the purposes of developing, producing and
distributing interactive software products and on-line programming for
narrowband (e.g., Internet), midband and broadband (e.g., interactive TV)
systems and platforms, intended to be of particular appeal to African-American
consumers and audiences. The venturers have agreed to significantly decrease
their respective financial commitments to the venture as specified in the
underlying joint venture agreement. As of July 1997, the parties modified
their financial commitment to the venture and limited their total annual
financial contribution to $500,000.
On September 10, 1997, the Board of Directors of the Company received a
letter (the "Letter") from Robert L. Johnson, the Company's Chairman and Chief
Executive Officer, and Liberty Media Corporation ("Liberty"), a major
shareholder of the Company, to acquire, through a newly formed entity owned by
them, all of the Company's Common Stock which they do not own at a price per
share of $48 cash (the "Offer"). The Letter states that the Offer will be
subject to financing on terms and conditions acceptable to the offerors and
other terms and conditions customary to transactions of this nature.
On September 15, 1997, the Board of Directors of the Company announced that
it had appointed an independent committee, consisting of Mr. Delano E. Lewis,
to review and report to the Company's Board its evaluation of the Offer.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates predominantly in the cable television programming
industry. Its continuing business activities in other industries are not
currently material within the context of Item 101 of Regulation S-K and
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise".
C. DESCRIPTION OF BUSINESS
The Company operates predominantly in the cable television programming
industry. Its cable television programming operations are primarily conducted
through the BET Cable Network, which accounted for approximately 88% of the
Company's total operating revenues during the year ended July 31, 1997. A
description of each of the Company's significant strategic business units
follows together with a description of certain other factors significant to
the Company's business taken as a whole.
1. BET CABLE NETWORK
The BET Cable Network provides a broad mix of programming targeted to the
interests and concerns of African-American viewers. Programming is produced
in-house or acquired from a variety of sources. BET Cable Network's in-house
productions include hosted music video programs, talk shows, sports, news and
public
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affairs, children's programs and comedy shows, and are produced in the
Company's studios in Washington, D.C., and Burbank, California. Acquired
programs include off-network programs, gospel music programs and sports and
entertainment specials.
(A) BET CABLE NETWORK AFFILIATED CABLE SYSTEMS AND SUBSCRIBERS
BET Cable Network contracts with cable system operators to provide
programming service for a monthly per subscriber fee under long-term
affiliation agreements, which are subject to renewal from time to time. BET
Cable Network's current affiliation agreement provides for a monthly per
subscriber rate of $.12 and $.13 in calendar years 1997 and 1998,
respectively, with the monthly per subscriber rate increasing $.005 each year
thereafter through calendar year 2003, at which time the monthly per
subscriber rate will be $.155. BET Cable Network's affiliation agreements are
subject to cancellation by either BET Cable Network or cable system operators
under certain circumstances. Additionally, substantially all of BET Cable
Network's affiliation agreements include a "most favored nations" provision
under which BET Cable Network is obligated to extend the terms and provisions
of its most favorable contractual rate to covered affiliates. Accordingly, in
the event BET Cable Network enters into a new or renewed affiliation agreement
with terms more favorable than those included in its current standard
affiliation agreement, it would be obligated to extend the more favorable
terms to substantially all other affiliates. The BET Cable Network currently
generates approximately 42% of its revenues from subscriber fees paid by cable
systems affiliates.
BET Cable Network affords cable system operators the opportunity both to
attract subscribers from a significant market segment not specifically
targeted by other programming services, and, by diversifying the mix of
programming offered on their systems, to satisfy certain social objectives
mandated by many franchising authorities. The BET Cable Network is also
attractive to cable operators seeking to respond to cable subscribers' demands
for black-oriented entertainment, sports and public affairs programming.
At July 31, 1997, BET Cable Network had over 47 million subscribers, based
on reports to the Company from affiliated cable systems, an increase of 14% as
compared to July 31, 1996. This growth is attributable both to incremental
growth in household penetration by cable systems nationwide and to the
Company's success in obtaining affiliation agreements with cable systems not
previously carrying the BET Cable Network. The Company believes that while it
will continue to experience subscribership growth, growth rates experienced in
previous years may not be attainable in the future. Continued subscribership
growth will be encouraged by new cable system construction in the central
cities of a number of metropolitan areas as well as by upgrades of existing
cable systems and, eventually, from the expected significant expansion of
channel capacity of cable television systems, which is expected to occur over
the next several years. Increased rate regulation and structural changes in
the cable industry generally, however, could place downward pressure on rates
charged by cable programming services and could cause cable system operators
not to expand channel capacity as rapidly as expected. The rate of
subscribership growth also may be restricted, in management's view, as a
result of re-regulation of the cable industry and competition for limited
channel capacity, both of which may make it more difficult to increase the BET
Cable Network's distribution in those markets with less than 5% black
populations.
(B) ADVERTISING
Advertisers on the BET Cable Network include nationally known companies in
the entertainment, beverage, packaged goods, fast food, automotive, retail,
insurance and travel industries. BET Cable Network currently earns
approximately 57% of its revenues from advertising. Advertising time on the
BET Cable Network is marketed and sold by the Company's advertising sales
force located in New York, Chicago, Los Angeles and Detroit. BET Cable
Network's advertising revenues are derived primarily from sales of national
spot advertising, infomercial advertising and direct response advertising.
National spot advertising primarily consists of 30 second advertisements for
products and services. BET Cable Network sells national spot advertising time
to agencies representing national advertisers and directly to
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advertisers. The Company believes that its advertising rates are among the
most cost effective of the cable networks. In fiscal 1997, national spot
advertising accounted for 67% of BET Cable Network's advertising revenues.
Infomercial advertising, such as instructional, ministry, health, beauty and
other programming, ranges in length from 30 to 60 minutes. These programs
frequently take the form of talk shows or game shows. Infomercial advertising
is generally aired during less desirable programming hours. Infomercial
advertising revenue accounted for 27% of BET Cable Network's advertising
revenue in fiscal 1997.
During fiscal 1997, Robert Rosenheim Associates ("Rosenheim") purchased
$20.4 million of infomercial advertising from BET, representing 13% of the
Company's consolidated revenues. The Company's long-term contract with
Rosenheim, which is cancelable of the option of the Company, extends through
its 1999 fiscal year and provides for annual rate increases of 10% in fiscal
years 1998 and 1999.
Direct response advertising consists of 30 and 60 second commercials for
various consumer products, such as musical recordings and kitchenware, which
direct consumers to dial an 800 or 900 telephone number in order to purchase
the particular product. In most cases, these products are not available on a
retail basis. In fiscal 1997, direct response advertising accounted for 6% of
BET Cable Network's advertising revenues.
(i)Market
The Company believes that advertising on BET Cable Network is attractive to
advertisers because it allows them to execute a general market strategy of
reaching television viewers and to target a specific population that
frequently uses their product or service. In recent years, cable television
has captured a greater share of advertising budgets relative to broadcast
television. During this period, the overall ratings for the major networks
(ABC, CBS, NBC and FOX), and for local broadcast stations, have declined,
while over the same period the overall ratings for basic cable television
programming services have increased. Because viewership ratings are a
significant factor in determining both advertisers' placement strategy and the
pricing of advertising time, during this period cable Advertising revenues
have grown significantly faster than those of broadcast networks. The Federal
Communications Commission has predicted that this trend will continue
throughout the 1990's. The Company believes that the BET Cable Network has
benefited, and will continue to benefit, from this trend.
In addition, the Company believes that the BET Cable Network will benefit
from the trend in advertising strategies toward greater market segmentation
and that a significant number of major national advertisers are dedicating a
larger share of their advertising budgets to target the black consumer in an
effort to increase their share of this large and rapidly growing market. These
advertisers, as well as manufacturers of black consumer products, purchase
advertising on the BET Cable Network because it provides them with a cost
effective means to reach a significant number of black consumers. In addition
to the other factors that normally motivate advertisers to purchase
advertising time on the BET Cable Network, certain advertisers may believe
that they derive indirect corporate benefits from supporting culturally
diverse programming services such as the BET Cable Network.
(ii)Demographics
The majority of the BET Cable Network's audience is comprised of black
viewers and at July 31, 1997, BET Cable Network reached approximately 100% of
the 7 million U.S. black cable households, based on reports from Nielsen. The
Company believes that certain demographic characteristics of the BET Cable
Network's viewing audience favorably influence advertisers' decisions to
purchase time on the BET Cable Network. Generally, homes served by cable
television watch more television, have a higher per capita income and have
more people per household than the general population. Additionally, research
indicates that black households watch more television and are more brand
conscious than the general population.
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The black population as a group is growing at a faster rate than the total
population of the United States. The United States Department of Commerce,
Bureau of the Census (the "Census Bureau") reported that the black population
grew by 15.6% to approximately 30.6 million between April 1, 1980 and April 1,
1990, a growth rate 1.5 times that of the total population. Another report by
the Census Bureau projected that this growth will continue, predicting that
the total black population of the United States will increase by approximately
15.8% between 1990 and 2000. Because of the unique niche occupied by the BET
Cable Network, the Company believes that growth in the black population will
generally lead to increased viewership of the BET Cable Network and to
increased advertising revenues. The Census Bureau has projected that the black
population in the age group of 35-44 years old, which is particularly
attractive to advertisers, will grow by 30.8% between 1990 and 2000.
According to Census Bureau reports, approximately 57% of the black
population in the United States is concentrated in the central cities of
metropolitan areas, compared to 31% of the total population. BET Cable Network
has affiliation agreements with cable operators in each of the top 50
metropolitan areas and distributes its programming to cable systems in each of
the 10 media markets in the United States with the largest black populations.
(iii)Ratings
Since 1987, Nielsen has provided the Company with metered audience
measurements. Nielsen's metered estimates are widely accepted by advertisers
as a basis for determining placement strategy. The Company also uses these
subscriber estimates for the purpose of determining the rates that the BET
Cable Network will charge advertisers for commercial air time within its
programs. According to Nielsen's most recent prime time audience measurements
(June 30, 1997 to September 28, 1997), BET Cable Network's ratings averaged
approximately .5. This signifies that during that period (based on Nielsen
estimates), on average, approximately 252,000 homes were tuned in to the BET
Cable Network during prime time. In addition, Nielsen reports the BET Cable
Network's prime time rating for black cable households reached by the BET
Cable Network. For the most recent period (June 30, 1997 to September 28,
1997), the BET Cable Network's prime time Black household ratings averaged
approximately 3.0, indicating that approximately 212,000 Black households were
tuned in to the BET Cable Network during prime time. The Company believes the
BET Cable Network's average prime time ratings are competitive with the
average prime time ratings of other basic cable programming services with a
targeted viewing audience, which ranged from .3 to 1.5 according to the most
recent Nielsen report (June 30, 1997 to September 28, 1997).
(C) PROGRAMMING
The BET Cable Network provides a range of black-oriented programming. Most
of BET Cable Network's programs feature black actors and performers in leading
or dominant roles or reflect the black cultural experience. BET Cable Network
independently produces the majority of its programming and acquires the
remainder from various external sources. Program offerings include hosted
music video programs, off-network productions, stand-up comedy, news and
public affairs programming, entertainment specials and concert performances.
The programs are transmitted via satellite from the Company's facilities in
Washington, D.C. to BET Cable Network's cable system affiliates.
(i)Originally Produced Programming
In fiscal 1997, most of the BET Cable Network's programmed hours (excluding
infomercial advertising) were produced by the Company. The majority of the
programming produced by the Company consists of hosted music video programs,
such as Planet Groove, featuring urban contemporary music, and Rap City,
featuring rap music. These programs also feature in-studio performances and
interviews with guest artists. Record companies provide the Company with music
videos at no cost in exchange for the promotional benefits gained by their
artists through exposure on BET Cable Network.
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Regularly produced programs also include entertainment related shows, such
as Comic View, a stand-up comedy show, and Teen Summit, a daily program which
addresses issues affecting black youth. The Company also produces a variety of
news and public affairs programming such as BET Tonight, an issues oriented
talk show featuring viewer participation, Lead Story, a news digest examining
national issues of particular concern to black Americans, and Our Voices, a
half-hour live call-in talk show designed to permit viewers to express their
opinions on various issues of interest to black Americans.
Programming is produced in two state-of-the-art production facilities owned
by the Company and located in Washington, D.C. Another studio located in
Burbank, California is leased. The production facilities in Washington, D.C.,
include four major production studios and six edit suites, while the facility
in Burbank has one production studio and two edit suites.
(ii)Acquired Programming
To complement its originally produced programming, the Company acquires
programs from various sources, including the broadcast networks, film
companies and program syndicators. The Company exhibits acquired programming
pursuant to licensing agreements with suppliers who generally own the
copyrights to such programming. Licenses to air acquired programming generally
run for two years and entitle the Company to show each episode several times.
During fiscal 1998, acquired programming will include off-network productions,
such as 227 and Thea and specialty shows, such as The Bobby Jones Gospel Show,
concerts featuring various music talent and feature-length movies.
Most acquired programming consists of off-network productions obtained from
major syndicators. Management believes that acquiring the rights to air high
quality, off-network programming, such as situation comedies, entertainment
specials and movies (rather than attempting to produce them independently) is
the most cost-effective way to provide its viewers with this kind of
programming. Although many of these programs are very popular with black
viewers, they may not have achieved ratings sufficient to justify their
continuation on a major broadcast network or as a first-run syndicated
program. Historically, BET Cable Network has often been the only national
television medium for many of these types of programs and, therefore,
exhibition rights have been relatively inexpensive. However, with the recent
proliferation of cable television programmers and broadcast networks,
obtaining rights to such programming has become increasingly competitive and
expensive.
(D) PATENTS, TRADEMARKS, LICENSES
The Company neither holds nor depends upon any material patent, trademark,
license, franchise or concession except its registered trademark for the
letters "BET" and the words "Black Entertainment Television".
(E) COMPETITION
There is intense competition for viewers among companies providing
programming services via cable television and through other video delivery
systems. Accordingly, BET Cable Network also competes for available channel
space on cable television systems and for subscriber fees from cable operators
with other cable programming services and nationally distributed and local
television stations. BET Cable Network also competes for advertising revenues
with other national cable programming services, including superstations,
broadcast networks, local over-the-air television stations, broadcast radio
and the print media. In addition, BET Cable Network competes for advertising
revenue with other black targeted media, including black-oriented radio
stations, magazines, such as Ebony, Black Enterprise, Jet and Essence, and
black-oriented television programs, such as Soul Train. More generally, BET
Cable Network competes with various other leisure-time activities such as home
videos, movie theaters, and other alternative forms of information and
entertainment.
Currently, music videos are included in approximately 60% of the Company's
programming. As is customary in the record industry, record companies provide
the Company with music videos in exchange for promotional considerations. If
the record industry were to change its current practice and begin to charge
for music videos, the Company's programming costs and operating margins may be
materially adversely affected if
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the Company was unable to receive adequate compensation for the promotional
value of its related airtime. The Company is aware of one programming service,
MTV, that has entered into exclusive arrangements with record companies
covering a limited number of artists.
Cable system channel capacity and competition in the cable industry may be
affected by technological advances, such as digital compression, which allows
cable systems to expand channel capacity, and "multiplexing", which allows
programming services to offer more than one feed of their programming. As a
result of the increased segmentation made possible by these advances, another
programming service might be able to provide programming that targets the
Company's viewing audience. MTV has announced plans to produce three separate
channels of programming, one of which might feature black urban contemporary
music. To the Company's knowledge, MTV does not have any present plan to offer
such a channel in the near future. The Company is aware, however, of several
cable programmers that have announced plans to offer programming targeted to
the BET Cable Network's audience. Although there can be no assurance, the
Company believes that it will be able to compete effectively against other
programming services distributing music video programming targeted to black
Americans because of its brand awareness, extensive experience,
capitalization, established relationships within the cable and advertising
industries, its reputation for providing a broad mix of quality black-oriented
programming and its identity as a black owned and operated enterprise.
2. BET ON JAZZ: THE CABLE JAZZ CHANNEL
The Company launched BET On Jazz: The Cable Jazz Network ("BET On Jazz") in
January 1996. BET On Jazz is an advertiser-supported basic cable network
featuring jazz concerts, music videos and interviews with jazz artists. In
June 1996, BET On Jazz expanded overseas when it began providing programming
to cable systems located in the United Kingdom, Europe and South Africa. At
July 31, 1997, BET On Jazz reached approximately 1.9 million domestic and
international households. Revenues earned by BET On Jazz represented 1% of the
Company's total operating revenues in fiscal 1997.
BET On Jazz's domestic affiliation agreements provide for up to a two year
free carriage period. Additionally, BET On Jazz's domestic marketing plan
contemplates payment of marketing support equal to $2 per subscriber as cable
systems launch BET On Jazz. While current marketing efforts indicate that the
Company may be able to negotiate more favorable affiliation agreements with
international cable system operators, such terms are not assured until
significant international subscriber penetration is achieved. Accordingly, BET
On Jazz is not expected to earn a significant level of revenue in the near
future.
The Company neither holds nor depends upon any material patent, trademark,
license, franchise or concession except its registered trademark for the words
"BET On Jazz: The Cable Jazz Channel."
3. ACTION PAY-PER-VIEW
The Company's pay-per-view operations are conducted by Action Pay-Per-View
("Action") and represented approximately 6% of the Company's total operating
revenues in fiscal 1997. Action is a satellite-delivered television network
which offers programming on a pay-per-view basis to cable systems operators
and, to a lesser extent, home satellite dish owners.
Action has entered into affiliation agreements with cable system operators
which provide for the offering of Action's programming to affiliated cable
system subscribers on a pay-per-view basis. Cable system subscribers purchase
Action's programming from their cable system operator on a one-time viewing
for a fixed charge basis of approximately $5. Affiliated cable systems remit
to Action a contractually specified portion of such revenues. At July 31,
1997, Action's programming was available to approximately 9 million
addressable homes.
Action acquires most of its programming from third parties including major
film studios such as Warner Bros., Paramount, Universal, Twentieth Century
Fox, Columbia/Tri Star, Disney, MGM and others. Typical pay-per-view licenses
entitle film studios to the greater of a minimum rental amount or a share of
the gross revenue generated at the consumer level from the purchase of the
pay-per-view film.
Action competes with several other companies which offer feature film
programming on a pay-per-view basis, some of which may have substantially
greater resources than Action and the Company. More generally, Action competes
with other segments of the entertainment industry, including network and cable
television, theater showing of films and video tape sales and rentals.
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The Company neither holds nor depends upon any material patent trademark,
license, franchise or concession except its registered trademark for the words
and design, "Action Pay-Per-View".
4. MAGAZINE PUBLISHING
Advertising and subscriber revenues earned by the Company's magazine
publishing operations represented 3% of the Company's total operating revenues
in fiscal 1997.
(A) EMERGE MAGAZINE
On December 31, 1991, the Company acquired control of Emerge, a general
interest magazine aimed at a predominantly black audience that is published
ten times a year. Since December 31, 1991, the Company has consolidated the
entire results of operations for Emerge into the Company's financial
statements. During the year ended July 31, 1995, the Company increased its
ownership interest in Emerge to 100%.
For the fiscal year ended July 31, 1997, Emerge's paid circulation
(including subscriptions and newsstand sales) approximated 190,000.
The Company neither holds nor depends upon any material patent, trademark,
license, franchise or concession except its registered trademark for the words
"Emerge".
(B) BET WEEKEND MAGAZINE
In fiscal year 1996, in a joint venture with the New York Daily News, the
Company began publication of BET Weekend, a newspaper supplement. During
fiscal year 1997, the Company increased its ownership interest in BET Weekend
to 100%. BET Weekend is currently published ten times per year and distributed
by seven metropolitan newspapers to over one million subscribers. As reader
and advertiser interest increases, the Company expects to ultimately move to
weekly publication.
The Company is currently doing business under the trademark "BET Weekend"
and an application for such trademark is pending before the U.S. Patent and
Trademark Office.
5. BET SOUNDSTAGE RESTAURANT
During January 1997, the Company opened the BET SoundStage restaurant,
located in Largo, Maryland. The BET SoundStage restaurant is a 12,000 square-
foot entertainment-themed restaurant featuring casual dining and music video
entertainment. The Company has announced plans to develop up to 20 additional
entertainment-themed restaurants. Revenues earned by the BET SoundStage
restaurant represented 2% of the Company's total operating revenues in fiscal
1997.
The Company is currently doing business under the trademark "BET SoundStage"
and an application for such trademark is pending before the U.S. Patent and
Trademark Office.
6. SATELLITE DISTRIBUTION
The Company transmits BET Cable Network and BET On Jazz programming from its
production facility located in Washington, D.C. by means of an earth station
transmitting antenna (called an "uplink") which the Company owns. The Company
operates the uplink facility, which transmits the programming signals over
Galaxy V and Galaxy VII, orbiting communications satellites on which the
Company owns transponders, to cable system headend receiving antennae
throughout the United States, its territories and possessions, Canada and
certain Caribbean nations.
The Company contracts with IDB Communications Group, Inc. ("IDB") to
transmit BET Action Pay-Per-View programming by means of an uplink. IDB
transmits Action's programming signal over Galaxy VII to cable system headend
receiving antennae throughout the United States.
The Company contracts with Orion Atlantic, L.P. to transmit BET On Jazz
programming internationally. The Company transmits its signal from its
production facility located in Washington, D.C. by means of an uplink to the
Orion 1 satellite to receiving antennae throughout Europe.
7. REGULATION
Although the vast majority of the Company's operations are not subject to
federal regulation, the operations of cable television systems, satellite
distribution systems and broadcast television program distribution companies
are subject to regulation under the Communications Act of 1934, as amended,
and to regulatory supervision thereunder by the Federal Communications
Commission (the "FCC") and agencies of certain foreign
8
<PAGE>
governments of countries where the Company conducts business. The Company's
uplink and microwave facilities are licensed by the FCC and must be operated
in conformance with the terms and conditions of those licenses. Cable systems
are also subjected to local franchise authority regulation.
(A) LOCAL CABLE REGULATION
The cable television industry is regulated by municipalities or other local
government authorities which have the jurisdiction to grant and to assign
franchises and to negotiate generally the terms and conditions of such
franchises, including rates charged to subscribers, except to the extent that
such jurisdiction is pre-empted by Federal law. Any such rate regulation may
place downward pressure on the subscriber fees earned by the Company.
(B) FEDERAL CABLE RE-REGULATION
The Company is regulated under the Communications Act of 1934 (the
"Communications Act"), as amended by the Telecommunications Act of 1996. The
Telecommunications Act of 1996 (the "1996 Act" or sometimes the "Act") was
responsible for the most significant changes in communications law and
regulation since enactment of the Communications Act. Almost every segment of
the communications industry was affected with sweeping changes in the way in
which broadcasters, cable operators, video programmers, equipment
manufacturers, and electronic publishers are regulated. The 1996 Act
substantially amended the provisions of the Communications Act concerning
cable television systems and other multichannel video programming services.
For example, the Act terminated rate regulation for cable programming service
("CPS") or "expanded basic" tiers for many small cable operators, and will
sunset such regulation for all other cable systems in 1999. Rate regulation
will also end for particular cable operators if a local exchange carrier
offers video programming in such cable operator's franchise areas by any means
other than direct broadcast satellite ("DBS"). The 1996 Act also contained
various provisions to stimulate the development of new video programming
services or other services offered over multichannel video programming
systems, such as interactive services. These changes in federal regulation
should have a beneficial impact, to some degree, on the future growth of BET,
BET on Jazz and Action although the extent of such impact cannot yet be
determined.
8. EMPLOYEES
As of July 31, 1997, the Company employed approximately 460 people. Although
none of the Company's employees are subject to collective bargaining
agreements, as of July 31, 1997, the BET Cable Network was in negotiations
with a local labor bargaining agent with respect to a group of approximately
40 of the BET Cable Network's labor force.
The Company does not believe any collective bargaining agreement resulting
from such negotiations will have a material effect on the Company as its scope
would affect personnel whose skills are readily available in the local labor
market. The Company has never experienced a strike or work stoppage.
ITEM 2. PROPERTIES
The Company owns its corporate office facility, which is located at One BET
Plaza, 1900 W Place, N.E. in Washington, D.C. The Company's corporate office
facility houses its executive staff, administrative staff, BET Cable Network's
and BET On Jazz's principal affiliate sales offices and the principal offices
of Emerge and BET Weekend. The Company also owns its production facility
located at 1899 9th Street, N.E. in Washington, D.C., which is adjacent to the
Company's corporate office facility. The corporate office and production
facilities are constructed on property that the Company leases from the
District of Columbia pursuant to a long-term lease. The initial expiration
date of the lease is October 1, 2013. At the Company's option, the Company may
extend the term for three successive 15 year periods. The lease also contains
an option to purchase the land.
The Company leases a production studio and office space at 2801 West Olive
Avenue in Burbank, California. The lease for this commercial space has been
extended to January 1999. The lease is not renewable by its terms but the
Company has not experienced difficulties in negotiating extensions to the
lease in the past.
9
<PAGE>
The Company's principal advertising sales offices are located at 380 Madison
Avenue in New York City, where the Company leases space under a long-term
lease expiring in December 2002. The Company also leases office space at 2425
West Olympic Boulevard in Santa Monica, California under a lease expiring in
January 1998. The space is used to house substantially all of Action's staff
as well as certain members of BET Cable Network's advertising sales and
affiliate sales staffs. Additional advertising sales offices are located in
Chicago and the Detroit area.
The Company owns a warehouse and underlying parcel of land located at 1235 W
Street, N.E., Washington, D.C.
The Company owns the BET Soundstage Restaurant, located in Largo, Maryland,
together with the land it is situated on.
The Company leases a certain building and underlying parcel of land within
that entertainment, recreation and lodging complex know as the "Walt Disney
World Resort" for the operation of an entertainment club to be known as the
"BET SoundStage Club" under a lease expiring on September 30, 2007.
The Company leases certain premises in the building having a street address
of 730 11th Street, N.W., Washington, D.C. for the operation of an
entertainment club and restaurant to be know as the "BET On Jazz Restaurant"
under a lease expiring on September 30, 2008. At the Company's option, the
Company may extend the lease term for two successive five year periods.
ITEM 3. LEGAL PROCEEDINGS
On or about September 11, 1997, purported class actions captioned Behrens v.
Robert L. Johnson et al., C.A. No. 15921 N.C., Harbor Finance Partners v.
Peter R. Barton et al., C.A. No. 15923 N.C., Tiger Options, L.L.C. v. Robert
L. Johnson et al., C.A. No. 15936, Friedman v. Robert L. Johnson et al., C.A.
No. 15924 N.C., and Ramos v. Robert L. Johnson et al., C.A. No. 15941, N.C.
were filed in the Court of Chancery of the State of Delaware in and for New
Castle County. On October 14, 1997, the five complaints were consolidated
under the caption: In re BET Holdings, Inc. Shareholders Litigation, Cons.
C.A. No. 15921 (the "Complaint"). The Complaint name BET Holdings, Inc.,
members of its Board of Directors, Peter R. Barton, Liberty Media Corporation
("Liberty") and Tele-Communications Inc. ("TCI") as defendants.
The Complaint concerns an offer, received by the Company on September 10,
1997, from Robert L. Johnson ("Johnson"), the Company's Chairman and Chief
Executive Officer, and Liberty, a major shareholder of the Company, to
acquire, through a newly formed entity owned by them, all of the Company's
outstanding Common Stock which they do not own at a price per share of $48
cash (the "Offer").
The Complaint alleges, among other things, that the transaction proposed by
the Offer ignores the full value of the Company's assets and future prospects,
the consideration does not reflect the value of the Company's assets, and that
the transaction was timed to place an artificial lid on the Company's common
stock which is unfair to the public stockholders.
The Complaint seeks preliminary and permanent injunctive relief, rescission
in the event the transaction is consummated, compensatory damages and costs
and attorney's fees.
On or about October 7, 1997, a class action captioned Baskerville v.
Johnson, et al., C.A. No. 97ca007778 (the "Baskerville Complaint") was filed
in the Superior Court of the District of Columbia. The Baskerville Complaint
names BET Holdings, Inc., its directors, Liberty and TCI as defendants.
The Baskerville Complaint alleges, among other things, that the transaction
contemplated by the Offer is designed to unfairly benefit Johnson, Liberty and
TCI at the expense of the public shareholders, that the Company's board is
dominated or controlled by Johnson, Liberty and TCI, that Johnson, Liberty and
TCI have
10
<PAGE>
breached their fiduciary duties as controlling shareholders of the Company,
and that the plaintiff and the purported class will suffer irreparable damage
unless the defendants are enjoined from breaching their fiduciary duties and
from completing the proposed transaction.
The Baskerville Complaint seeks preliminary and permanent injunctive relief,
recision in the event the transaction is consummated, compensatory damages and
costs and attorney's fees.
The Company believes that the claims presented in both the Complaint and the
Baskerville Complaint are meritless and intends to defend them vigorously.
Additionally, the Company is from time to time engaged in legal proceedings
incidental to its business. The Company does not believe that the outcome of
any such legal proceedings that it is engaged in, either individually or in
the aggregate, will have a material adverse effect on the Company's financial
condition or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
11
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of October 17, 1997 and their ages
and positions with the Company are set forth below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert L. Johnson 51 Chaiman of the Board of Directors, Chief Executive Officer
Debra L. Lee 43 President and Chief Operating Officer
William T. Gordon, III 44 Executive Vice President, Chief Financial Officer and Treasurer
James A. Ebron 43 Executive Vice President, Media Sales
Sheila Crump Johnson 48 Executive Vice President, Corporate Affairs and Director
Jefferi K. Lee 40 Executive Vice President, Network Operations and Programming
Curtis N. Symonds 42 Executive Vice President, Affiliate Sales and Marketing
Janis P. Thomas 42 Executive Vice President, Brand Marketing and Licensing
</TABLE>
The executive officers of the Company serve at the pleasure of the Board of
Directors. The following is a brief description for at least the past five
years of the current executive officers of the Company.
Mr. Johnson founded BET, the Company's primary operating subsidiary, in
1979. Mr. Johnson has served as President, Chief Executive Officer and a
director of BET since its creation. Since 1991 Mr. Johnson also served as the
Chairman of the Board of Directors. Since 1991, Mr. Johnson also served as
Chief Executive Officer of the Company and has served as its President from
1991 until March 1996. Mr. Johnson is also the Chairman of District
Cablevision, Inc., a Washington, D.C. cable system operating company which he
founded in 1980, and has served as a director of Liberty Media Corporation
since December 1991. Since January 1994, Mr. Johnson has served as a director
of Hilton Hotels Corporation.
Ms. Lee has served as President and Chief Operating Officer since March
1996. Prior to that time Ms. Lee served as an Executive Vice President of the
Company since September 1992. From September 1991 until May 1997, she served
as the General Counsel and Secretary of the Company. From September 1991 to
September 1992, she served as a Vice President of the Company. Ms. Lee has
also served as Vice President and General Counsel of BET since April 1986. In
July 1991, she became the Secretary of BET.
Mr. Gordon has served as Executive Vice President, Chief Financial Officer
and Treasurer since August 1993. From 1987 to 1993, Mr. Gordon was a partner
with the accounting firm of Price Waterhouse LLP. Mr. Gordon was BET's audit
partner on behalf of Price Waterhouse LLP between 1989 and early 1992. Mr.
Gordon joined Price Waterhouse in 1975.
Mr. Ebron has served as Executive Vice President, Media Sales since
September 1992. Prior to that time, Mr. Ebron served as Vice President,
Network Sales of the Company from September 1991 to September 1992. He served
as Vice President, Network Sales of BET from August 1983 until September 1991.
Mrs. Johnson has served as Executive Vice President, Corporate Affairs of
the Company since September 1992. From September 1991 to September 1992, she
served as Vice President, Corporate Affairs of the Company. Since 1979 she has
served as a director of BET and, since 1990, as Vice President, Corporate
Affairs of BET. Prior to 1990, Mrs. Johnson was a lecturer and author in the
area of early childhood music education.
Mr. Lee has served as Executive Vice President, Network Operations and
Programming since September 1992. Mr. Lee served as Vice President, Network
Operations of the Company from September 1991 to September 1992 and of BET
since September 1982.
Mr. Symonds has served as Executive Vice President, Affiliate Sales and
Marketing since September 1992. Mr. Symonds served as Vice President,
Affiliate Marketing of the Company from September 1991 to September 1992 and
of BET since July 1988.
12
<PAGE>
Ms. Thomas has served as Executive Vice President, Brand Marketing and
Licensing since August 1997. She previously served as Executive Vice
President, Marketing and Merchandising from May 1996 to August 1997. Ms.
Thomas served as Executive Vice President, Direct Marketing and Advertising
Services from September 1992 to April 1996. Ms. Thomas served as Vice
President, Advertising of the Company from September 1991 to September 1992
and of BET since September 1982.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information regarding the market for the Company's Class A Common Stock,
number of shareholders and dividends is included under the captions entitled
"Price Range of Common Stock" and "Selected Consolidated Financial Data" and
in the Notes to Consolidated Financial Statements in the Company's 1997 Annual
Report to Shareholders and is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
A summary of selected consolidated financial data for the Company for the
five years in the period ended July 31, 1997 is included under the caption
entitled "Selected Consolidated Financial Data" of the Company's 1997 Annual
Report to Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Information regarding the Company's results of operations and financial
condition is included under the caption entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition" of the Company's
1997 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
Not applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, notes thereto and supplementary data
of the Company, which are included in the 1997 Annual Report to Shareholders
under the following captions listed below, are incorporated herein by
reference.
Consolidated Balance Sheets at July 31, 1997 and 1996.
Consolidated Statements of Income for the three years in the period ended
July 31, 1997.
Consolidated Statements of Cash Flows for the three years in the period
ended July 31, 1997.
Consolidated Statements of Changes in Shareholders' Equity for the three
years in the period ended July 31, 1997.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
Unaudited Quarterly Financial Information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
<PAGE>
PART III
Pursuant to General Instruction G to Form 10-K, the information required by
Part III will be incorporated by reference from the Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following financial statements and report of independent accountants,
which are included in the Company's 1997 Annual Report to Shareholders, are
incorporated herein by reference (see Exhibit 13).
Consolidated Balance Sheets at July 31, 1997 and 1996.
Consolidated Statements of Income for the three years in the period ended
July 31, 1997.
Consolidated Statements of Cash Flows for the three years in the period
ended July 31, 1997.
Consolidated Statements of Changes in Shareholders' Equity for the three
years in the period ended July 31, 1997.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
(A)(2) FINANCIAL STATEMENTS SCHEDULES FOR THE THREE YEARS IN THE PERIOD ENDED
JULY 31, 1997
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
-------- ----------- ------
<C> <S> <C>
II Valuation and Qualifying Accounts and Reserves.............. S-1
</TABLE>
The report of the Company's independent accountants with respect to the
above-referenced financial statement schedule appears on page 21 of this
report.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
16
<PAGE>
(A)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3(i) Restated Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.3 to Amendment No. 4 to the Company's
Registration Statement on Form S-1, Registration No. 33-42853, filed
with the Commission on October 30, 1991)
3(ii) Bylaws, as amended, of Registrant (incorporated by reference to
Exhibit 3.4 to Amendment No. 4 to the Company's Registration Statement
on Form S-1, Registration No. 33-42853, filed with the Commission on
October 30, 1991, as additionally amended by the attached exhibit)
4.1 Note Agreement, dated January 30, 1990, between Aetna Life Insurance
Company and Black Entertainment Television, Inc., as amended by the
Guaranty, Consent and Amendment to Note Agreement, dated September 5,
1991 (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1, Registration No. 33-42853, filed
with the Commission on September 18, 1991)
10.1 Ground Lease, dated as of March 18, 1988, by and between the District
of Columbia and Black Entertainment Television, Inc. (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1, Registration No. 33-42853, filed with the Commission on
September 18, 1991)
10.2 Ground Lease, dated May 4, 1993 between BET Acquisition, Inc. and the
District of Columbia (incorporated by reference to Exhibit 10.18 to
the Company's Form 10-K for the fiscal period ended July 31, 1992)
10.3 Plan of Recapitalization for BET Holdings, Inc. (incorporated by
reference to Exhibit 3.3 of Amendment No. 4 to the Company's
Registration Statement on Form S-1, Registration No. 33-42853, filed
with the Commission on October 30, 1991)
10.4 Trustee's Assignment of Ground Lease, dated March 19, 1992, by and
between Leonard W. Harrington, Jr., Substitute Trustee, appointed by
Deed of Appointment of Substitute Trustee dated August 29, 1990, and
recorded August 31, 1990, as instrument no. 48429, and Black
Entertainment Television, Inc. (incorporated by reference to Exhibit
10.11 to the Company's Form 10-K for the fiscal period ended July 31,
1992)
10.5 Assignment of Purchase Agreement, dated March 17, 1992, between Black
Entertainment Television, Inc. and BET Acquisition Corp. (incorporated
by reference to Exhibit 10.12 to the Company's Form 10-K for the
fiscal period ended July 31, 1992)
10.6 Agreement Among Stockholders among BET Holdings, Inc., Robert L.
Johnson, TW/BET Holding Co. and LMC BET Inc. dated November 6, 1991,
(incorporated by reference to Exhibit 10.6 to the Company's Form 10-K
for the fiscal period ended July 31, 1994)
10.7 Affiliation Agreement, dated as of January 1, 1989, between Black
Entertainment Television, Inc. and American Television and
Communications Corporation (incorporated by reference to Exhibit 10.4
to the Company's Registration Statement on Form S-1, Registration No.
33-42853, filed with the Commission on September 18, 1991)
10.8 Affiliation Agreement, dated as of January 1, 1989, between Black
Entertainment Television, Inc. and Satellite Services, Inc.
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1, Registration No. 33-42853, filed
with the Commission on September 18, 1991)
10.9 Amendment to Affiliation Agreement dated March 3, 1993 between Black
Entertainment Television, Inc. and Satellite Services, Inc.
incorporated by reference to Exhibit 10.9 to the Company's Form 10-K
for the fiscal period ended July 31, 1993)
</TABLE>
17
<PAGE>
(A)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.10 Letter Agreement, dated January 29, 1991, among Time Warner Inc.,
Butch Lewis Productions, Inc. and Black Entertainment Television,
Inc., together with Agreement, dated as of January 1, 1991, among
Butch Lewis Productions, Inc., Black Entertainment Television, Inc.,
Joe Brown and Adrienne L. Brown (incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-1, Registration
No. 33-42853, filed with the Commission on September 18, 1991)
10.11 Transponder Lease Agreement, dated January 1, 1993, between Avalon
Pictures, Inc. and IDB Communications Group, Inc. (incorporated by
reference to Exhibit 10.11 to the Company's Form 10-K for the fiscal
period ended July 31, 1993)
10.12 Black Entertainment Television, Inc. TVRO Affiliation Agreement with
HBO Satellite Services, Inc., dated as of February 9, 1990, together
with Letter Agreement from HBO Satellite Services, Inc. to Black
Entertainment Television, Inc. dated March 24, 1992 (incorporated by
reference to Exhibit 10.18 to the Company's Form 10-K for the fiscal
period ended July 31, 1992)
10.13 Purchase Agreement among Black Entertainment Television, Inc., The
Time Inc. Magazine Company and Emerge Communications, Inc., dated as
of December 31, 1991 (incorporated by reference to Exhibit 10.19 to
the Company's Form 10-K for the fiscal period ended July 31, 1992)
10.14 BET Holdings, Inc. Incentive Plan (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1,
Registration No. 33-42853, filed with the Commission on September 18,
1991)
10.15 BET Holdings, Inc. 1991 Executive Stock Option Plan as amended and
restated August 1, 1994 (incorporated by reference to Exhibit 10.15 to
the Company's Form 10-K for the fiscal period ended July 31, 1995)
10.16 Black Entertainment Television, Inc. 401(k) Profit Sharing Plan
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1, Registration No. 33-42853, filed
with the Commission on September 18, 1991)
10.17 Agreement by and between BET Pictures, Inc., Live Ventures, Inc. and
QE + Limited dated February 1, 1994 (incorporated by reference to
Exhibit 10.17 to the Company's Form 10-K for the fiscal period ended
July 31, 1994)
10.18 Agreement by and between BET Pictures, Inc., and New River
Entertainment Corp. dated December 21, 1993 (incorporated by reference
to Exhibit 10.18 to the Company's Form 10-K for the fiscal period
ended July 31, 1994)
10.19 Purchase Agreement among Black Entertainment Television, Inc., Syncom
Capital Corporation, Tower's Ventures, Inc., Future Value Ventures,
Inc., Opportunity Capital Corporation, District Cablevision, Inc., The
Estate of Dean E. Stetz, and Emerge Communications, Inc. dated
September 26, 1994 (incorporated by reference to Exhibit 10.19 to the
Company's Form 10-K for the fiscal period ended July 31, 1994)
10.20 Purchase Agreement among Black Entertainment Television, Inc., Time
Inc. and Emerge Communications, Inc. Dated October 7, 1994
(incorporated by reference to Exhibit 10.20 to the Company's Form 10-K
for the fiscal period ended July 31, 1994)
10.21 Transponder Lease Agreement for Galaxy VII between Hughes
Communications Galaxy, Inc., and BET Satellite Services, Inc.
(incorporated by reference to Exhibit 10.21 to the Company's Form 10-K
for the fiscal period ended July 31, 1994 as amended by Form 10K-A
Amendment No. 2 the Form 10-K)
</TABLE>
18
<PAGE>
(A)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.22 Transponder Lease Agreement for Galaxy VII between Hughes
Communications Galaxy, Inc., and BET Satellite Services, Inc.
(incorporated by reference to Exhibit 10.22 to the Company's Form 10-K
for the fiscal period ended July 31, 1994 as amended by Form 10K-A
Amendment No. 2 the Form 10K)
10.23 BET Holdings, Inc. Incentive Plan for the President, effective August
1, 1994 (incorporated by reference to Exhibit 10.23 to the Company's
Form 10-K for the fiscal period ended July 31, 1995)
10.24 Amendment No. 1 to the BET Holdings, Inc. Incentive Plan (incorporated
by reference to Exhibit 10.24 to the Company's Form 10-K for the
fiscal period ended July 31, 1995)
10.25 Addendum to Transponder Lease Agreement for Galaxy VII between Hughes
Communications Galaxy, Inc. and BET Satellite Services, Inc.
(incorporated by reference to Exhibit 10.25 to the Company's Form 10-Q
for the fiscal period ended January 31, 1996)
10.26 Stock Purchase Agreement between Time Warner Entertainment Company,
L.P. and BET Holdings, Inc. dated November 1, 1995 (incorporated by
reference to Exhibit 10.26 to the Company's Form 8-K filed November 1,
1995)
10.27 Transponder Lease Agreement between Orion Atlantic, L.P. and BET
Satellite Services, Inc. dated June 1, 1996 (incorporated by reference
to Exhibit 10.27 to the Company's Form 10-K for the fiscal period
ended July 31, 1996)
10.28 Joint Venture Agreement between Daily News, L.P. and Black
Entertainment Television, Inc. dated July 31, 1996 (incorporated by
reference to Exhibit 10.28 to the Company's Form 10-K for the fiscal
period ended July 31, 1996)
10.29 Agreement to terminate the Joint Venture Agreement between Daily News,
L.P. and Black Entertainment Television, Inc. dated March 2, 1997
10.30 Joint Venture Agreement between Black Entertainment Television, Inc.,
QE+, Ltd. and Encore Media Corporation dated September 17, 1996
10.31 Investment and Loan Agreement between La-Van Hawkins UrbanCityFoods,
LLC and BET Holdings, Inc. dated December 17, 1996
13 1997 Annual Report to Shareholders (with the exception of the
information expressly incorporated by reference in Items 1 , 5, 6, 7,
and 8 of this report, the 1997 Annual Report to Shareholders is not to
be deemed "filed" with the Securities and Exchange Commission or
otherwise subject to the liabilities of Section 18 of the Securities
Exchange Act of 1934)
23 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
There was one Current Report on Form 8-K filed on September 23, 1997 to
report, among other things, the receipt of the Letter by the Company in
connection with the Offer as well as the announcement of the appointment of an
independent committee to review the Offer.
19
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE 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.
BET HOLDINGS, INC.
/s/ Robert L. Johnson
By:__________________________________
Robert L. Johnson
Chairman of the Board and Chief
Executive Officer
Date: October 29, 1997
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 DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert L. Johnson Chief Executive Officer and October 29, 1997
____________________________________ Director
ROBERT L. JOHNSON
/s/ William T. Gordon, III Chief Financial Officer and October 29, 1997
____________________________________ Treasurer (Principal
WILLIAM T. GORDON, III Financial and Accounting
Officer)
/s/ Robert R. Bennet Director October 29, 1997
____________________________________
ROBERT R. BENNET
/s/ Sheila Crump Johnson Director October 29, 1997
____________________________________
SHEILA CRUMP JOHNSON
/s/ Delano E. Lewis Director October 29, 1997
____________________________________
DELANO E. LEWIS
/s/ John C. Malone Director October 29, 1997
____________________________________
JOHN C. MALONE
/s/ Denzel Washington Director October 29, 1997
____________________________________
DENZEL WASHINGTON
/s/ Herbert P. Wilkins, Sr. Director October 29, 1997
____________________________________
HERBERT P. WILKINS, SR.
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of BET Holdings, Inc.
Our audits of the consolidated financial statements referred to in our
report dated October 2, 1997 appearing in the BET Holdings, Inc. 1997 Annual
Report (which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ Price Waterhouse LLP
-------------------------------------
PRICE WATERHOUSE LLP
Washington, D.C.
October 2, 1997
21
<PAGE>
SCHEDULE II
BET HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1995
Allowance for doubtful
accounts............. $ 973 $1,266 $ -- $ 876 (1) $1,363
Deferred tax asset
valuation allowance.. -- -- 3,893 (2) -- 3,893
------ ------ ------ ------ ------
$ 973 $1,266 $3,893 $ 876 $5,256
====== ====== ====== ====== ======
Year ended July 31, 1996
Allowance for doubtful
accounts............. $1,363 $ 599 $ -- $ 419 (1) $1,543
Deferred tax asset
valuation allowance.. 3,893 -- -- -- 3,893
------ ------ ------ ------ ------
$5,256 $ 599 $ -- $ 419 $5,436
====== ====== ====== ====== ======
Year ended July 31, 1997
Allowance for doubtful
accounts............. $1,543 $ 490 -- $ 200 (1) $1,833
Deferred tax asset
valuation allowance.. 3,893 -- -- 3,893 (3) --
------ ------ ------ ------ ------
$5,436 $ 490 $ -- $4,093 $1,833
====== ====== ====== ====== ======
</TABLE>
- - --------
(1) Write-off of uncollectible amounts, net of recoveries.
(2) Represents valuation allowance related to net operating loss carryforwards
of Emerge Communications, Inc. (ECI) for income tax reporting purposes
established pursuant to the purchase method of accounting in connection
with the Company's increased ownership interest in ECI.
(3) Represents realization of acquired net operating loss carryforwards of ECI
in connection with the merger of ECI with another of the Company's wholly
owned subsidiaries on December 31, 1996.
S-1
<PAGE>
EXHIBIT 3(ii)
Section 1 of Article V, of the bylaws of the Corporation be,
---------
and is hereby, amended so that it will hereafter read as follows:
"SECTION 1. Principal Officers. The Principal Officers of the
------------------
Corporation shall be a Chief Executive Officer, a President and Chief
Operating Officer, one or more Executive Vice Presidents (the number
thereof, if any, to be determined by the CEO), one or more Vice
Presidents (the number thereof, if any, to be determined by the CEO),
a Secretary, and a Chief Financial Officer. In addition there may be
such subordinate officers, agents, and employees as may be appointed
in accordance with the provisions of Section 3 of this Article V. Any
---------
two (2) or more offices may be held by the same person."
<PAGE>
Section 7 of Article V, of the by-laws of the Corporation be, and is
---------
hereby, amended so that it will hereafter read as follows:
"SECTION 7. Chief Executive Officer. The Chief Executive Officer ("CEO") of
-----------------------
the Corporation shall act as Chairman of the Board of Directors and preside at
all meetings of the Board of Directors and of the stockholders at which he or
she is present. The CEO shall have general authority and responsibility for
managing the affairs of the Corporation, and shall perform all such duties as
are incident to the office of CEO or as are properly required of him or her by
the Board of Directors. The CEO shall have authority to enter into any contract
or execute and deliver any instrument in the name and on behalf of the
Corporation, when authorized by the Board of Directors. In addition, the CEO
shall have such further powers and perform such further duties as may, from time
to time, be assigned to him or her by the Board of Directors or as may be
prescribed by these bylaws."
Section 8 of Article V of the bylaws of the Corporation be, and is hereby
---------
substituted and replaced with a new Section 8 to read in its entirety as
---------
follows:
"SECTION 8. President. There is hereby created the office of President and
---------
Chief Operating Officer ("COO"). The President and COO shall be appointed by the
CEO, and shall be annually elected by, and serve at the pleasure of, the Board
of Directors. The President and COO shall direct the day-to-day activities of
the Corporation in accordance with policies and objectives established by the
Chief Executive Officer and the Board of Directors to achieve maximum
profitability of operations. The President and COO shall assist the CEO in
developing policies and an organization that will ensure that full advantage is
taken of the long range potential of the business. In the absence of the CEO,
the President and COO shall direct and coordinate the activities of the
Corporation's staff and operations. The President and COO shall have authority
to enter into any contract or execute and deliver any instrument in the name and
on behalf of the Corporation, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or these bylaws
to some other officer, agent, or employee of the Corporation. In addition, the
President and COO shall have such further powers and perform such further duties
as may, from time to time, be assigned to him or her by the Chief Executive
Officer, the Board of Directors, or as may be described by these bylaws."
<PAGE>
A new Section 9 of Article V of the bylaws of the Corporation reading as
---------
follows is hereby added:
"SECTION 9. Executive Vice Presidents. The Board of Directors may establish
-------------------------
several classifications of Executive Vice President. In addition, each Executive
Vice President shall have such powers and perform such duties as shall, from
time to time, be assigned to him or her by the President and COO, CEO, Board of
Directors, or Chairman of the Board."
A new Section 10 of Article V of the bylaws of the Corporation reading as
----------
follows is hereby added:
"SECTION 10. Vice Presidents. The CEO or the President and COO may appoint
---------------
several classifications of Vice Presidents which shall be annually elected by
the Board of Directors. In the absence of an Executive Vice President or in the
event of an Executive Vice President's death, inability or refusal to act, a
Vice President (or in the event there is more than one (1) Vice President, the
Vice Presidents' in the order designated at the time of their election, or in
the absence of any designation, then in the order of their appointment) may
perform the duties of an Executive Vice President, as directed by the President
and COO. When so acting, the Vice President shall have all the powers and shall
be subject to all the restrictions upon an Executive Vice President. In
addition, a Vice President shall have such powers and perform such duties as
shall, from time to time, be assigned to him or her by an Executive Vice
President to whom he or she reports, or the President and COO, or Chief
Executive Officer, or Chairman of the Board, or the Board of Directors."
The old Section 9 and Section 10 of Article V of the bylaws of the
--------- ----------
Corporation shall be, and are hereafter changed to be Section 11 and Section 12,
---------- ----------
respectively.
<PAGE>
EXHIBIT 10.29
[LETTERHEAD OF DAILY NEWS APPEARS HERE]
Dated as of March 2, 1997
Black Entertainment Television, Inc.
One BET Plaza
1900 W Place, N.E.
Washington, DC 20018
Attention: Debra Lee, President and Chief Operating Officer
Ladies/Gentlemen:
Reference is made to the Joint Venture (the "Joint Venture") for
the publication of a magazine insert publication geared toward an African
American audience currently entitled "BET Weekend" (the "Supplement"), as
described in that certain Joint Venture Agreement dated July 1996 between Daily
News, L.P. ("Daily News") and BET Holdings, Inc. ("BET") as amended and
supplemented from time to time (the "Joint Venture Agreement").
Daily News and BET agreed to dissolve the Joint Venture and
terminate the Joint Venture Agreement on the following terms and conditions:
1. The Joint Venture terminated effective as of March 2, 1997 (the
"Effective Date"). As of the Effective Date, Daily News shall have no further
rights or obligations regarding the management of the Joint Venture or the
sharing of profits and losses (except as provided in Paragraphs 3 and 9 below).
Further, Daily News shall have no liability regarding the business of the Joint
Venture arising from and after the Effective Date (Daily News and BET each
remaining liable for their proportionate share of liabilities incurred prior to
the Effective Date in accordance with, and subject to the provisions on
indemnification contained in, the terms of the Joint Venture Agreement).
2. BET shall have the right to continue the operation, publication
and distribution of the Supplement and shall retain legal title to all property
of the Joint Venture, including without limitation, all logos, trademarks,
tradenames and copyrights of the Joint Venture.
3. BET shall pay to Daily News an amount equal to its proportionate
share (one-half) of the net losses, if any, of the Joint Venture through and
including the March 1997 issue of the Supplement, determined in accordance with
generally accepted accounting principles consistently applied and taking into
account all amounts due and/or balances in BET's and Daily News' respective
Capital Accounts. As of the date of the Final Accounting (as hereinafter
defined) all unreimbursed cash outlays by BET and/or
<PAGE>
Daily News shall be credited to its/their respective Capital Accounts. Payment
shall be made after a final accounting (the "Final Accounting"), to be done as
promptly as practicable following the publication and distribution of the March
1997 issue of the Supplement but in no event more than ninety (90) days
following such publication and distribution. Daily News shall represent and
warrant that to the best of its knowledge the Final Accounting is complete and
accurate in all material respects. BET shall not be liable for reimbursement of
any costs or expenses incurred by Daily News prior to the Effective Date that
are submitted following the issuance of the Final Accounting.
4. For so long as the Supplement and any similar products are regularly
published and distributed, BET shall provide Daily News with a mutually agreed
upon number of copies of each issue thereof (not less than 300,000) and Daily
News shall insert them in its Sunday edition of the New York Daily News. BET
--- ---- ----- ----
shall pay to Daily News a distribution fee at the rate of $90 per 1,000 copies,
subject to reasonable annual increases established by Daily News and approved by
BET, with such approval not to be unreasonably withheld.
5. At BET's request, Daily News will assist BET in administering the
distribution of the Supplement or any other similar products by other
newspapers. Such assistance will be provided at no additional expense to BET
during the time Daily News inserts the Supplement or any similar products in its
Sunday edition.
6. To the extent not already paid, BET shall pay to Daily News Five
Hundred Fifty Dollars ($550) per page of advertising, procured by the Daily News
or its employees prior to the termination date of the Joint Venture, for each
issue of the Supplement published in 1997, payable promptly after the
publication of each issue. Such amount will cover commission bonuses to Daily
News employees responsible for procuring such advertising.
7. At BET's request, Daily News will assist BET in the solicitation and
sale of advertising for the Supplement from time to time for a commission and on
other terms mutually satisfactory to BET and Daily News.
8. Neither BET nor Daily News will issue any press release or make any
other public announcement regarding the termination and dissolution of the Joint
Venture and the change in relationship between BET and Daily News contemplated
by this letter without the prior consent of the other. Daily News and BET will
cooperate in the preparation and timely distribution of a letter or other
communication notifying major suppliers, advertisers and other key persons of
the changes in Supplement operation resulting from the termination and
dissolution, each parties consent thereto not to be unreasonably withheld.
9. The provisions of Sections 12 (Tax Matters), 21 (Representations and
Warranties), 23 (Indemnification) and 24B. (Joint Liability) shall survive as to
all matters or claims arising prior to the Effective Date.
2
<PAGE>
Please acknowledge and confirm your agreement by signing a counterpart of
this letter where indicated below and returning it to the undersigned.
Sincerely yours,
DAILY NEWS, L.P.
By New DN Company, its
General Partner
By: /s/ Martin D. Krall
-----------------------------
Martin D. Krall
Executive Vice President
AGREED TO:
BLACK ENTERTAINMENT TELEVISION, INC.
By: /s/ Debra Lee
----------------------------------
Debra Lee
President and Chief Operation Officer
3
<PAGE>
EXHIBIT 10.30
Joint Venture Agreement
As of September 17, 1996
RE: BET Movies . Starz13
The purpose of this Joint Venture Agreement (this "Agreement") is to set
forth certain mutual understandings between Black Entertainment Television, Inc.
("BET") QE divided by, Ltd. ("QE divided by"), and Encore Media Corporation
("EMC"), with respect to the material terms of their agreement to form a venture
(the "Venture") to conduct the business of BET Movies - Starz13 in the Territory
(as hereinafter defined). The parties agree to use their reasonable best efforts
to negotiate in good faith, as soon as reasonably practicable, definitive
documentation embodying the terms set forth herein and other customary terms for
the Venture (the "Owners Agreement"). Subject to the negotiation and execution
of the Owners Agreement, and approval by the Board of Directors or other
governing body of each of the parties hereto, this Agreement, as modified by the
Owners Agreement, shall constitute a binding agreement among the parties hereto.
If such board or other governing body approval is not received on or before
October 31, 1996, this Agreement shall automatically terminate.
1. Business Purpose. The Venture will be engaged in the programming and
----------------
distribution of BET Movies - Starz13, a multiplex pay tv channel of Starz-encore
8 (the "Business") throughout the United States and its territorial possessions
(the "Territory").
2. Structure/Equity.
----------------
a. The Venture will be structured as a limited liability company or
limited partnership, the specific form of which will be selected with a view
towards maximizing overall limited liability protection and tax efficiencies for
each of the parties hereto.
b. Initial equity ownership shall be as follows:
(i) BET 49%
(ii) QE+ 49%
(iii) EMC 2%
3. Capitalization.
--------------
a. QE+ and EMC shall collectively provide to the Venture,
on an ongoing basis, the following:
1
<PAGE>
(i) certain movies licensed by QE+ and/or EMC in
their first pay television window, with black talent
(actors, directors, producers, etc.) and/or black themes,
in accordance with their multiplex rights:
(ii) certain movies licensed by QE and/or EMC which
are in pay windows subsequent to their first pay
television window, with black talent (actors, directors,
producers, etc.) and/or black themes, in accordance with
their multiplex rights; and
(iii) Use of the Starz!3 name.
b. BET shall provide to the Venture, on an annual basis, except as
otherwise noted, the following:
(i) Promotional avails on Black Entertainment Television
Network ("BET Network"), to be used for promotion of BET
Movies & Starz!/Encore Multiplexes: the number of spots
delivered by BET for promotion of BET Movies and
Starz!/Encore Multiplex is based upon the following
formula:
Prime Time: 4.000 30-second spots x 1.8 black household
Nielsen rating x current number of BET black households.
Day Time: 4.000 30-second spots x 0.9 black household
Neilsen rating x current number of BET black households.
The number of spots will be adjusted accordingly,
depending upon a change of black household ratings or the
number of BET black households. The number of prime time
promotional avails per year, each with a 30 second
duration, shall be provided evenly over the days of each
week of the year, between the hours of 7:00 p.m. and
11:00 p.m., EST, and the number of day time promotional
avails per year, each with a 30 second duration, shall be
provided evenly over the days of each week of the year,
between the hours of 9:00 a.m. and and 7:00 p.m, and 11:00
p.m. and 1:00 a.m., EST. The foregoing promotional avails
shall be reduced by 2/3 after the fifth full calender year
of the Venture.
(ii) Celebrity endorsement for BET Movies, including but not
limited to: (A) S "A" list spokespersons, who are
reasonably acceptable to the Managing Member (as defined
below), and (B) 40 additional spokesperson, who are
reasonably acceptable to the Managing Member. (NOTE: "A"
list is not a static list)
(iii) Twelve full page, 4 color ads, one in each edition of BET
weekend,
2
<PAGE>
reasonably acceptable to the Managing Member. (NOTE: On an
occasional basis. BET may substitute a feature length
editorial or other feature in place of an ad, however, the
primary emphasis must be on ads and not editorials or
features.).
(iv) Twelve to fifteen Screen Scene segments per month,
reasonably acceptable to the Managing Member.
(v) BET Movies sponsorship of "Black Events" reasonably
acceptable to the Managing Member.
(vi) Use of the BET name and logo, subject to BET approval.
(vii) The reasonable efforts of Bob Johnson and BET to do their
best to (A) promote and influence distribution of BET
Movies by multichannel video distributors, and (B)
interface with the Black creative community for access and
publicity.
c. BET shall be obligated to fund all operating costs of the Venture
up to a maximum amount of $24.1 million in accordance with the "BET Movies Cost
Analysis" faxed to Bob Johnson from Michele Weiner on September 12, 1996
(attached hereto as Exhibit A), of which 80% shall be in the form of mandatory
capital contributions, and 20% in the form of loans to the Venture. Thereafter,
all capital needs of the Venture shall be provided by the parties hereto in
accordance with their respective equity ownership interests, and shall be made
only with the prior approval of all of the parties hereto.
4. Distributions/Profits and Losses.
--------------------------------
a. As between the parties hereto, all distributions of available
cash shall be made:
(i) First, to BET in an amount necessary to repay all loans made
by BET to the Venture.
(ii) Thereafter, to the parties hereto, in accordance with their
respective equity ownership interests.
b. Any profits and losses of the Venture will be allocated to each
of the parties hereto in accordance with their respective equity ownership
interests.
5. Governance.
----------
a. Except as provided below in this paragraph 5, the business
affairs and day-to-day management of the Venture shall be directed and
controlled by EMC (the "Managing Member").
3
<PAGE>
b. Specific matters requiring approval of all of the parties hereto:
(i) Sale of all or substantially all of the Venture's assets.
(ii) Material change in the Business of the Venture.
(iii) Additional capital calls in excess of the amount specifies
in paragraph 3.c. above.
(iv) Material change in pricing of BET Movies.
c. In the event that during any year of the Venture, the year end
Starz! subscriber distribution is less than 70% of the projection as provided on
Exhibit B hereto, then for the immediately following fiscal year of the Venture,
BET will have the right to approve the costs and expenditures of the Venture, as
set forth in the Venture's budget for such year.
6. Miscellaneous
-------------
a. Transfer. Prior to the execution of the Owners Agreement, neither
--------
party will be entitled to transfer any of its rights or obligations hereunder or
any of its interest in the Venture without the express written consent of the
other party, provided that either party will be entitled to transfer its rights
hereunder and/or its interest in the Venture to any Affiliate of such party but
such transfer will not serve to release the transferring party from any of its
obligations hereunder. The term "Affiliate" of a party, as used herein shall
mean an individual, corporation, partnership, limited liability company or other
entity (a "Person") that Controls, is Controlled by,or is under common Control
with such party, and "Control" means the possession, directly or indirectly, of
the power to direct the management and policies of a Person, whether by
ownership of voting securities, by contract, or otherwise. A "Controlled
Affiliate" of a Person is an Affiliate of such Person which such Person
Controls. It is the intention of the parties hereto that the Owners Agreement
shall provide an exit mechanism for the parties hereto, after the expiration of
five years. Such provision shall be mutually agreeable to the parties.
Notwithstanding the foregoing, BET shall have the right to transfer up to (10%)
of its interest in the Venture to attract either the 5 "A" list spokespersons
referenced in Paragraph 3.b. hereof or such other spokespersons or persons of
influence, in any case reasonably acceptable to the Managing Member.
b. Confidentiality. Any dissemination of confidential information or
---------------
any disclosure or announcements public or private regarding the existence or
terms of this agreement is subject to approval of all equity holders, provided
that a party may disclose such information or make a public announcement (with
prior notice to the other party) if required by a valid, binding and
non-appealable court order or applicable securities laws.
c. Governing Law. This Agreement will be governed in all respects by
-------------
the laws of Colorado.
4
<PAGE>
d. Counterparts. This Agreement may be executed in counterparts and
------------
each will be deemed an original.
The parties indicate their agreement to the foregoing by signing in the space
provided below.
By: [SIGNATURE ILLEGIBLE]
----------------------
BET
By: [SIGNATURE ILLEGIBLE]
----------------------
QE divided by
By: [SIGNATURE ILLEGIBLE]
----------------------
EMC
5
<PAGE>
EXHIBIT 10.31
INVESTMENT AND LOAN AGREEMENT
-----------------------------
THIS INVESTMENT AND LOAN AGREEMENT (this "Agreement") is made and entered
into as of the 12th day of December, 1996 by and among La-Van Hawkins
UrbanCityFoods, LLC (the "Company") and BET Holdings, INC. (BET").
WHEREAS, BET desires to make a $5,000,000 investment in the Company in
exchange for a 15% membership interest and is also willing to make a loan to the
Company in the maximum principal amount of $10,000,000; and
WHEREAS, the Company desires to sell BET a 15% membership interest and to
borrow up to $10,000,000 from BET.
NOW THEREFORE, in consideration of the foregoing, the mutual promises
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and BET hereby agree
as follows:
ARTICLE 1
DEFINITIONS
-----------
For the purposes of this Agreement, the following terms shall have the
following meanings:
"Advance" shall mean any of the First Advance or the Second Advance.
"Affiliate" shall have the meaning given thereto in Section 6.2(p).
"BET" shall have the meaning given thereto in the first paragraph hereof
and shall include any successor or assigns of its rights hereunder.
"Burger King Documents" shall mean any and all agreements by and between
the Company and Burger King Corporation, including any and all Franchise
Agreements and Burger King Restaurant Number Assignments.
"Business Plan" shall have the meaning given thereto in Section
4.1(h)(iii).
"Closing Date" shall have the meaning given thereto in Section 2.7.
<PAGE>
"Company" shall have the meaning given thereto in the first paragraph
hereof.
"Financing Statements" shall have the meaning given thereto in Section
3.1(b).
"First Advance" shall have the meaning given thereto in Section 2.3(b).
"FMAC" shall mean Franchise Mortgage Acceptance Company, LLC.
"FMAC Documents" shall mean the documents pursuant to which the Company
borrowed Seven Million Eighty Eight Dollars ($7,000,088.00) from FMAC.
"Investor Rights Agreements" shall mean that certain Investor Rights
Agreement by and between the Company, Management, UrbanCityFoods Holding, Inc.,
and BET in substantially the form attached hereto as Exhibit A.
---------
"Loan" shall have the meaning given thereto in Section 2.2(a).
"Loan Advance Criteria" shall have the meaning given thereto on Schedule
4.2(c).
"Loan Documents" shall mean this Investment and Loan Agreement, the Notes,
the Investor Rights Agreement, the Mortgages, the Assignments of Leases, the
Security Agreement, the Financing Statements, and all other documents, exhibits,
and schedules executed and delivered in connection herewith or therewith,
including all amendments, modifications and supplements of or to all such
documents.
"Management" shall have the meaning given thereto in Section 2.6.
"Note" and "Notes" shall have the meaning given thereto in Section 2.4(a).
"Operation Agreement" shall mean the Amended and Restated Operating
Agreement of the Company, dated as of September 13, 1996, between Management and
UrbanCityFoods Holdings, Inc.
"Person" shall have the meaning given thereto in Section 6.2(p)(i).
INVESTMENT AND LOAN AGREEMENT PAGE 2
<PAGE>
"Projections" shall have the meaning given thereto in Section 4.1(h) (ii).
"Second Advance" shall have the meaning given thereto in Section 2.3(c).
"Security Agreement" shall mean a security agreement substantially in the
form attached hereto as Exhibit B executed by the Company in favor of BET.
---------
"Senior Indebtedness" shall have the meaning given thereto in Section 2.5.
ARTICLE 2
AMOUNTS AND TERMS OF THE INVESTMENT AND LOAN
--------------------------------------------
2.1 THE INVESTMENT.
--------------
Simultaneously herewith BET will contribute $5,000,000 to the Company
(the "Equity Investment") in exchange for a 15% membership interest in the
Company (the "Membership Interest"). The Membership Interest shall be issued to
BET free and clear of all liens and encumbrances and any other third party
claims whatsoever. Simultaneously, with the execution of this Agreement,
the parties hereto will enter into a certain amended and restated operating
agreement for the Company in the form of Exhibit J attached hereto.
2.2 THE LOAN.
--------
(a) BET agrees, subject to the terms and conditions hereinafter set
forth, to provide financing to the Company in the maximum principal amount of
Ten Million Dollars ($10,000,000) (the "Loan").
(b) The Loan shall be convertible, at any time until paid in full,
in accordance with the terms of those certain Notes, which Notes shall provide
that the First Advance shall be convertible into a membership interest
sufficient to increase BET's equity stake in the Company to thirty percent
(30%), and the Second Advance shall be convertible into an additional membership
interest sufficient to increase BET's equity stake in the Company to forty-five
percent (45%). Any accured and unpaid interest at the time of conversion of any
Advance shall continue to accrue interest and shall be payable on the maturity
date of the Note under which it accrued.
INVESTMENT AND LOAN AGREEMENT PAGE 3
<PAGE>
2.3 ADVANCES.
--------
(a) BET will fund the Equity Investment on the Closing Date.
(b) BET may fund an advance of up to Five Million Dollars
($5,000,000) (the "First Advance") either (i) upon the written request of the
Company if the conditions set forth in Section 4.2 have been met, or (ii) upon
the decision of BET to make the advance in its sole discretion.
(c) BET may fund an additional advance of up to Five Million Dollars
($5,000,000) (the "Second Advance") either (i) upon the written request of the
Company if the conditions set forth in Section 4.2 have been met, or (ii) upon
the decision of BET to make the advance in its sole discretion.
(d) BET shall be under no obligation whatsoever to make the First
Advance or the Second Advance regardless of whether the conditions set forth in
Section 4.2 have been met. Such advances shall be made in the sole discretion
of BET and may be withheld for any reason whatsoever. The Company agrees,
however, prior to seeking any additional "equity" or subordinated financing of
the type contemplated under this Loan Agreement that it shall provide BET thirty
(30) days advance written notice of its desire to seek such alternative
financing. Within such period, BET shall have the right to make the First
Advance or the Second Advance, as the case may be, on the terms and conditions
set forth in this Loan Agreement. If BET fails to make the First Advance or the
Second Advance when so requested and provided that conditions to such Advance
have been satisfied, notwithstanding the restrictions set forth in Section
6.2(e) the Company shall be free to seek and obtain alternative equity or
subordinated financing, provided, however, that the Company shall not be
otherwise relieved of its obligations under this Agreement or the Investor
Rights Agreement and that any such additional equity or subordinated financing
shall dilute Management's interest solely and shall not in any way dilute or
reduce BET's interest in or rights with respect to the Company. Additionally, at
any time, all dates inclusive, commencing on the date hereof and continuing to
the day which is sixty (60) months from the date hereof, BET in its sole
discretion may make the First Advance and/or the Second Advance and the Company
shall be required to accept such Advances and issue the Notes as contemplated
hereunder.
INVESTMENT AND LOAN AGREEMENT PAGE 4
<PAGE>
2.4 THE NOTES.
---------
(a) Each Advance shall be evidenced by and subject to the terms of a
convertible subordinated promissory note substantially in the form attached
hereto as Exhibit C and by this reference incorporated herein (each a "Note",
---------
collectively, the "Notes"), to be duly executed and delivered by the Company to
BET. Each Note shall bear interest at a floating rate equal to the Bank of New
York Prime Rate plus 200 basis points utilizing a 360-day year and shall be
payable in a single payment of principal and accrued interest five years from
the date of the advance which that Note evidences.
(b) The Notes shall be secured in accordance with Article 3 hereof,
shall be subject to the Investor Rights Agreement, and the Notes shall contain
such additional terms and conditions which are customary in transactions of this
kind including, without limitation, provisions for default interest,
acceleration of payment upon default, customary waivers (including the rights to
notices, demands, presentments, and a jury in resolving disputes), and an
agreement to jurisdiction.
2.5 SUBORDINATION.
-------------
BET is aware that in order to carry out the Business Plan which
contemplates acquiring and/or developing 225 Burger King Restaurants over the
next five (5) years, the Company will require significant additional financing.
BET also recognizes that in order for the Company to obtain such financing, BET
will be required to subordinate the repayment of the Loan and its interest in
the collateral securing the Loan to certain Senior Indebtedness incurred by the
Company. BET agrees to cooperate with the Company and the Company's senior
lenders and to execute such subordination agreements or other similar agreements
as may be reasonably required in order to facilitate the financing required by
the Company to accomplish its Business Plan. For the purposes of this Agreement,
"Senior Indebtedness" shall mean all indebtedness, not to exceed One Hundred
Fifty Million Dollars ($150,000,000.00), incurred by the Company to banks or
other similar financial institutions or commercial lenders to finance the
acquisition, construction, development and operation of the Company's Burger
King Restaurants in accordance with the Business Plan. Senior Indebtedness
shall not include any indebtedness of the Company to an Affiliate. BET agrees
that in the event the Company is unable, after reasonable efforts, to obtain the
Senior Indebtedness required to implement and accomplish the Business Plan,
solely as a result of the capital structure resulting from the Loan, BET will
reasonably consider a request by the Company to convert its Loan to a preferred
membership interest in the
INVESTMENT AND LOAN AGREEMENT PAGE 5
<PAGE>
Company, which membership interest will have characteristics substantially
identical to the Loan. BET, however, shall be under no obligation whatsoever to
restructure the Loan in the manner described in this Section 2.5.
2.6. BOARD OF DIRECTORS.
------------------
(a) So long as BET owns at least 15% of the membership interests of
the Company, or holds convertible debt instruments convertible into at least 15%
of the membership interests of the Company, each Member of the Company shall,
pursuant to the Investor Rights Agreement, vote all of its interests to elect as
directors of the Company, two individuals designated by BET, two individuals
designated by UrbanCityFoods Management, LLC ("Management") and one person
mutually agreeable to both BET and Management.
(b) In the event that (i) there occurs an Event of Default under any
of the Loan Documents, (ii) the Company becomes in default under any material
provision of any Senior Indebtedness, or (iii) the Company fails to meet EBITDA
set forth in the Projections for any fiscal year by more than fifty percent
(50%), the board member selected by agreement of BET and the Company shall be
removed and a new member selected by BET shall be appointed. BET's right to
appoint the fifth director shall continue until the foregoing defaults are
cured. For the purposes of this Section the first determination of whether the
Company failed to meet the EBITDA requirements of (iii) above, shall be made
for the twelve months ending November 30, 1997 and thereafter each determination
shall be made on a calendar year basis, with the first calendar year
determination being made for calendar year 1997. The EBITDA threshold for the
period ending November 30, 1997 shall be $2.35 million (50% of $4.7 million).
2.7 THE CLOSING.
-----------
(a) BET shall disburse the Equity Investment on the date on which the
Agreement is executed by all parties (the "Closing Date"), via wire transfer or
certified funds, if all of the conditions precedent contained in Article 4
hereof have been fully satisfied, as determined by BET in its sole discretion.
ARTICLE 3
SECURITY/ADDITIONAL CONSIDERATION FOR LOAN
------------------------------------------
INVESTMENT AND LOAN AGREEMENT PAGE 6
<PAGE>
3.1 SECURITY INTEREST. As security for the Loan, the Company shall deliver
-----------------
to BET, on or before an Advance:
(a) The Security Agreement granting to BET (i) a second lien priority
security interest (until such time as BET executes a subordination agreement in
accordance with Section 2.5), subordinate only to the existing lien and security
interest of Franchise Mortgage Acceptance Company, LLC, in all tangible and
intangible assets of the Company now or hereafter acquired and all proceeds and
products therefrom, including but not limited to those assets specified in
Section 2 of the Security Agreement; and
(b) duly executed UCC-1 financing statements (the "Financing
Statements") for filing as shall be required by BET.
3.2 MORTGAGE. As further security for the Loan, the Company shall deliver
--------
to BET from time to time, at the request of BET, (i) mortgages or deeds of
trust, as applicable (the "Mortgages") in favor of BET securing any or all real
property now owned or hereafter acquired by the Company in substantially the
form of Exhibit D, and (ii) assignments of lease (the "Assignments of Lease")
---------
in favor of BET relating to any or all leases entered into by the Company prior
to or subsequent to the date of this Agreement in substantially the form of
Exhibit E; in each case subordinate only to the existing lien and security
- - ---------
interest of FMAC and purchase money financing with respect to assets acquired by
the Company subsequent to the date hereof. In connection with the execution of
the Assignments of Lease, the Company agrees to use its best efforts to obtain
consent of the landlord under each lease to the assignment of such lease.
ARTICLE 4
CONDITIONS TO LENDING
---------------------
4.1 CONDITIONS TO THE EQUITY INVESTMENT. The obligation of BET to make the
-----------------------------------
Equity Investment is subject to the conditions that BET shall have received
(unless expressly modified or waived in writing by BET) prior to or on the
Closing Date, all of the following in form and substance satisfactory to BET:
(a) The Loan Documents, duly executed and delivered by the Company
thereto;
INVESTMENT AND LOAN AGREEMENT PAGE 7
<PAGE>
(b) The favorable written opinion of Jones & Associates substantially
in the form attached hereto as Exhibit F and by this reference incorporated
---------
herein;
(c) Certification by counsel to the Company that the Company retains
legal title to all its real and personal property free and clear of any liens or
encumbrances;
(d) Incumbency certificates with respect to the officers of the
Company;
(e) A certificate of the President of the Company that all of the
representations and warranties contained in this Agreement shall be true and
correct on the Closing Date;
(f) A copy of the Articles of Organization of the Company and all
amendments thereto, certified by the Maryland State Department of Assessments
and Taxation; a certificate of good standing from the Maryland State Department
of Assessments and Taxation and in each other state in which the Company is
required to be qualified to do business; and a copy of the Company's Operating
Agreement, certified by the Company's Secretary as true and correct;
(g) A copy of the resolutions of the Members and of the Board of
Directors of the Company evidencing approval of the execution, delivery and
performance of the Loan Documents, and all other instruments to be executed,
delivered and performed pursuant thereto, and all other matters contemplated
thereby, and a copy of all documents evidencing other necessary Company action,
if any, with respect thereto; and a list of the Members, directors and officers
of the Company, all of which documents shall be certified by each of the
Company's Secretary as true and correct;
(h) The following statements, schedules and projections of the
Company certified as true and correct by appropriate officers of the Company:
(i) Schedule of all indebtedness or liabilities of the Company
in excess of $50,000 dated as of the Closing Date; which shall be attached
hereto as schedule 4.1(h) (i).
-------------------
(ii) Projections of balance sheets, statements of income and
retained earnings, and cash flow for the Company the next five (5) years
following the Closing (the "Projections") which shall be attached hereto as
Exhibit G; and
---------
INVESTMENT AND LOAN AGREEMENT PAGE 8
<PAGE>
(iii) The Company's business plan for the development,
acquisition, and operation of 225 Burger King restaurants during the next
five years (the "Business Plan") a copy of which is attached hereto as
Exhibit H.
---------
(i) Copies of the Company's federal and state (if required) tax
filings;
(j) Copies of all insurance policies pertaining to the Company and
the operation of its business operations required to be maintained pursuant to
Section 6.1(c) below;
(k) Any required written consents to the Loans, the grant of the
security interests, and the other matters contemplated by the Loan Documents by
each third party whose consent is required under other agreements executed by
the Company;
(l) Copies of such searches for lawsuits, liens, encumbrances, UUC
filings, federal and state tax liens, and judgment filings relating to the
Company as BET may require;
(m) Copies of all leases, including ground leases, and contracts or
agreements where the contract or agreement price exceeds $50,000 to which the
company is a party;
(n) Evidence of the current premium payments for a "key-man" life
insurance policy in the amount of Five Million Dollars ($5,000,000) insuring
La-Van Hawkins and naming BET as the sole beneficiary;
(o) Copies of the Burger King franchise agreement and all other
agreements entered into between the Company and Burger King;
(p) Copies of all management or other agreements between Management
and the Company (the "Management Agreement");
(q) All legal matters incident to the Loan that shall be satisfactory
to counsel to BET.
4.2 CONDITIONS PRECEDENT TO THE FIRST AND SECOND ADVANCES.
-----------------------------------------------------
The Company may request that BET make the First Advance or the Second Advance at
any time provided that the following conditions are met:
(a) The Company shall submit, with the request a certificate of the
President that all of the representations and
INVESTMENT AND LOAN AGREEMENT PAGE 9
<PAGE>
warranties contained in this Agreement are true and correct as of the date of
the request;
(b) There exists no Event of Default under this Agreement;and
(c) The Company has satisfied the Loan Advance Criteria set forth on
Schedule 4.2(c).
- - --------------
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company and La-Van Hawkins jointly and severally represent and warrant
to BET, and shall be deemed to represent and warrant as of the Closing Date, as
follows:
5.1 DUE ORGANIZATION, GOOD STANDING, POWER AND AUTHORITY. The Company is
----------------------------------------------------
a limited liability company duly organized, validly existing in good standing
under the laws of the State of Maryland, is duly qualified to do business under
the laws of all jurisdictions in which the character of the properties owned or
proposed to be owned by the Company or in which the transaction of the business
of the Company is now conducted or is proposed to be conducted requires or will
require it to qualify to do business and is in good standing in such
jurisdictions. The Company has all requisite power and authority, corporate or
otherwise, to conduct its business, to own its properties, to borrow hereunder,
and to execute, deliver and perform all of its respective obligations under the
Loan Documents.
5.2 CAPITALIZATION. The capitalization of the Company as of the closing
--------------
date is as set forth on Schedule 5.2. There are no membership interests held by
------------
any person other than as set forth in the Operating Agreement of the Company;
the designations, powers, preferences, rights, qualifications, limitations and
restrictions in respect of each class of authorized membership interests are as
set forth in the Articles of Organization and all such designations, powers,
preferences, rights, qualifications, limitations and restrictions are valid,
binding and enforceable and in accordance with all applicable laws; all
outstanding membership interests have been duly authorized and validly issued
and are fully paid and nonassessable; all of the outstanding securities were
issued in compliance with all applicable Federal and state securities laws; none
of the outstanding securities has been issued in violation of any preemptive
rights, rights of first refusal or similar rights; there are no outstanding
options, warrants, convertible
INVESTMENT AND LOAN AGREEMENT PAGE 10
<PAGE>
securities, calls, rights, commitments, preemptive rights or agreements or
instruments or understandings of any character, to which the Company is a party
or by which it is bound, obligating it to issue, deliver or sell, or cause to be
issued, delivered or sold, contingently or otherwise, additional membership
interests or any securities or obligations convertible into or exchangeable for
such shares or to grant, extend or enter into any such option, warrant,
convertible security, call, right, commitment, preemptive right or agreement;
there are no outstanding obligations, contingent or otherwise, to purchase,
redeem or otherwise acquire any membership interests of the Company; there are
no voting trust agreements or other contracts, agreements, arrangements,
commitments, plans or understandings restricting or otherwise relating to
voting, dividend or other rights with respect to the Company's membership
interests.
5.3 AUTHORIZATIONS, NO DEFAULTS, COMPLIANCE WITH LAWS. The execution,
-------------------------------------------------
delivery and performance of the Loan Documents by the Company has been duly
authorized by all necessary action, corporate or otherwise, and do not and will
not (a) violate, conflict with, or result in a breach of any provision of any
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award presently in effect and applicable to the Company, or of the Articles
of Organization or the Operating Agreement of the Company; or (b) create (with
or without the giving of notice or lapse of time, or both) a breach of or a
default under any indenture, loan, credit or borrowing agreement, or any other
agreement, lease or instrument to which the Company is a party or by which its
properties or assets may be bound or affected or result in the imposition of a
lien or encumbrances of any nature whatsoever upon any of the properties or
assets of the Company and the Company is not in default under any such law,
rule, regulation, order, writ, judgment, injunction, decree, determination or
award or any indenture, loan, creditor borrowing agreement, or any other
agreement, lease or instrument to which it is a party or by which it is bound,
or by which its properties or assets may be bound or affected; and the Company
has complied and is in compliance in all respects with all applicable laws,
ordinances and regulations thereof. Notwithstanding the foregoing, the Company
has disclosed to BET that execution of the Loan Documents requires the consent
of FMAC under the terms of the FMAC Documents and the consent of Burger King
Corporation under the terms of the Burger King Documents, which consents have
been obtained pursuant to Section 5.4 below.
5.4 NO CONSENT. No consent or approval of any other party and no
----------
authorization, consent, approval, declaration, license or exemption of, or
filing or registration with, any court or other governmental department,
commission, board, bureau, agency or
INVESTMENT AND LOAN AGREEMENT PAGE 11
<PAGE>
instrumentality, domestic or foreign, is or will be necessary in connection
with the valid execution, delivery, performance validity, enforcement or
priority of the Loan Documents or any lien, security interest, or encumbrance
created and granted thereunder; except that the consent of FMAC is required
under the FMAC Documents, which consent has been received by the Company; and
the consent of Burger King Corporation is required under the Burger King
Documents, which consent has been received by the Company.
5.5 BINDING OBLIGATION. The Loan Documents constitute, and any other
------------------
agreements or instruments when delivered by the Company will constitute, legal,
valid and binding obligations of the Company, enforceable against the Company in
accordance with its terms.
5.6 FINANCIAL INFORMATION. All financial statements, balance sheets and
---------------------
operating statements of the Company provided to BET fairly present the financial
condition of the Company as of the date of said statements and are true,
accurate and correct in all material respects. The Company has no material
obligations, liabilities or commitments, direct or contingent, which are not
reflected in the aforementioned financial statements, balance sheets and
operating statements. The monthly financial statements provided to BET are true,
correct and accurate and have been prepared in accordance with generally
accepted accounting practices. Set forth as Exhibit I is the Company's balance
---------
sheet as of September 15, 1996.
5.7 ACTIONS, JUDGMENTS, PROCEEDINGS. There are no outstanding judgments,
-------------------------------
actions, or proceedings pending before any court or governmental authority,
bureau or agency, or against or affecting the Company, or the properties of any
of them, nor are there any such actions or proceedings in which the Company is a
plaintiff or complainant.
5.8 USE OF PROCEEDS, REGULATION G. No part of the proceeds received by the
-----------------------------
Company from the Equity Investment or the Loan will be used directly or
indirectly for purposes other than those contemplated by the Business Plan. No
part of the proceeds will be used to make any distributions, loan repayments or
other payments to any Member of the Company or any employee of the Company other
than compensation paid in the ordinary course of business. Additionally, no part
of the proceeds received by the Company from the Loan will be used directly or
indirectly for the purpose of purchasing or carrying, or for payment in full or
in part of any indebtedness which was incurred for the purposes of purchasing or
carrying any margin stock as such term is defined
INVESTMENT AND LOAN AGREEMENT PAGE 12
<PAGE>
in Regulation G of the Board of Governors of the Federal Reserve System, 12
C.F.R., Chapter II.
5.9 TITLE TO PROPERTIES.
-------------------
(a) Personal Property. The Company has good and marketable title to
-----------------
all of its personal property, free and clear of any and all liens, security
interests and encumbrances of any nature whatsoever, except for the lien
created pursuant to the Security Agreement and those liens, security interests
and encumbrances listed on Schedule 5.9(a) (1) attached hereto and made a part
-------------------
hereof. Except for those filed or to be filed pursuant to the Security
Agreement, no financing statements, mortgages or other evidences of security
interests, liens, or encumbrances covering all or any of the Company's personal
property are on file among the records of any public office, except for those
financing statements, mortgages or security interests listed in Schedule 5.9(a)
---------------
(2) attached hereto and made a part hereof.
- - ---
(b) Real Property. The Company has good and marketable title to all
-------------
of its respective real property free and clear of any and all liens, security
interests, and encumbrances of any nature whatsoever, except for the
encumbrances created by the Mortgages and the Assignments of Lease, if any.
Except for those filed pursuant to the Security Agreement, the Mortgages or the
Assignments of Lease, and except for those matters listed on Schedule 5.9(b), no
---------------
financing statements, mortgages, deed of trust or other evidences of security
interests, liens, or encumbrances covering or pertaining to all or any of the
Company's real property are on file among the records of any public office.
5.10 ZONING. All necessary occupancy and other certificates and permits for
------
the lawful use and occupancy of all of the Company's properties have been
procured.
5.11 LEGAL BAR; BURDENSOME DOCUMENTS. The Company is not a party to or
-------------------------------
bound by, nor are any of the properties or assets owned by the Company affected
by, any indenture, resolution, decree, loan or credit agreement, lease, bond,
note, order, judgment, or other agreement or instrument, or subject to any
charter or corporate restriction which would have an adverse effect on the
business, properties, assets, operations or condition, financial or otherwise,
of the Company or on the ability of the Company to carry out its obligations
under the Loan Documents
INVESTMENT AND LOAN AGREEMENT PAGE 13
<PAGE>
5.12 GUARANTIES. The Company is not a party to any agreement by which it
----------
assumes, guarantees, endorses, contingently agrees to purchase or provide funds
for the payment of or otherwise becomes liable upon any obligation of any other
person or entity or any agreement by which it agrees to maintain the net worth
or financial condition of any other person or entity.
5.13 TAX RETURNS. The Company has filed all tax returns or extensions
-----------
(federal, state and local) required to be filed and has paid all taxes,
including interest and penalties, on or before the due dates thereof, and has
and will timely file federal tax returns, as necessary. There are no federal,
state or local tax liabilities of the Company due or to become due for any tax
year ended on or prior to the date of the financial statements provided to BET,
whether incurred in respect of or measured by the income of the Company, and
there are no claims pending or, to the best knowledge of the Company proposed or
threatened, against the Company for past federal, state or local taxes, except
for those tax liabilities reserved against and reflected on the financial
statements provided to BET.
5.14 ENVIRONMENTAL COMPLIANCE. The Company is in compliance with all
------------------------
applicable federal, state or local environmental laws and regulations,
including, without limitation, all environmental laws and regulations in all
jurisdictions in which the Company owns or operates or has owned or operated, a
facility or site; arranges or has arranged for disposal or treatment of
hazardous substances, hazardous waste, solid waste or other wastes; accepts or
has accepted for transport any hazardous substances, hazardous waste, solid
waste or other wastes; or holds or has held any interest in real property or
otherwise. No litigation or proceeding arising under, relating to or in
connection with any applicable federal, state or local environmental law or
regulation is pending or, to the best knowledge of the Company proposed or
threatened against the Company, with respect to any real property related,
directly or indirectly, to any past or present operation of the Company or any
real property in which the Company holds or has held an interest. No release,
threatened release, storage, treatment, or disposal of any hazardous substance,
hazardous waste, solid waste or other waste is occurring or has occurred, on,
under or to any real property in which the Company holds any interest or
performs any of its operations in violation of any applicable federal, state or
local environmental law, regulation, complaint, order or citation. As used in
this Section 5.14, "litigation or proceeding" means any demand, claim, notice,
suit, suit in equity, action, administrative action, investigation or inquiry
whether brought by any governmental authority, private person or entity or
otherwise.
INVESTMENT AND LOAN AGREEMENT PAGE 14
<PAGE>
5.15 MATERIAL MISSTATEMENT. No document, statement, exhibit, financial
---------------------
statement, or report furnished by or on behalf of the Company in connection with
the negotiation, execution and delivery of the Loan Documents contains any
untrue statement of a material fact, or omits to state a material fact necessary
in order to make the statements contained therein or herein not misleading, as
of the date such statement was made. There is no fact known to the Company which
has, or would in the foreseeable future have, a material adverse affect on the
business, prospects or condition, financial or otherwise, of the Company or any
of its properties or assets, which fact has not been set forth herein, in any
document, statement, exhibit, financial statement, or report, or other written
statements so made or furnished to BET by or on behalf of the Company.
5.16 INTANGIBLE ASSETS. The Company possesses or is licensed to use all
-----------------
necessary patents, trademarks, trademark rights, trade names, trade name rights
and copyrights to conduct its businesses as now conducted and as currently
proposed to be conducted, without any conflict with the patents, trademark
rights, trade names, trade name rights and copyrights of others.
5.17 LICENSES AND APPROVALS. The Company has all requisite power and
----------------------
authority and necessary licenses and permits, which are necessary to own and
operate its properties and/or to carry on its businesses as now conducted and as
currently proposed to be conducted. No event has occurred which (a) results in,
or after notice or lapse of time or both would result in, revocation or
termination of any such licenses or permits or (b) materially or adversely
affect or in the future would materially or adversely affect any of the rights
of the Company thereunder. To the best of the Company's knowledge, no other
license or franchise is necessary for the operation of the business of the
Company as now conducted or as proposed to be conducted.
5.18 EMPLOYEE GRIEVANCES. There are no actions or proceedings pending or,
-------------------
to the best knowledge of the Company threatened against any of them by or on
behalf of, or with, its employees.
5.19 CONDITION OF ASSETS. All of the assets and properties of the Company
-------------------
now owned, and acquired in the future when owned, are in good working condition,
except for normal wear and tear.
5.20 ERISA.
-----
(a) The Company does not have and has never had any plan in
connection with which there could arise a direct or contingent liability of the
Company to the Pension Benefit
INVESTMENT AND LOAN AGREEMENT PAGE 15
<PAGE>
Guaranty Corporation (the "PBGC"), the Department of Labor, or the Internal
Revenue Service (the "IRS"). The Company is not a participating employer (i) in
any Plan under which more than one employer makes contributions as described in
Sections 4063 and 4064 of the Employment Retirement Income Security Act of 1974,
as amended from time to time ("ERISA"), or (ii) in a multi-employer plan as
defined in Section 4001(a) (3) of ERISA. For purposes of this Agreement, "Plan"
shall mean an employee welfare benefit plan as defined in Section 3(1) of ERISA,
or an employee pension benefit plan as defined in Section 3(2) of ERISA or a
plan which is both an employee welfare benefit plan and an employee pension
benefit plan.
(b) All references to the Company in this Section 5.20 or in any
other section of this Agreement relating to ERISA, shall be deemed to refer to
the Company and all other entities which are, together with the Company, part of
a controlled group.
5.21 SUBSIDIARIES. The Company (i) has no subsidiaries, (ii) does not own
------------
of record or beneficially, directly or indirectly, (A) any shares or stock or
securities convertible into stock or any other corporation or (B) any
participating interest in any partnership, joint venture, limited liability
company or other non-corporate business enterprise and (iii) does not control,
directly or indirectly, any other entity.
5.22 MEMBERSHIP INTEREST. The Membership Interest to be issued to BET as
-------------------
contemplated under Section 2.1 shall be issued free and clear of all liens and
encumbrances of any nature whatsoever and BET will obtain good title to the
Membership Interest subject to no liability, mortgage, pledge, lien,
encumbrance, debt, obligation or charge of any nature whatsoever.
5.23 LOANS FROM AFFILIATES. Except as set forth on Schedule 5.23 attached
-------------------- -------------
hereto, the Company is not indebted to La-Van Hawkins or any Affiliate of La-Van
Hawkins.
ARTICLE 6
COVENANTS OF THE COMPANY
-------------------------
6.1 AFFIRMATIVE COVENANTS. So long as BET owns at least 15% of the
---------------------
membership interests of the Company or so long as the Notes remain outstanding
and until payment in full of the Notes and full and complete performance of all
of the Company's obligations arising under any of the Loan Documents, the
Company shall:
INVESTMENT AND LOAN AGREEMENT PAGE 16
<PAGE>
(a) Preservation of Corporate Existence, Etc. Preserve and maintain
-----------------------------------------
the Company's limited liability company existence, rights, franchises and
privileges in the jurisdiction of its formation, and qualify and remain
qualified as a foreign limited liability company in each jurisdiction in which
qualification is necessary or desirable in view of its business and operations
or the ownership of its properties; shall not seek to amend the Company's
articles of organization or operating agreement without permission of BET, which
permission must be received in writing before any change or amendment is made.
(b) Payment of Taxes, Etc. Pay and discharge (i) all taxes,
---------------------
assessments and governmental charges or levies imposed upon the Company or its
income or profits, or upon any properties belonging to the Company, prior to
the due date of such taxes, assessments and governmental charges or levies,
and (ii) all lawful claims which, if unpaid, might become a lien or charge
upon any properties of the Company.
(c) Maintenance of Insurance. Maintain policies of insurance covering
------------------------
all of the Company's property, real and personal, and all of the Company's
operations with responsible and reputable insurance companies or associations
and covering such risks and insured amounts as may be reasonably requested by
BET.
(d) Maintenance of Properties. Maintain and preserve all of the
-------------------------
Company's properties, whether real or personal, in good working order and
condition, ordinary wear and tear excepted.
(e) Board of Directors and Directors and Shareholders Meetings.
----------------------------------------------------------
Maintain a five (5) member Board of Directors elected in accordance with Section
2.6 and hold Board of Directors' meetings at least once quarterly and Members'
meetings at least once annually. A representative of BET may attend all Members'
meetings as an observer and shall receive at the same time as the Members all
information regarding actions to be taken or matters to be discussed at Members'
meetings.
(f) Compliance with Laws. Comply with the requirements of all
--------------------
applicable laws, rules, regulations and orders of any governmental authority.
(g) Keeping of Records and Books of Account. Keep adequate records
---------------------------------------
and books of account, in which complete entries will be made in accordance with
then generally-accepted accounting principles consistently applied, reflecting
all dealings or transactions of the Company.
INVESTMENT AND LOANS AGREEMENT PAGE 17
<PAGE>
(h) Examination of Records. Upon reasonable notice and at reasonable
----------------------
times during normal business hours, as often as BET may require, permit BET or
its agents or representatives, to examine and make copies and abstracts of
information pertinent to the Loans, from the records and books of account of the
Company, to visit the properties of the Company, and to discuss the affairs,
finances and accounts of the Company with any of its specifically designated
officers and directors.
(i) Additional Documents. Deliver to BET, upon BET's request, such
--------------------
documents as BET, in its sole discretion, shall deem necessary to perfect BET's
rights with respect to the Mortgages, the Assignments of Lease, and the
Security Agreement, including without limitation, any documents required by the
uniform commercial code of any applicable state or other jurisdiction;
(j) Minimum EBITDA. For each fiscal year of the Company, maintain a
--------------
minimum EBITDA equal to fifty percent (50%) of the EBITDA set forth in the
Projections, determined by the Company's regular accounting firm in accordance
with generally accepted accounting principals. For the purposes of this Section,
the first determination of whether the company failed to meet the EBITDA
requirements set forth herein shall be made for the twelve months ending
November 30, 1997 and thereafter shall be made on a calendar year basis, with
the first calendar year determination being made for calendar year 1997.
(k) Life Insurance. Maintain a "key-man" life insurance policy in the
--------------
amount of $5,000,000 (or such greater amount as BET shall reasonably require) in
full force and effect insuring La-Van Hawkins and naming BET as the sole
beneficiary.
(l) Notice of Litigation. Promptly notify BET in writing of any
--------------------
litigation or other legal or administrative proceeding instituted against or
involving the Company, or any threatened litigation or other legal or
administrative proceeding involving the Company:
(i) With respect to the compliance by the Company with any law,
ordinance, regulation or order, or its operations; or
(ii) Involving amounts in excess of $10,000, whether or not
fully covered by insurance, and regardless of the subject matter thereof.
(m) Compliance with ERISA, Reportable Events. Comply with all
----------------------------------------
applicable provisions of ERISA now or hereafter in
INVESTMENT AND LOAN AGREEMENT PAGE 18
<PAGE>
effect, and promptly notify BET in writing of the occurrence of any reportable
event, as defined in Section 4043 of ERISA, if a notice of such reportable event
is required under ERISA to be delivered to the PBGC, together with a description
of such reportable event and a statement of the action the Company intends to
take with respect thereto, together with a copy of the notice thereof given to
the PBGC.
(n) Accounts Receivable. Maintain an average accounts receivable
-------------------
aging of no more than ninety (90) days.
6.2 NEGATIVE COVENANTS. So long as BET owns at least 15% of the membership
------------------
interests of the Company, or so long as the Notes remain outstanding and until
payment in full of the Notes and full and complete performance of all of the
Company's obligations arising under any of the Loan Documents, the Company shall
not do, agree to do, or permit to be done, without the prior written consent of
BET, any of the following:
(a) Indebtedness. Incur, create, assume or suffer to exist any
------------
indebtedness including any indebtedness evidenced by notes, bonds, debentures,
conditional sale or other title retention agreements, or accept any deposits,
advances, or progress payments of any kind except: (i) the Senior Indebtedness;
(ii) trade debt to vendors, suppliers, landlords and the like incurred in the
ordinary course of business; (iii) unsecured short term indebtedness which shall
not exceed, in the aggregate, twenty five percent (25%) more than the amounts
reflected in the Projections.
(b) Liens. Except for purchase money financing with respect to assets
-----
being acquired by the Company, create, assume or suffer to exist, directly or
indirectly, any security interest, mortgage, pledge, lien, charge or other
encumbrance, of any nature whatsoever upon the Company's properties, real or
personal, now owned or hereafter acquired, excluding, however, from the
operation of this covenant:
(i) any security interests or liens created pursuant to this
Agreement or to secure the Senior Indebtedness as contemplated under the
Business Plan;
(ii) liens for taxes or assessments either not delinquent or the
validity of which are being contested in good faith by appropriate legal or
administrative proceedings and as to which adequate reserves shall have
been set aside on the books of the Company, in conformity with generally
accepted accounting principles, or deposited in a restricted account for
the benefit of the Company;
INVESTMENT AND LOAN AGREEMENT PAGE 19
<PAGE>
(iii) materialmen's mechanics', carriers', workmen's,
repairmen's, warehousemen's or other like liens arising in the ordinary
course of the Company's business or being contested in good faith by
appropriate legal proceedings and as to which adequate reserves shall have
been set aside on the books of the Company, in conformity with generally
accepted accounting principles, but not to exceed, in the aggregate, at any
one time, $25,000;
(iv) deposits or pledges to secure payment of worker's
compensation, employment insurance or other social security benefits or
obligations, incurred in the ordinary course of business;
(v) any judgment lien securing a judgment which shall, within
thirty (30) days after the entry thereof, have been discharged, vacated,
reversed, or execution thereof stayed pending appeal, and, if stayed, shall
have been discharged, vacated or reversed within sixty (60) days after the
expiration of any such stay.
(c) Distributions. Declare or make any distribution, or make payment
-------------
or distribution on account of the Company's membership or equity interests or
set aside any sum for any such purpose.
(d) Loans and Advances. Make any loan or advance to any officer,
------------------
member, director or employee of the Company or any Affiliate of such person
except for advances to its officers and employees to cover travel and other
similar expenses to be incurred in the ordinary course of business or repay any
loan or advance from any Member, director, or employee of the Company or any
Affiliate of such Person, or repay any loan to an Affiliate other than in
accordance with terms approved by the Board of Directors of the Company, except
for the repayment of those loans or advances reflected in the financial
statements provided to BET and upon the repayment schedule set forth in the
Projections.
(e) Capital Interests. Except pursuant to the conversion of the Loan
-----------------
and as contemplated hereunder or pursuant to the Investor Rights Agreement,
issue or authorize the issuance of additional membership interests or any right
or option to acquire any membership or equity interest in the Company, or
authorize any sale or assignment of any capital interest, or purchase, or
redeem, retire or otherwise acquire, directly or indirectly, or make any sinking
fund payments with respect to any membership interest.
INVESTMENT AND LOAN AGREEMENT PAGE 20
<PAGE>
(f) Disposition of Assets. Without the consent of BET, which consent
---------------------
shall not be unreasonably withheld if the Company's performance is consistent
with the Projections, sell, transfer, assign, convey, lease or otherwise dispose
of any portion of the Company's business or discount, sell, pledge, hypothecate,
or otherwise dispose of the accounts receivable of the Company. Notwithstanding
the foregoing, the Company may dispose of unprofitable locations from time to
time, without BET's consent, consistent with the Business Plan, provided that
any single disposition does not involve assets valued at more then $1,000,000
and all dispositions in any one calendar year do not involve assets valued in
excess of $4,000,000.
(g) Merger. Enter into any consolidation or merger with, or into any
------
acquisition of all or substantially all the properties or assets or any of the
capital stock of, any person or entity, except with respect to the acquisition
of restaurants or restaurant sites in a manner consistent with the Business
Plan.
(h) Capital Expenditures. Expend more than $1,500,000 in any fiscal
--------------------
year for capital improvements for the Company, including without limitation any
equipment leases which, under generally accepted accounting principals, may be
deemed capitalized leases, except as may be incurred directly in connection with
the acquisition or operation of restaurants consistent with the Business Plan.
(i) La-Van Hawkins Compensation. Pay to La-Van Hawkins, annually, as
---------------------------
an officer, director or employee of the Company compensation, in the aggregate,
an amount that shall exceed $500,000 unless and until the Board of Directors of
the Company unanimously adopts an incentive-based compensation plan. Said plan
shall contain, among other things, a compensation package based upon meeting
certain cash flow projections for the operations of the Company. The term
"compensation" shall include all payments for services rendered whether such
payments be denominated salary, bonus or otherwise (including benefits such as
insurance, car, allowances, deferred compensation and retirement benefits).
Notwithstanding the foregoing, La-Van Hawkins compensation shall not exceed
$250,000 on an annualized basis for any period in which the targets set forth on
Schedule 6.2(i) are not met. Any adjustments to La-Van Hawkins' compensation
- - ---------------
shall be effective for the entire period following any period in which the
targets have not been met. If, after having failed to meet the target for a
particular quarter, the target for the next quarter is met, La-Van Hawkin's
compensation shall be increased to $500,000 per year for the quarter following
the quarter in which the targets were met. Additionally, in any
INVESTMENT AND LOAN AGREEMENT PAGE 21
<PAGE>
calendar year in which, on a cumulative basis, the targets have been satisfied,
even though in one or more periods for that calendar year the targets were not
satisfied, La-Van Hawkins shall be entitled to a bonus such that the total
compensation for such calendar year equals $500,000.
(j) Change of Business or Name. Engage in any business activities
--------------------------
not contemplated in the Business Plan, change the nature or character of the
Company's businesses or purchase, engage in, or manage any other business or
activity, or liquidate or dissolve the Company (or suffer any liquidation or
dissolution) or change the name of the Company.
(k) Guarantees. Assume, endorse, be or become liable for, or
----------
guarantee, the obligations of any third person or entity, including, without
limitation, any agreement, whether such agreement is on a contingency basis or
otherwise, to purchase, repurchase, or otherwise acquire indebtedness of any
other person or entity, or to purchase, sell or lease, as lessee or lessor,
property or services, in any such case primarily for the purpose of enabling any
other person or entity to make payment of any indebtedness, or to make any
payment (whether as an advance, capital contribution, purchase of any equity
interest or otherwise) to assure a minimum equity, asset base, working capital
or other balance sheet or financial condition, in connection with the
indebtedness of any other person or entity or to supply funds to or in any
manner invest in another person or entity in connection with such person's or
entity's indebtedness.
(l) Prepayments. Make any voluntary or optional prepayment of any
-----------
indebtedness incurred or permitted to exist under the terms of this Agreement or
any of the other Loan Documents, other than indebtedness evidenced by the Notes
or the Loan Documents.
(m) Investments. Make or suffer to exist, investments in any person
-----------
or entity including, without limitation, any stockholder, director, officer or
employee of the Company, except investments in:
(i) obligations issued or guaranteed by the United Stated of
America;
(ii) Certificates of Deposit, time deposits, banker's acceptances
or other "money market instruments" issued by any federally insured bank or
trust company organized under the laws of the United States of America or
any state thereof at having a combined capital and surplus in an aggregate
amount not less than $100,000,000 in each
INVESTMENT AND LOAN AGREEMENT PAGE 22
<PAGE>
case maturing or being due or payable in full not more than ninety (90)
days after the acquisition thereof.
(n) Fiscal Year of the Company. Change the Company's fiscal years.
--------------------------
(o) ERISA Obligations. Be or become obligated to the PBGC, other than
-----------------
an annual premium payment, in excess of $10,000; or be or become obligated to
the IRS with respect to excise or other penalty taxes provided for in those
provisions of Section 4975 of the Internal Revenue Code, as in effect or
hereafter amended or supplemented, in excess of $10,000.
(p) Transactions With Affiliates; Mangement Agreements.
--------------------------------------------------
(i) Make any investment in any Affiliate or transfer, sell,
lease, assign or otherwise dispose of any assets to an Affiliate, or merge
into or consolidate with or purchase or acquire assets or capital stock
from an Affiliate, or enter into any other transaction directly or
indirectly with or for the benefit of any Affiliate (including, without
limitation, any management agreement or similar agreement, and guarantees
and assumptions of obligations of an affiliate). "Affiliate" shall mean any
director (or person holding the equivalent position) or officer (or person
holding the equivalent position) of the Company; and any other person
which, directly or indirectly, controls or is controlled by or under common
control with the Company or any Affiliate of the Company (excluding any
trustee under, or any committee with responsibility for administering, any
Pension Plan). "Person" includes any natural person, corporation, limited
liability company, firm, trust, association, government, government agency
or other entity whether acting in an individual, fiduciary or other
capacity. BET shall be deemed not to be an Affiliate of the Company. For
the purposes of this Agreement, each Member of the Company and La-Van
Hawkins and any entity controlled by La-Van Hawkins shall be an Affiliate
of the Company. A person shall be deemed to be
(1) "controlled by" any other person if such other Person
possesses, directly or indirectly, power
a. to vote 10% or more of the securities having at the time
of any determination hereunder voting power for the election of
directors of such person (or persons holding equivalent
positions); or
INVESTMENT AND LOAN AGREEMENT PAGE 23
<PAGE>
b. to direct or cause the direction of the management
and policies of such person whether by contract or otherwise; or
(2) "controlled by" or "under common control with" such
other person if such other person is a member of the immediate family
of such person or is the executor, administrator, or other personal
representative of such person.
(ii) Pay or become obligated to pay, any management or other
similar fees to any Affiliate (whether or not a stockholder, director,
officer or employee of the Company) or any interest on any deferred
obligation therefor, other than as contemplated under the Management
Agreement, which shall not be amended or modified without the written
consent of BET.
6.3 REPORTING REQUIREMENTS. So long as the Notes remain outstanding or
-----------------------
BET holds an equity interest in the Company and until payment in full of the
Notes and full and complete performance of all of the Company's obligations
under any of the Loan Documents, the Company shall furnish to BET:
(a) Default Notice. As soon as possible and in any event within ten
--------------
(10) days after the occurrence of each Event of Default (as defined in Article 7
below), or each event which would be an Event of Default but for a requirement
that notice be given after, or a lapse of time occur, or both, or which
constitutes a material or adverse change in the condition, financial or
otherwise, or the operations of the Company, the statement of the Company's
President setting forth details of the Event of Default or such other event and
the action which the Company proposes to take with respect thereto.
(b) Monthly Variance Operating Statements. On a monthly basis, a
-------------------------------------
comparison of operations, on a year-to-date basis, reflecting income, cash flow,
EBITDA, store acquisitions and operations compared to the Projections and the
Business Plan.
(c) Quarterly Financial Statements. As soon as available, but in any
------------------------------
event, within twenty (20) days after the end of each quarter of the Company's
fiscal year, a balance sheet of the Company, as of the last day of such quarter,
and statements of income, retained earnings, and cash flow, for such quarter all
in reasonable detail, setting forth in each case in comparative form to
corresponding figures for the corresponding month in the preceding year, each
statement to be certified in a certificate of the President or Chief Financial
Officer of
INVESTMENT AND LOAN AGREEMENT PAGE 24
<PAGE>
the Company as fairly presenting the financial position and the results of
operations of the Company as at its date and for such quarter and as having been
prepared in accordance with generally accepted accounting principles
consistently applied (subject to year-end audit adjustments). Such financial
statements shall include, in a separately itemized schedule, any single
expenditure made by the Company of One Hundred Thousand Dollars ($100,000) or
more.
(d) Audited Annual Financial Statements. Annually, as soon as
-----------------------------------
available, but in any event within ninety (90) days after the end of each fiscal
year, a balance sheet of the Company, as at such last day of the fiscal year,
and statements of income, retained earnings, and cash flow, for such fiscal
year, each prepared in accordance with generally accepted accounting principles
consistently applied, in reasonable detail, and certified without qualification
by a firm of independent certified public accountants satisfactory to BET, as
fairly presenting the financial position and results of operations of the
Company for the year ending on its date and as having been prepared in
accordance with generally accepted accounting principles.
(e) Projections of Operations. On or before thirty (30) days before
-------------------------
the end of each fiscal year of the Company, projections, approved by the
Company's Board of Directors, of income and expense of the Company for the next
12-month period, prepared on a consolidated basis and prepared in good faith and
after reasonable analysis utilizing such assumptions management of the Company
believes to be reasonable, and in form consistent with the quarterly financial
statements provided under Section 6.3(c).
(f) Taxes. Copies of all of the Company's federal, state, and local
-----
tax returns, in a form acceptable to BET, and evidence acceptable to BET in its
sole discretion that all such tax obligations are being met in a timely manner.
(g) No Default Certificate. At least quarterly certificates, in a
----------------------
form acceptable to BET, of the President or Chief Executive Officer of the
Company to the effect that no Event of Default hereunder and that no default
under any other agreement to which the Company is a party or by which it is
bound, or by which any of its properties or assets may be affected, and no event
which, with the giving of notice or the lapse of time, or both, would constitute
a default, has occurred, or, if such can not be so certified, specifying in
reasonable detail the exceptions, if any, to such statement.
INVESTMENT AND LOAN AGREEMENT PAGE 25
<PAGE>
(h) Certificate of Accountants. At the same time that the financial
--------------------------
statements required under the provisions of this Section 6.3(d) are delivered,
(i) a certificate of the Chief Financial Officer and independent certified
public accountants of the Company, specifically addressed to the Company and
BET, to the effect that during the course of their audit of the operations of
the Company and its conditions as of the end of the fiscal year, to the best of
their knowledge, nothing has come to their attention which would indicate that
an Event of Default or default hereunder or under any of the Loan Documents has
occurred or that there was any violation of the covenants of the Company
contained in Section 6.1 or in Section 6.2 of this Agreement, or, if such can
not be so certified, specifying in reasonable detail the exceptions, if any, to
such statements and (ii) in every odd-numbered year, a management report of the
independent certified accountants of the Company regarding the Company's
operations.
(i) Other Accountant's Reports. Promptly upon receipt thereof, copies
--------------------------
of all other reports submitted to the Company by its independent certified
public accountants in connection with any annual or interim audit of the books
and records of the Company made by such accountants.
(j) Copies of Other Documents. Promptly upon their becoming
-------------------------
available, copies of any:
(i) financial statements, projections, material non-routine
reports, notices (other than routine correspondence), requests for waivers
and proxy statements, in each case, delivered by the Company to any lending
institution other than BET or to its Members or directors;
(ii) material non-routine correspondence or official notices
received by the Company form any federal, state or local governmental
authority which regulates the operations of the Company;
(iii) registration statements and any amendments and supplements
thereto, and any regular or periodic reports, if any, filed by the Company
with any securities exchange or with the Securities and Exchange Commission
or any governmental authority succeeding to any or all of the functions of
the said Commission;
(iv) letters of comments or correspondence sent to the Company
by the Securities and Exchange Commission in relation to the Company and
its respective affairs, and
INVESTMENT AND LOAN AGREEMENT PAGE 26
<PAGE>
(v) materials to be received or sent to the Members or directors
of the Company.
(k) ERISA Notices.
-------------
(i) Concurrently with such filing, a copy of each annual report
which is filed with respect to each Plan with the Secretary of Labor or the
PBGC;
(ii) promptly upon their becoming available, copies of all
material non-routine correspondence with the PBGC, the Secretary of Labor
or any representative of the IRS with respect to any Plan;
(iii)copies of all actuarial valuations received by the Company
with respect to any Plan; and
(iv) copies of any notices of Plan termination filed by any Plan
administrator (as those terms are used in ERISA) with the PBGC and of any
notices from the PBGC to institute involuntary termination procedures.
(l) Corporate Overhead Budget. On or before thirty (30) days
-------------------------
before the end of each fiscal year of the Company, a corporate overhead budget,
approved by the Company's Board of Directors, for the next 12-month period
prepared on a consolidated basis and in good faith and after reasonable analysis
utilizing such assumptions management of the Company believes to be reasonable.
(m) Other Information. Such other information respecting the
-----------------
business, properties or the condition of operations, financial or otherwise, of
the Company as BET may from time to time reasonably request.
ARTICLE 7
EVENTS OF DEFAULT
-----------------
7.1 EVENTS OF DEFAULT. Under this Agreement an Event of Default shall be
-----------------
any of the following:
(a) The Company shall fail to make any payment of principal or
interest upon any of the Notes or any amount due under any other obligation
between BET and the Company to BET when due, whether at the due date thereof or
by acceleration or
INVESTMENT AND LOAN AGREEMENT PAGE 27
<PAGE>
otherwise, and such failure remain unremedied for five (5) days after written
notice thereof shall have been given by BET to the Company.
(b) Any representation or warranty made by the Company herein, in any
other Loan Document, agreement, certificate, instrument, statement or report
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any of the other Loan Documents shall prove to have been false or
misleading in any material respect when made.
(c) The Company shall fail to perform, observe or comply with any
material term, covenant or agreement contained in any of the Loan Documents and
such failure remains unremedied for thirty (30) days after written notice
thereof shall have been given by BET to the Company.
(d) The Company shall default under, or fail to fulfill any
obligation of any bond, note, debenture, loan agreement, indenture, guaranty,
trust agreement, equipment lease, mortgage or similar instrument to which the
Company is a party or by which any of them is bound, or by which any of their
properties or assets may be affected (each, a "Debt Instrument"), so that, as a
result of any such failure to perform (assuming the giving of appropriate notice
thereof, if required), the indebtedness included therein or secured or covered
thereby may be declared due and payable prior to the date on which such
indebtedness would otherwise become due and payable; or any event or condition
referred to in any Debt Instrument shall occur or fail to occur, so that, as a
result thereof, the indebtedness included therein or secured or covered thereby
may be declared due and payable prior to the date on which such indebtedness
would otherwise become due and payable; or failure to pay any indebtedness for
borrowed money due at final maturity or pursuant to demand under any Debt
Instrument.
(e) Any of the Loan Documents shall, for any reason, cease to be in
full force and effect, or shall be declared to be null and void, or the validity
or enforceability thereof shall be contested by the Company; or the Company
shall deny that it has any further liability or obligation under the Loan
Documents.
(f) The Company shall make an assignment for the benefit of
creditors, file a petition in bankruptcy, be adjudicated insolvent, petition or
apply to any tribunal for the appointment of a receiver, custodian, or any
trustee for itself or a substantial part of its assets, or shall commence any
proceeding under any bankruptcy, reorganization, arrangement, readjustment of
debt, dissolution or liquidation law or statute
INVESTMENT AND LOAN AGREEMENT PAGE 28
<PAGE>
of any jurisdiction, whether now or hereafter in effect, or the Company shall
take any action to authorize the foregoing; or there shall have been filed any
such petition or application, or any such proceeding shall be commenced against
it, which remains undismissed for a period of sixty (60) days or more; or any
order for relief shall be entered in any such proceeding; or the Company by any
act or omission shall indicate its consent to, approval of or acquiescence in
any such petition, application or proceeding or the appointment of a custodian,
receiver or any trustee for it or any substantial part of its property, or shall
suffer any custodianship, receivership or trusteeship to continue undischarged
for a period of sixty (60) days or more; or the Company shall have concealed,
removed, or permitted to be concealed or removed, any part of its property, with
intent to hinder, delay or defraud its creditors or any of them or made or
suffered a transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or shall have made any
transfer of its property to or for the benefit of a creditor at a time when
other creditors similarly situated have not been paid; or shall have suffered
or permitted, while insolvent, any creditor to obtain lien a or other
encumbrance of any nature whatsoever upon any of its property through legal
proceedings or distraint which is not vacated within thirty (30) days from the
date hereof.
(g) Any judgement against the Company or any attachment, levy or
execution against its property, subsequent to the Closing Date, for any amount
in excess of $25,000 shall remain unpaid, unstayed, unappealed, undischarged,
unbonded or dismissed for a period of thirty (30) days or more.
(h) The termination of any Plan or the institution by the PBGC of
proceedings for the involuntary termination of any Plan, in either case, by
reason of, or which results or could result in, a "material accumulated funding
deficiency" under Section 412 of the Internal Revenue Code, or the failure by
the Company to make required contributions, in accordance with the applicable
provisions of ERISA, to each of the plans hereafter established or assumed by
it.
(i) Any of the liens created and granted to BET hereunder or under
any of the other Loan Documents shall at any time fail to be valid, perfected
liens.
(j) La-Van Hawkins shall cease for any reason, whatsoever, including
without limitation, death or disability (as such disability shall be determined
in the reasonable judgement of BET) to be and continuously perform the duties of
Chairman of the Company or, if such cessation shall occur as a result of death
or
INVESTMENT AND LOAN AGREEMENT PAGE 29
<PAGE>
disability, no successor reasonably satisfactory to BET shall have become and
shall have commenced to perform the duties of Chairman of the Company within
thirty (30) days after such cessation; provided, however, that if any reasonably
satisfactory successor, shall have been approved by BET, shall have been duly
elected, and shall have commenced performance of such duties within such period,
the name of such successor or successors shall be deemed to have been inserted
in place of La-Van Hawkins in this subsection 7.1(j);
(k) An event occurs which is defined as a Default or an Event of
Default under any of the Loan Documents;
(l) A controlling interest in Management is sold, transferred or
pledged without the prior written consent of BET;
7.2 EFFECT OF EVENT OF DEFAULT. Should any Event of Default occur, BET, by
--------------------------
notice to the Company, may at its option terminate its commitment to provide any
proceeds of the Loan hereunder, and declare the entire unpaid principal amount
of the Notes, together with all other amounts payable, hereunder or under the
other Loan Documents, including without limitation, unpaid interest, and legal
fees associated with enforcing the Loan Documents and accompanying Notes, and
every other obligation of the Company to BET, immediately due and payable,
whereupon the Notes and all other such obligations shall become and be forthwith
due and payable, without presentment, demand for payment, notice of non-payment,
protest or further notice or demand of any kind, all of which are hereby
expressly waived by the Company, anything contained herein or in the Notes or in
such other note or evidence of indebtedness to the contrary notwithstanding. BET
shall have, in addition to all other rights and remedies allowed by law, the
rights and remedies of a secured party under the Uniform Commercial Code as in
effect in the State of Maryland, and without limiting the generality of the
foregoing, the rights and remedies provided for in any of the Loan Documents,
the provisions of which are hereby incorporated by reference.
ARTICLE 8
MISCELLANEOUS
-------------
8.1 SPECIFIC PERFORMANCE. BET, in addition to being entitled to exercise
--------------------
all rights provided herein, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement, including but not
limited to the right to make the First Advance, the Second Advance, and receive
INVESTMENT AND LOAN AGREEMENT PAGE 30
<PAGE>
the convertible instruments contemplated hereunder. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by any of them of the provisions of this Agreement and hereby
agrees to waive the defense in any action for specific performance that remedy
at law would be adequate.
8.2 NO WAIVER; CUMULATIVE REMEDIES. Each and every right granted to BET
------------------------------
hereunder or under any other document delivered hereunder or in connection
herewith, or allowed it by law or equity, shall be cumulative and may be
exercised from time to time. No failure on the part of BET or the holder of the
Notes to exercise, and no delay in exercising, any right shall operate as a
waiver thereof, nor shall any single or partial exercise of any right preclude
any other or future exercise thereof or the exercise of any other right. The due
payment and performance of the Company's obligations hereunder or under the
other Loan Documents shall be without regard to any counterclaim, right or
offset or any other claim whatsoever which the Company has or may have against
BET and without regard to any other obligation of any nature whatsoever which
BET may have to the Company and no such counterclaim or offset shall be asserted
by the Company in any action, suit or proceeding instituted by BET for payment
or performance of the Company's obligations hereunder.
8.3 AMENDMENTS/ENTIRE AGREEMENT. No modification, amendment or waiver of
---------------------------
or with respect to any provision of this Agreement or any of the other Loan
Documents, nor consent to any departure by the Company from any of the terms or
conditions hereof or thereof, shall in any event be effective unless it shall be
in writing and signed by BET. Any such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. No consent to
or demand on the Company in any case shall, of itself, entitle it or any of them
to any other or further notice or demand in similar or other circumstances. This
Agreement together with the other Loan Documents embodies the entire agreement
and understanding between the Company and BET with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof.
8.4 NOTICES. All notices, requests, reports and other communications
-------
pursuant to this Agreement or any of the other Loan Documents shall be in
writing, either by letter (delivered by hand or commercial delivery service or
sent by certified mail, return receipt requested, except for routine reports
which shall be by ordinary first-class mail) or facsimile or telegram, addressed
as follows:
INVESTMENT AND LOAN AGREEMENT PAGE 31
<PAGE>
If to the Company: La-Van Hawkins UrbanCityFoods, LLC
201 North Charles Street, Suite 1410
Baltimore, Maryland 21201
Attn: Mr. La-Van Hawkins, Chairman
With a copy to:
Nathaniel E. Jones, Jr., Esq.
Jones & Associates, P.C.
Legg Mason Tower, Suite 2700
111 South Calvert Street
Baltimore, Maryland 21202
If to BET BET Holdings, Inc.
One BET Plaza
1900 W Place, N.W.
Washington, DC 20018
Attn: Robert L. Johnson, Chairman
With a copy to:
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attn: Richard N. Gale, Esq.
Any notice, request or communication hereunder shall be deemed to have been
given on the day on which it is delivered by hand or facsimile to such party at
its address specified above, or, if sent by mail, on the third day after it is
deposited in the mail, postage prepaid, or in the case of facsimile notice, when
acknowledgement of transmission is received by the transmitting fax machine. Any
party may change the person to whom or address to which notices are to be given
hereunder, by notice duly given hereunder, provided, however, that any such
notice shall be deemed to have been given hereunder only when actually received
by the party to whom it is address.
8.5 FEES; CONDITIONS OF CLOSING.
---------------------------
(a) Expenses: Indemnity.
--------------------
(i) The Company will promptly pay to BET
(1) all out-of-pocket costs or BET
(A) in connection with the filing or recording
of any assignments, mortgages, financing statements
and other documents), (B) incurred as reasonable
legal fees and expenses and
INVESTMENT AND LOAN AGREEMENT PAGE 32
<PAGE>
disbursements of counsel to BET, Arent, Fox, Kitner, Plotkin &
Kahn in connection with the preparation, negotiation, execution
and delivery, administration, interpretation and enforcement of
the Loan Documents and the consummation of the transactions
contemplated by this Agreement and the Loan Documents (whether
or not the closing on the Loan occurs on the Closing Date), (C)
in connection with the negotiation, preparation and execution and
delivery of any amendment, modification or supplement of or to,
or any consent or waiver under, any of the Loan Documents or any
other document (or any such instrument which is proposed but not
executed and delivered) and (D) in connection with any claim or action
threatened, made or brought against BET arising out of or relating to
any extent to this Agreement, the other Loan Documents or the
transactions contemplated hereby or thereby, except in the case of
BET's willful misconduct; and
(2) all costs and expenses (including, without
limitaion, reasonable fees and disbursements of counsel) suffered
or incurred by BET in connection with its enforcement of the
payment of the Notes or any other sum due to them under this
Agreement or any of the other Loan Documents or any of its other
rights hereunder or thereunder.
(ii) The provisions of this Section 8.5 shall survive the payment
of the Notes and the termination of this Agreement.
(b) Conditions of Closing. The obligations of BET to close under
---------------------
this Agreement shall be subject to (i) completion by BET of due diligence on the
business and affairs of the Company satisfactory to BET, in its sole
discretion, and (ii) no material adverse change in the business, affairs,
prospects or financial conditions of the Company during the period commencing on
the date of this Agreement and expiring on the Closing Date.
8.6 TAXES. If, under any law in effect on the date of the closing
-----
of any loan hereunder, or under any retroactive provision of the law
subsequently enacted, it shall be determined that any federal, state or local
tax is payable in respect of the issuance of the Notes, or in connection with
the filing or recording of
INVESTMENT AND LOAN AGREEMENT PAGE 33
<PAGE>
any assignments, mortgages, financing statements, or other documents (whether
measured by the amount of indebtedness secured or otherwise) as contemplated by
this Agreement, then the Company will pay any such tax and all interest and
penalties, if any, and will indemnify BET against and save them harmless from
any federal Internal Revenue Service form 1099 or damage resulting from or
arising out of the nonpayment or delay in payment of any such tax. If any such
tax or taxes shall be assessed or levied against BET, then BET may notify the
Company and make immediate payment thereof, together with interest or penalties
in connection therewith, and shall thereupon be entitled to and shall receive
immediate reimbursement therefor from the Company. Notwithstanding any other
provision contained in this Agreement, the covenants and agreements of the
Company in this Section 8.6 shall survive payment of the Notes and the
termination of this Agreement.
8.7 PAYMENTS. All payments by the Company on account of principal,
--------
interest and other charges (including any indemnities) shall be made to BET at
the principal office of BET in lawful money of the United States of America in
immediately available funds on the date such payment is due in accordance with
the provisions of the Notes. If any payment of principal or interest becomes
due on a day other than a business day, such payment may be made on the next
succeeding business day and such extension shall be included in computing
interest in connection with such payment. All payments hereunder, under any
other Loan Document, and under the Notes shall be made without set-off or
counterclaim and in such amounts as may be necessary in order that all such
payments shall not be less than the amounts otherwise specified to be paid under
this Agreement, any other Loan Document, and the Notes (after withholding for or
on account of (a) any present or future taxes, levies, imposts, duties or other
similar charges of whatever nature imposed by any government or any political
subdivision or taxing authority thereof, other than any tax (except those
referred to in clause (b) below) on or measured by the net income of BET to
which any such payment is due pursuant to applicable federal, state and local
income tax laws, and (b) deduction of amounts equal to the taxes on or measured
by the net income of BET payable by BET with respect to the amount by which the
payments required to be made under this sentence exceed the amounts otherwise
specified to be paid in this Agreement, any other Loan Document, and the Notes).
Upon payment in full of each Note, BET shall mark such Note "Paid" and return
it to the Company.
8.8 BINDING EFFECT; ASSIGNMENT. This Agreement shall become effective when
--------------------------
executed and thereafter shall be binding upon and inure to the benefit of the
Company, BET and their
INVESTMENT AND LOAN AGREEMENT PAGE 34
<PAGE>
respective successors and assigns, except that the Company shall not have the
right to assign or delegate any rights or obligations hereunder without the
prior written consent of BET and any purported assignment or delegation without
such consent shall be null and void.
8.9 CONSTRUCTION; GOVERNING LAW. The section headings used in this
---------------------------
Agreement are for convenience only and shall not affect the meaning or
interpretation of this Agreement. All terms used herein of any gender or of a
singular or plural term shall be deemed to include uses of the masculine,
feminine or neuter gender or plural or singular terms, as the context may
require. This Agreement shall be interpreted, and the rights and liabilities of
the parties hereto determined, in accordance with the laws and decisions of the
State of Maryland.
8.10 JURISDICTION; VENUE; AND PERSONAL SERVICE. The Company irrevocably
-----------------------------------------
consents that any legal action or proceeding against it under, arising out of or
in any manner relating to this Agreement, the notes, or any of the other Loan
Documents may be brought in the United States District Court for the District of
Maryland or any other appropriate Federal District Court, determined by BET
where jurisdiction is proper. The Company expressly and irrevocably assents and
submits to the personal jurisdiction of any of such courts in any such action or
proceeding. The Company irrevocably consents to the service of any complaint,
summons, notice or other process relating to any such action or proceeding by
delivery thereof to any of the by hand or by mail in the manner provided for in
Section 8.4 hereof. The Company hereby expressly and irrevocably waives any
claim or defense in any such action or proceeding based on any alleged lack of
personal jurisdiction, improper venue or forum non conveniens or any similar
basis. The Company shall not be entitled in any such action or proceeding to
assert any defense given or allowed under the laws of any state other than the
State of Maryland. Nothing in this Section 8.10 shall affect or impair in any
manner or to any extent the right of BET to commence legal proceedings or
otherwise proceed against the Company in any jurisdiction or to serve process in
any manner permitted by law.
8.11 WAIVER OF JURY TRIAL. The Company waives any right to have a jury
--------------------
participate in resolving any dispute, whether sounding in contract, tort, or
otherwise, among BET, the Company or any of the other parties arising out of,
in connection with, related to, or incidental to the relationship established
among the parties hereto in connection with the loan documents or any other
agreement among them.
INVESTMENT AND LOAN AGREEMENT PAGE 35
<PAGE>
8.12 SURVIVAL OF AGREEMENT AND REPRESENTATIONS. All agreements,
-----------------------------------------
representations and warranties made herein shall survive the delivery of this
Agreement, any of the other Loan Documents and the Notes.
8.13 SEVERABILITY OF PROVISIONS. The provisions of this Agreement are
--------------------------
severable, and if any clause or provision hereof shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision, or part thereof,
in such jurisdiction and shall not in any manner affect such clause or provision
in any other jurisdiction, or any other clause or provision in this Agreement
in any jurisdiction. Each of the covenants, agreements and conditions contained
in this Agreement is independent and compliance by the Company with any of them
shall not excuse non-compliance by the Company with any other. The Company shall
not take any action the effect of which shall constitute a breach or violation
of any provision of this Agreement.
8.14 RIGHTS AFFECTED BY EXTENSIONS. The rights of BET and its assigns
-----------------------------
granted hereunder shall not be impaired by any indulgence, release, renewal,
extension or modification which BET may grant with respect to the indebtedness
or any part thereof, or with respect to the collateral or with respect to any
endorser, guarantor or surety without notice or consent of the Company, or any
endorser, guarantor or surety.
8.15 COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, and all such counterparts shall constitute one and the same
Agreement.
INVESTMENT AND LOAN AGREEMENT PAGE 36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
BET HOLDINGS, INC.
By: [SIGNATURE APPEARS HERE]
--------------------------
Name:
Title:
LA-VAN HAWKINS URBANCITYFOODS, LLC
By: [SIGNATURE APPEARS HERE]
--------------------------
Name:
Title:
LA-VAN HAWKINS, individually as to
Article 5
[SIGNATURE APPEARS HERE]
------------------------------
INVESTMENT AND LOAN AGREEMENT PAGE 37
<PAGE>
EXHIBIT 13
BET HOLDINGS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth, for the periods and as of the dates
indicated, selected consolidated financial data for the Company. The selected
consolidated financial data for the five years in the period ended July 31, 1997
have been derived from the Company's audited financial statements. This
information should be read in conjunction with the Company's consolidated
financial statements and notes thereto appearing elsewhere in this annual
report.
<TABLE>
<CAPTION>
In thousands,except per share amounts
- - ---------------------------------------------------------------------------------------------
Year Ended July 31, 1997 1996 1995 1994 1993
=============================================================================================
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenues
Advertising $ 80,572 $ 67,562 $ 56,017 $ 48,616 $ 40,585
Subscriber 69,300 61,797 56,045 47,509 33,272
Other 4,355 2,916 3,160 1,385 361
- - ---------------------------------------------------------------------------------------------
Total operating revenues 154,227 132,275 115,222 97,510 74,218
Operating expenses 100,452 89,438 77,705 71,100 50,609
- - ---------------------------------------------------------------------------------------------
Income from operations 53,775 42,837 37,517 26,410 23,609
- - ---------------------------------------------------------------------------------------------
Income from continuing operations 28,022 22,678 19,912 14,776 12,640
Discontinued operations (4,235) (615) - - -
- - ---------------------------------------------------------------------------------------------
Net income $ 23,787 $ 22,063 $ 19,912 $ 14,776 $ 12,640
=============================================================================================
PER COMMON SHARE*
Income from continuing operations $ 1.60 $ 1.23 $ 1.00 $ .72 $ .61
Discontinued operations (.24) (.03) - - -
- - ---------------------------------------------------------------------------------------------
Net income 1.36 1.20 1.00 0.72 0.61
- - ---------------------------------------------------------------------------------------------
EBITDA** 3.56 2.76 2.23 1.51 1.30
- - ---------------------------------------------------------------------------------------------
Cash dividends declared - - - - -
- - ---------------------------------------------------------------------------------------------
Weighted average shares outstanding 17,515 18,454 19,867 20,490 20,844
=============================================================================================
OTHER DATA
EBITDA** $ 62,435 $ 50,939 $ 44,263 $ 31,022 $ 27,111
- - ---------------------------------------------------------------------------------------------
Capital expenditures 14,562 13,514 17,241 11,284 3,519
=============================================================================================
BALANCE SHEET DATA
Total assets $ 173,511 $ 150,731 $157,810 $113,868 $104,842
- - ---------------------------------------------------------------------------------------------
Long-term debt*** 62,993 60,560 35,875 12,392 13,207
- - ---------------------------------------------------------------------------------------------
Shareholders' equity 88,418 66,749 96,684 81,378 77,791
=============================================================================================
</TABLE>
* Net income for fiscal year 1993 includes a $1.8 million non-cash charge
related to a litigation settlement effected by the transfer of a
shareholders' assets. Net income per common share for fiscal year 1993
approximated $0.66 exclusive of the after tax effect of this non-cash
charge.
** EBITDA represents income from continuing operations before income taxes,
nonoperating income and expenses, and depreciation and amortization of
intangibles. EBITDA is presented as a measure of the Company's ability to
fund its operations. However, EBITDA should not be considered in isolation
from, or as a substitute for, net income or cash flows from operating
activities determined in accordance with generally accepted accounting
principles or as a measure of the Company's profitability or liquidity.
*** Includes current maturities of long-term debt.
EX13-1
<PAGE>
BET HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
BET Holdings, Inc. (the "Company") operates predominantly in the cable
television programming industry. Its cable television programming operations are
conducted through Black Entertainment Television ("BET"), BET on Jazz: The Cable
Jazz Channel ("BET on Jazz") and Action Pay-Per-View ("Action"). Both BET and
BET on Jazz are basic cable networks with revenues derived primarily from sales
of advertising time and monthly subscribership fees. Action provides programming
on a pay-per-view basis. Ancillary businesses established to leverage and expand
the BET brand name include publication of Emerge and BET Weekend magazines and
operation of the BET Soundstage restaurant, which opened in January 21, 1997.
Additionally, the Company has equity ownership interests in certain affiliated
companies, which are accounted for under the equity method, including BET
Movies/Starz!3, a Black-oriented pay movie channel devoted to showcasing Black
film artists, which was jointly launched with Encore Media Corporation in
February 1997. Prior to September 30, 1996, the Company published Young Sisters
and Brothers (YSB) magazine.
The Company has adopted a plan for disposal of its Color Code skin care
product business segment in connection with a strategic initiative to focus the
Company's executive management and capital resources on its core businesses:
cable television programming and leveraging the BET "brand name", primarily in
the areas of leisure time activities. Accordingly, results of operations for the
year ended July 31, 1997 reflect a $1.7 million provision, net of a tax benefit
of $1.2 million, for losses expected to be incurred upon disposal.
CONSOLIDATED RESULTS OF OPERATIONS
The Company's consolidated results of operations were as follows:
<TABLE>
<CAPTION>
In thousands of dollars
- - --------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
====================================================================
<S> <C> <C> <C>
Operating Revenues $154,227 $132,275 $115,222
- - --------------------------------------------------------------------
Income From Operations 53,775 42,837 37,517
- - --------------------------------------------------------------------
Income Before Income Taxes 46,593 38,395 35,138
- - --------------------------------------------------------------------
Income From Continuing Operations 28,022 22,678 19,912
- - --------------------------------------------------------------------
Discontinued Operations (4,235) (615) -
- - --------------------------------------------------------------------
Net Income $ 23,787 $ 22,063 $ 19,912
====================================================================
</TABLE>
EX13-2
<PAGE>
OPERATING RESULTS BY BUSINESS UNIT
Summarized results of continuing operations by each of the Company's
significant business units were as follows (unaudited):
<TABLE>
<CAPTION>
In thousands of dollars
- - ----------------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
=============================================================================
<S> <C> <C> <C>
OPERATING REVENUES
BET $136,162 $117,243 $101,408
Action Pay-Per-View 9,327 8,775 8,470
BET on Jazz 1,125 405 -
Magazine Publishing 4,234 5,852 5,344
BET Soundstage Theme Restaurant 3,379 - -
- - ------------------------------------------------------------------------
TOTAL $154,227 $132,275 $115,222
========================================================================
INCOME (LOSS) FROM OPERATIONS
BET $ 64,438 $ 49,961 $ 42,538
Action Pay-Per-View (487) (730) (1,298)
BET on Jazz (6,242) (3,155) -
Magazine Publishing (2,930) (3,205) (3,723)
BET Soundstage Theme Restaurant (1,004) (34) -
- - ------------------------------------------------------------------------
TOTAL $ 53,775 $ 42,837 $ 37,517
========================================================================
</TABLE>
Income (loss) from operations presented in the preceding table does not
reflect the allocation of certain overhead and administrative costs incurred by
BET which relate to all of the Company's business units.
OPERATING REVENUE
Components of consolidated operating revenue from continuing operations
were as follows (unaudited):
<TABLE>
<CAPTION>
In thousands of dollars
- - ------------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
========================================================================
<S> <C> <C> <C>
BET
Advertising $ 77,620 $ 64,075 $ 52,865
Subscriber 57,684 50,344 45,459
Other 858 2,824 3,084
- - ----------------------------------------------------------------------
TOTAL BET 136,162 117,243 101,408
- - ----------------------------------------------------------------------
OTHER BUSINESS UNITS
Advertising 2,952 3,487 3,152
Subscriber 11,616 11,453 10,586
Other 3,497 92 76
- - ----------------------------------------------------------------------
TOTAL OTHER BUSINESS UNITS 18,065 15,032 13,814
- - ----------------------------------------------------------------------
TOTAL CONSOLIDATED OPERATING REVENUE $154,227 $132,275 $115,222
======================================================================
</TABLE>
EX13-3
<PAGE>
BET
Advertising Revenue
Components of BET's advertising revenue were as follows (unaudited):
<TABLE>
<CAPTION>
In thousands of dollars
- - ----------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
======================================================================
<S> <C> <C> <C>
National Spot $ 51,658 $ 42,709 $ 33,647
Infomercial 21,240 17,482 14,068
Direct Response 4,722 3,884 5,150
- - ----------------------------------------------------------------------
TOTAL $ 77,620 $ 64,075 $ 52,865
======================================================================
</TABLE>
BET's national spot advertising revenue increased 21%, to $51.7 million,
and 27%, to $42.7 million, during fiscal years 1997 and 1996, respectively, as
compared to the prior year comparable periods. Increased revenues primarily
resulted from an increase in volume of advertising broadcast time sold, rate
increases and increased effective rates on the spot market.
BET's infomercial advertising revenues increased 21%, to $21.2 million, and
24%, to $17.5 million, during fiscal years 1997 and 1996, respectively, as
compared to the prior year comparable periods. Increased fiscal year 1997
revenues primarily resulted from a scheduled 22% contractual increase in the
rate charged to BET's largest purchaser of infomercial time. Increased fiscal
year 1996 revenues resulted from a scheduled 10% contractual increase in the
rate charged to BET's largest purchaser of infomercial time and an increase in
the volume of infomercial advertising time.
BET's direct response advertising revenues increased 22%, to $4.7 million,
and decreased 25% to $3.9 million, during fiscal years 1997 and 1996,
respectively, as compared to the prior year comparable periods. Increased fiscal
year 1997 revenues primarily resulted from effective rate increases and
inventory management efficiencies. Decreased fiscal year 1996 revenues primarily
resulted from a reduction in broadcast time made available for direct response
advertising in favor of more profitable national spot advertising.
Subscriber Revenue
BET's subscriber revenues increased 15%, to $57.7 million, and 11%, to
$50.3 million, during fiscal years 1997 and 1996, respectively, as compared to
prior year comparable periods. Subscriber revenue gains resulted from scheduled
annual rate card increases and continuing increases in BET's subscriber base.
BET's basic monthly subscriber fee was $.11 during calendar years 1995 and 1996
and is $.12 for calendar year 1997, resulting in weighted average monthly
subscriber fees of $.116, $.11 and $.106 during fiscal years 1997, 1996 and
1995, respectively. BET's subscriber base, as reported by affiliated cable
system operators, increased 14% to 47 million, at July 31, 1997 and increased
11%, to 41.4 million, at July 31, 1996 as compared to July 31, 1996 and July 31,
1995, respectively. Included in BET's subscriber base at July 31, 1997 were 3.9
million subscribers of satellite-delivered programming services that are not
required to remit affiliation fees until dates ranging from September 1998 to
April 2000, pursuant to deferred billing arrangements.
BET's rate card structure provides for a monthly per-subscriber rate of
$.13 in 1998, and rate increases of $.005 per year through 2003, at which time
the monthly per-subscriber rate will be $.155. BET's affiliation agreements are
subject to cancellation by either BET or cable system operators under certain
circumstances. Additionally, substantially all of BET's affiliation agreements
include a "most favored nations" provision under which BET is obligated to
extend the terms and provisions of its most favorable contractual rate structure
to covered affiliates. Accordingly, in the event BET enters into a new or
renewed affiliation agreement with terms more favorable than those contemplated
under the current rate structure, it will be obligated to extend the more
favorable terms to substantially all other affiliates.
EX13-4
<PAGE>
The Company is regulated under the Communications Act of 1934 (the
"Communications Act"), as amended by the Telecommunications Act of 1996. The
Telecommunications Act of 1996 (the "1996 Act" or sometimes the "Act") was
responsible for the most significant changes in communications law and
regulation since enactment of the Communications Act. Almost every segment of
the communications industry was affected, with sweeping changes in the way in
which broadcasters, cable operators, video programmers, equipment manufacturers,
and electronic publishers are regulated. The 1996 Act substantially amends the
provisions of the Communications Act concerning cable television systems and
other multichannel video programming services. For example, the Act terminated
rate regulation for cable programming service ("CPS") or "expanded basic" tiers
for many small cable operators, and will sunset such regulation for all cable
systems in 1999. Rate regulation will also end for particular cable operators if
a local exchange carrier offers video programming in such cable operators'
franchise areas by any means other than direct broadcast satellite ("DBS"). The
1996 Act also contains various provisions to stimulate the development of new
video programming services or other services offered over multichannel video
programming systems, such as interactive services. These changes in federal
regulation should have a beneficial impact, to some degree, on the future growth
of BET, BET on Jazz and Action, although the extent of such impact cannot yet be
determined.
Other Revenue
BET's other operating revenue for the years ended July 31, 1997 and July
31, 1996 decreased substantially as compared to the prior years, primarily due
to the discontinuance of revenues related to the lease of excess transponder
capacity prior to the January 1996 launch of BET on Jazz.
OTHER BUSINESS UNITS
Advertising Revenue
Advertising revenue earned by the Company's other business units for the
years ended July 31, 1997 and July 31, 1996 decreased 15%, to $3 million, and
increased 11%, to $3.5 million, respectively, as compared to the prior year
comparable periods. Decreased fiscal year 1997 advertising revenues reflect a
decline in revenues resulting from the discontinuance of YSB magazine in
September 1996, offset by increased advertising revenue earned by Emerge
magazine and advertising revenue earned by BET on Jazz and BET Weekend magazine.
Increased fiscal year 1996 advertising revenue primarily resulted from increased
advertising revenues earned by Emerge magazine.
Subscriber Revenue
Subscriber revenue earned by the Company's other business units for the
years ended July 31, 1997 and July 31, 1996 increased 1%, to $11.6 million, and
8%, to $11.4 million, respectively, as compared to the prior year comparable
periods. Increased fiscal year 1997 revenue primarily reflects increased
subscriber revenue attributable to Action, partially offset by a reduction in
subscriber revenue related to the discontinuance of YSB magazine. Also included
in fiscal year 1997 subscriber revenue is a one-time payment of approximately
$520,000 related to the early termination of an international affiliation
agreement for BET on Jazz. Increased fiscal year 1996 subscriber revenue
primarily resulted from increased subscriber revenue attributable to Action,
increased newsstand sales of Emerge magazine and circulation gains by YSB
magazine.
At July 31, 1997 and July 31, 1996, Action was available to approximately 9
million and 8.2 million subscribers, respectively, representing increases of 10%
and 12%, respectively, as compared to prior year comparable periods. Subscriber
revenues resulted from an average monthly buy rate of approximately 4.5%, 5.2%
and 5.1% during fiscal years 1997, 1996 and 1995, respectively.
At July 31, 1997, BET on Jazz was available to approximately 1.9 domestic
and international subscribers. BET on Jazz has not earned a significant level of
advertising or subscriber revenue since its January 1996 launch, reflecting the
economics of launching a new programming service in a highly competitive
environment. BET on Jazz's current domestic rate card provides for a free
carriage period generally through December 1998.
EX13-5
<PAGE>
Accordingly, BET on Jazz is not expected to earn significant subscriber revenue
until calendar year 1999. As an inducement to attract significant additional
subscribership, BET on Jazz has adopted a launch support initiative that may
result in its funding of a significant level of launch support costs incurred by
affiliated cable system operators.
Other Revenue
Other revenue increased substantially for the year ended July 31, 1997
as compared to the prior year, primarily due to $3.4 million of sales reported
by BET Soundstage Restaurant, which opened in January 1997.
OPERATING EXPENSES
Components of consolidated operating expenses from continuing
operations were as follows (unaudited):
<TABLE>
<CAPTION>
In thousands of dollars
- - --------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
====================================================================
BET
<S> <C> <C> <C>
Production and Programming $ 31,652 $ 32,361 $ 28,001
Marketing 18,598 16,583 14,431
General and Administrative 16,255 13,408 12,056
Depreciation and Amortization 5,219 4,930 4,382
- - --------------------------------------------------------------------
TOTAL BET 71,724 67,282 58,870
- - --------------------------------------------------------------------
OTHER BUSINESS UNITS
Production and Programming 18,063 12,129 9,169
Marketing 4,777 4,894 5,018
General and Administrative 2,447 1,961 2,284
Depreciation and Amortization 3,441 3,172 2,364
- - --------------------------------------------------------------------
TOTAL OTHER BUSINESS UNITS 28,728 22,156 18,835
- - --------------------------------------------------------------------
TOTAL CONSOLIDATED OPERATING EXPENSE $100,452 $ 89,438 $ 77,705
====================================================================
</TABLE>
BET
Production and Programming
BET's production and programming expenses for the year ended July
31, 1997 were essentially flat as compared to the prior year, primarily due to a
reduction in special event programming, which typically is more expensive than
regularly scheduled programming broadcast by BET. Additionally, elimination of
programming produced by BET for syndication helped contain programming costs.
Production and programming expenses for the year ended July 31, 1996 increased
16% as compared to the prior year, primarily due to increases in the cost of
acquired programming and a variety of special event programming, including news
and public affairs, sporting and musical events.
Marketing
BET's marketing expenses for the years ended July 31, 1997 and July
31, 1996 increased 12% and 15% respectively, as compared to the prior years,
primarily due to revenue-based incentive compensation and various marketing
initiatives, including internet marketing activities.
EX13-6
<PAGE>
General and Administrative
BET's general and administrative expenses for the years ended July 31,
1997 and July 31, 1996 increased 21% and 11% as compared to the prior years.
Increased fiscal year 1997 expenses primarily related to increased executive
compensation and travel costs in addition to an increase in the level of
charitable contributions. Increased fiscal year 1996 expenses primarily related
to increased business development, facilities and personnel costs.
OTHER BUSINESS UNITS
Production and Programming
Production and programming costs incurred by the Company's other
business units during the years ended July 31, 1997 and July 31, 1996 increased
49% and 32%, respectively, as compared to the prior years. Increased fiscal
year 1997 expenses were primarily due to costs of sales for BET Soundstage
restaurant, which opened in January 1997, BET on Jazz operating for twelve
months during fiscal year 1997 versus seven months during fiscal year 1996, and
costs incurred in publishing BET Weekend magazine. Increased costs related to
these activities were partially offset by discontinuance of the publication of
YSB magazine. Increased fiscal year 1996 costs primarily related to costs
incurred by BET on Jazz, which commenced operations in January 1996.
Marketing
Marketing costs incurred by the Company's other business units during
the years ended July 31, 1997 and July 31, 1996 decreased 2% and 2%,
respectively, as compared to the prior years. Decreased fiscal year 1997 costs
reflect reduced marketing costs related to the discontinuance of YSB magazine,
which were partially offset by increased marketing costs related to BET on Jazz
and BET Weekend magazine. Decreased fiscal year 1996 marketing costs primarily
resulted from decreased promotional costs incurred by Emerge and YSB magazines,
partially offset by marketing costs incurred in connection with the launch of
BET on Jazz.
General and Administrative
General and administrative expenses incurred by the Company's other
business units during the years ended July 31, 1997 and July 31, 1996 increased
25% and decreased 14%, respectively, as compared to the prior years. Increased
fiscal year 1997 expenses primarily related to costs incurred by the BET
Soundstage restaurant. Decreased fiscal year 1996 costs primarily related to
administrative efficiencies realized by the Company's magazine publishing
operations.
NONOPERATING EXPENSES
Net nonoperating expenses increased significantly during the years ended July
31, 1997 and July 31, 1996 as compared to the prior years. Increased fiscal
year 1997 costs were primarily attributable to the Company's equity in losses
incurred by BET Movies/Starz!3, in which it owns a 49% interest, which
approximated $3.4 million for the year. Increased fiscal year 1996 costs
primarily related to increased interest expenses resulting from increased
borrowings.
INCOME TAXES
Effective December 31, 1996, the Company merged its wholly-owned subsidiary,
Emerge Communications, Inc. ("ECI"), which published Emerge magazine, with
another of the Company's wholly-owned subsidiaries. In connection with merger,
the Company realized a $3.4 million benefit for income tax reporting purposes
related to utilization of ECI's acquired operating loss carryforwards. For
financial reporting purposes, this benefit was credited against $3.1 million of
unamortized goodwill related to the Company's acquisition of ECI, with the
balance of $.3 million credited to the provision for income taxes. Accordingly,
the Company's effective income tax rate for the year ended July 31, 1997
decreased as compared to the prior years.
EX13-7
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of working capital is internally
generated cash flow from operations. As reported in its consolidated statements
of cash flows, the Company generated net cash from operating activities of $33.5
million during the year ended July 31, 1997. At July 31, 1997, the Company's
cash and temporary investments aggregated $7.1 million and the Company had an
excess of current assets over current liabilities of $33.1 million. At July 31,
1997, $30.5 million was available under the Company's $75 million revolving
credit facility.
As part of its ongoing strategic plan, the Company plans to continue
to invest significant amounts of capital in compatible media and other
businesses reaching the Black consumer marketplace. Significant current and
potential future funding commitments include:
. During the years ended July 31, 1997, and 1996 the Company provided
significant operational funding to BET on Jazz. This level of funding is
expected to continue until the viability of BET on Jazz is attained, which
is not expected within the Company's fiscal year ending July 31, 1998 or
July 31, 1999.
. Through July 31, 1997, the Company has invested approximately $6.5 million
in the BET Soundstage restaurant. The Company recently announced that it may
open as many as 20 additional BET Soundstage restaurants during the next
five years, which would require significant additional capital funding.
. During the year ended July 31, 1997, the Company invested approximately $4.1
million in BET Movies/Starz!3. The Company is committed to loan BET
Movies/Starz!3 up to $4 million through December 31, 1997.
. During the year ended July 31, 1997, the Company invested $5 million in
LaVan Hawking UrbanCityFoods LLC ("UCF"), a franchisee within the Burger
King system, which plans to develop up to 225 restaurants in traditionally
underserved inner-city African-American communities. The Company is
committed to loan UCF up to $10 million, contingent upon the achievement of
certain operating results by UCF.
. During the year ended July 31, 1997, the Company invested $1 million in
Cybersonic Records, Inc.("CRI"), which produces, publishes, markets and
distributes musical recordings under the Fully Loaded Records label. The
Company is committed to loan CRI up to $3 million.
. The Company is considering pursuing other investment opportunities in the
themed-restaurant hotel/casino segments of the entertainment industry
together with potential equity partners experienced in these segments of the
entertainment industry.
On September 10, 1997, the Company received an offer from Robert L.
Johnson, its majority shareholder, Chairman and Chief Executive Officer, and
Liberty Media Corporation, a major shareholder of the Company, to acquire,
through a newly formed entity owned by them, all of the Company's outstanding
common stock which they do not own, at a per share price of $48. The offer
contemplates financing the purchase of such common stock on terms and conditions
customary to transactions of a similar nature, which could result in a
significant amount of debt funding by the Company or its successor.
CAPITAL STOCK
During the year ended July 31, 1997, the Company repurchased 149,800
shares of its outstanding Class A common stock at an aggregate cost of $4.1
million.
EX13-8
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
The preceding discussion contains certain forward looking statements
regarding expected operating results of the Company and its unconsolidated
affiliates. Such statements are subject to inherent uncertainties and risk,
including among others: pricing pressures and other competitive factors,
results of the Company's strategies to obtain additional subscribership to its
cable programming services, and general business and economic conditions in the
industries in which the Company operates. Consequently, actual events and
results may vary significantly from those included in or contemplated by such
statements.
EX13-9
<PAGE>
BET HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands of dollars
=======================================================================
ASSETS July 31, 1997 July 31, 1996
- - -----------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,094 $ 4,247
Accounts receivable, less allowance for
doubtful accounts of $1,833
and $1,543 at July 31, 1997 and 1996,
respectively 34,434 27,635
Prepaid expenses and other current assets 9,594 9,423
Current portion of programming rights, net 1,534 2,972
Deferred income tax benefit 2,937 1,775
- - -----------------------------------------------------------------------
TOTAL CURRENT ASSETS 55,593 46,052
- - -----------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land 1,884 1,884
Buildings and leasehold improvements 39,101 32,386
Broadcasting and other equipment 39,022 27,844
Satellite transponders 32,782 32,782
Construction in progress 3,030 5,032
- - -----------------------------------------------------------------------
Total 115,819 99,928
- - -----------------------------------------------------------------------
Less: Accumulated depreciation (30,734) (23,146)
- - -----------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 85,085 76,782
- - -----------------------------------------------------------------------
Notes receivable 12,654 7,235
Investments in unconsolidated affiliates 6,864 3,147
Programming rights, less current portion 973 1,077
Goodwill and other intangibles, net 9,710 13,669
Other assets 2,632 2,769
- - -----------------------------------------------------------------------
TOTAL ASSETS $ 173,511 $ 150,731
=======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
EX13-10
<PAGE>
BET HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands of dollars, except share data
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY July 31, 1997 July 31, 1996
- - ---------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 10,192 $ 6,857
Accrued compensation 5,781 5,318
Current portion of programming rights
payable 2,723 4,155
Deferred revenue 1,175 3,231
Current maturities of long-term debt 2,646 2,067
- - -----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 22,517 21,628
- - -----------------------------------------------------------------------
Long term debt, less current maturities 60,347 58,493
Programming rights payable, less - 308
current portion
Deferred income taxes 1,880 2,504
Other liabilities 349 1,049
- - -----------------------------------------------------------------------
TOTAL LIABILITIES 85,093 83,982
- - -----------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 11 AND 12)
SHAREHOLDERS' EQUITY
Preferred stock; $.01 par value,
15,000,000 shares authorized, no shares
issued or outstanding - -
Common stock; $.02 par value:
Class A; 50,000,000 shares authorized,
12,888,848 and 12,805,605 shares
issued, 10,049,248 and 10,115,805
shares outstanding
at July 31, 1997 and 1996, respectively 258 257
Class B; 15,000,000 shares authorized,
3,349,900 shares issued, 1,831,600
shares outstanding 67 67
Class C; 15,000,000 shares authorized,
4,820,000 shares issued and outstanding 96 96
Additional paid-in capital 47,123 45,156
Retained earnings 121,994 98,207
Cost of 2,839,600 Class A and 1,518,300
Class B common shares held in treasury
at July 31, 1997 and 2,689,800 Class A
and 1,518,300 Class B common shares
held in treasury at July 31, 1996 (81,120) (77,034)
- - -----------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 88,418 66,749
- - -----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 173,511 $150,731
=======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
EX13-11
<PAGE>
BET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands of dollars, except per share amounts
- - ----------------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Advertising $ 80,572 $ 67,562 $ 56,017
Subscriber 69,300 61,797 56,045
Other 4,355 2,916 3,160
- - ----------------------------------------------------------------------------
TOTAL OPERATING REVENUES 154,227 132,275 115,222
- - ----------------------------------------------------------------------------
OPERATING EXPENSES
Production and programming 49,715 44,490 37,170
Marketing 23,375 21,477 19,449
General and administrative 18,702 15,369 14,340
Depreciation and amortization of
intangibles 8,660 8,102 6,746
- - ----------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 100,452 89,438 77,705
- - ----------------------------------------------------------------------------
INCOME FROM OPERATIONS 53,775 42,837 37,517
- - ----------------------------------------------------------------------------
NONOPERATING INCOME (EXPENSE)
Interest income 1,554 1,504 1,325
Interest expense (4,197) (4,162) (2,227)
Other, net (4,539) (1,784) (1,477)
- - ----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 46,593 38,395 35,138
Provision for income taxes (18,571) (15,717) (15,226)
- - ----------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 28,022 22,678 19,912
- - ----------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Loss from discontinued operations, net
of income tax benefit of $1,659 and
$410, respectively (2,499) (615) -
Loss from disposal of discontinued
operations, net of income tax benefit
of $1,152 (1,736) - -
- - ----------------------------------------------------------------------------
NET INCOME $ 23,787 $ 22,063 $ 19,912
============================================================================
NET INCOME PER COMMON SHARE
Income from continuing operations $ 1.60 $ 1.23 $ 1.00
Discontinued operations (.24) (.03) -
- - ----------------------------------------------------------------------------
Net income per common share $ 1.36 $ 1.20 $ 1.00
============================================================================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 17,515 18,454 19,867
============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
EX13-12
<PAGE>
BET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands of dollars
- - ---------------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
- - ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 23,787 $ 22,063 $ 19,912
Adjustments to reconcile net income to
net cash provided by operating
activities, net of effect of
business combinations:
Depreciation and amortization of
other intangibles 8,660 8,102 6,746
Amortization of programming rights 3,536 3,549 2,481
Equity in losses of unconsolidated
affiliates 3,399 1,725 1,203
Loss on disposition of property
and equipment - 69 163
Deferred income taxes (1,506) 1,428 1,249
Income tax benefit from exercise
of common stock options 438 312 -
Income tax benefit from merger of
wholly-owned subsidiaries (263) - -
Increase in accounts receivable (6,799) (5,829) (2,454)
(Increase) decrease in prepaid
expenses and other assets (171) 273 (3,726)
(Decrease) increase in deferred
revenue (2,056) (940) 2,120
Increase in other liabilities 4,438 2,452 1,373
- - ---------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 33,463 33,204 29,067
- - ---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Business combinations, net of cash
acquired (198) (512) (902)
Redemption of marketable securities - 14,648 3,955
Capital expenditures (14,562) (13,514) (17,241)
Acquisition of programming rights (1,994) (6,189) (2,079)
Additions to notes receivable (5,929) (5,163) -
Collection of notes receivable 510 - -
Investments in unconsolidated
affiliates (9,901) (2,073) (923)
Decrease (increase) in other assets 1,581 (2,444) 437
- - ---------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (30,493) (15,247) (16,753)
- - ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 21,500 56,000 -
Principal payments of long-term debt (19,067) (26,104) (728)
Proceeds from issuance of common stock 1,530 1,349 -
Repurchase of common stock (4,086) (58,939) (4,606)
- - ---------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (123) (27,694) (5,334)
- - ---------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 2,847 (9,737) 6,980
Cash and cash equivalents, beginning of
year 4,247 13,984 7,004
- - ---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,094 $ 4,247 $ 13,984
===========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
EX13-13
<PAGE>
BET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
In thousands of dollars, except share data
==================================================================================================================================
Additional Cost of
Common Stock Paid-In Retained Treasury
------------
Years ended July 31, 1997, 1996 and 1995 Class A Class B Class C Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1994 $ 255 $ 67 $ 96 $ 38,217 $ 56,232 $(13,489) $ 81,378
- - ----------------------------------------------------------------------------------------------------------------------------------
Purchase of 301,800 Class A common
shares held in treasury - - - - - (4,606) (4,606)
Net income for the year - - - - 19,912 - 19,912
- - ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1995 255 67 96 38,217 76,144 (18,095) 96,684
- - ----------------------------------------------------------------------------------------------------------------------------------
Purchase of 1,518,500 Class A common shares
and 1,518,300 Class B common shares held
in treasury - - - 5,280 - (58,939) (53,659)
Exercise of 86,900 Class A common stock
options 2 - - 1,347 - - 1,349
Income tax benefit from exercise of
common stock options - - - 312 - - 312
Net income for the year - - - - 22,063 - 22,063
- - ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1996 257 67 96 45,156 98,207 (77,034) 66,749
- - ----------------------------------------------------------------------------------------------------------------------------------
Purchase of 149,800 Class A common (4,086) (4,086)
shares held in treasury
Exercise of 79,800 Class A common stock
options 1 - - 1,444 - - 1,445
Issuance of 3,443 Class A common shares - - - 85 - - 85
Income tax benefit from exercise of
common stock options - - - 438 - - 438
Net income for the year - - - - 23,787 - 23,787
- - ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 1997 $ 258 $ 67 $ 96 $ 47,123 $121,994 $(81,120) $ 88,418
==================================================================================================================================
</TABLE>
The acconpanying notes are an integral part of these financial statements.
EX13-14
<PAGE>
BET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BET Holdings, Inc. (the "Company") operates predominantly in the cable
television programming industry. Its cable television programming operations are
conducted through Black Entertainment Television ("BET"), BET on Jazz: The Cable
Jazz Channel ("BET on Jazz") and Action Pay-Per-View ("Action"). Both BET and
BET on Jazz are basic cable networks with revenues derived primarily from the
sale of advertising time and monthly subscribership fees. Action provides cable
programming on a pay-per-view basis. The Company also publishes Emerge and BET
Weekend magazines and operates the BET Soundstage restaurant, which opened
January 21, 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from management's estimates and
assumptions.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and equipment under capital
leases is recorded at the present value of future minimum lease payments at the
inception of the lease. Maintenance and repair expenditures are charged to
expense as incurred and expenditures for modifications and improvements which
increase the expected useful lives of assets are capitalized. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. The principal useful lives are: buildings and improvements, 40 years;
broadcasting and other equipment, three to 15 years; and satellite transponders,
12 years. Amortization of leasehold improvements is provided using the straight-
line method over the lesser of the useful life of the improvements or the lease
term.
PROGRAMMING RIGHTS
Programming rights acquired under license agreements are recorded at cost
and are amortized using the straight-line method over the period during which
the programming is broadcast, which generally ranges from one to two years and
approximates amortization that would be provided on a program-by-program basis.
Unamortized programming rights expected to be amortized within one year and
programming rights license fees payable within one year are classified as
current assets and current liabilities, respectively. Accumulated amortization
of programming rights was $5.8 million and $3.2 million at July 31, 1997 and
1996, respectively.
EX13-15
<PAGE>
INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in affiliated companies in which the Company does not exert
significant influence and has an ownership interest of less than 20% are
recorded at the lower of cost or estimated fair value, as determined by the
Company's management based upon pertinent information, including current and
projected operating results and financial condition. Investments in affiliated
companies in which the Company has an ownership interest of at least 20% but not
in excess of 50% are recorded at cost and adjusted for the Company's equity in
earnings and losses in accordance with the equity method of accounting.
GOODWILL AND OTHER INTANGIBLES
Goodwill is the excess of the cost of net assets acquired in business
combinations over their fair value and is amortized using the straight-line
method over ten to 15 years. The Company assesses the recoverability of
unamortized goodwill on an ongoing basis by evaluating whether it can be
recovered through undiscounted cash flows over the remaining amortization term.
Accumulated amortization of goodwill and other intangibles was $4 million and
$4.3 million at July 31, 1997 and 1996, respectively.
REVENUE RECOGNITION
Advertising revenues, net of agency commissions, are recognized in the
period during which underlying advertisements are broadcast or published.
Broadcast subscriber revenues are recognized in the period during which
programming is provided, pursuant to affiliation agreements. Magazine
subscription revenues are recognized ratably over the subscription term in which
the magazine is published.
In addition to revenues earned from related parties (Note 10), during
fiscal years 1997, 1996 and 1995, the Company earned advertising revenues
aggregating $20.4 million, $15.3 million, and $12 million, respectively, from a
single cable infomercial advertiser representing 13%, 12% and 10% of
consolidated operating revenues, respectively.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), stock-based compensation
is accounted for under using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
INCOME TAXES
Income taxes are determined based on income before taxes with deferred tax
provisions for the effect of temporary differences in the recognition of assets
and liabilities for income tax and financial reporting purposes provided for
under the liability method.
NET INCOME PER COMMON SHARE
In accordance with Accounting Principles Board Opinion No. 15 (APB 15),
"Earning Per Share", the computation of earnings per common share for the years
ended July 31, 1997 and July 31, 1996 is based upon the weighted average number
of outstanding common shares during each year plus common stock equivalents,
consisting of common shares subject to stock options. For the year ended July
31, 1995, common stock equivalents are not included in the computation of
earnings per common share since their inclusion is deemed
to be immaterial in accordance with APB 15. The number of shares used in
computing earnings per common share was as follows:
EX13-16
<PAGE>
<TABLE>
<CAPTION>
In thousands
- - --------------------------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
======================================================================================
<S> <C> <C> <C>
Weighted average common shares outstanding 16,703 17,834 19,867
Common stock equivalents 812 620 -
- - --------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 17,515 18,454 19,867
======================================================================================
</TABLE>
Statement of Financial Accounting Standards No. 128, "Earnings per Share",
is required to be adopted beginning in the Company's fiscal year ending July 31,
1998. The Company anticipates that adoption of this standard will not materially
affect the computation of its earnings per share but will require the
presentation and disclosure of additional information.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses, and programming rights payable
approximate fair value because of the short-term maturity of such financial
instruments. The carrying amount of notes receivable approximates fair value
since substantially all notes bear interest at floating market rates. The fair
value of outstanding borrowings is estimated by discounting future cash flows
under such borrowings using borrowing rates currently available to the Company.
OPERATING SEGMENT INFORMATION
Pursuant to Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise", the Company is not required to
disclose certain information about its operations in different industries since
it operates predominantly in the cable television programming industry.
NOTE 2: DISCONTINUED OPERATIONS
During September 1997, the Company adopted a plan for disposal of its Color
Code skin care product business segment, in connection with a strategic
initiative to focus the Company's executive management and capital resources on
its core businesses: cable television programming and leisure time activities.
Accordingly, results of operations for the year ended July 31, 1997, reflect a
$1.7 million provision, net of a tax benefit of $1.2 million, for losses
expected to be incurred in connection with the disposition, including operating
losses expected to be incurred prior to disposal. The Company anticipates that
the Color Code business segment will be disposed of by December 31, 1997.
Remaining assets and liabilities of the Color Code business segment at July 31,
1997 were not significant.
NOTE 3: PROPERTY AND EQUIPMENT
Assets recorded under capital leases included in property and equipment
consisted of:
<TABLE>
<CAPTION>
In thousands of dollars
- - ------------------------------------------------------------
July 31, 1997 1996
============================================================
<S> <C> <C>
Satellite transponder $10,001 $10,001
Less: accumulated depreciation (2,540) (1,748)
- - ------------------------------------------------------------
Net $ 7,461 $ 8,253
============================================================
</TABLE>
Amortization of assets under capital leases charged to expense during the
years ended July 31, 1997, 1996 and 1995 was $.8 million, $1.2 million and $1.8
million, respectively.
EX13-17
<PAGE>
Interest capitalized in connection with qualifying construction
projects aggregated $.5 million, $.4 million and $1.1 million during the years
ended July 31, 1997, 1996 and 1995, respectively.
NOTE 4: NOTES RECEIVABLE
Notes receivable consisted of:
<TABLE>
<CAPTION>
In thousands of dollars
- - ----------------------------------------------------------------
July 31, 1997 1996
================================================================
<S> <C> <C>
Note receivable from shareholder affiliate $ 8,933 $ 3,265
Notes receivable guaranteed by shareholder 3,431 3,681
Other notes receivable 290 289
- - ----------------------------------------------------------------
Total $ 12,654 $ 7,235
================================================================
</TABLE>
During December 1995, the Company entered into a loan agreement with R&S
PCS, Inc. ("R&S"), an entity wholly-owned by the Company's majority shareholder,
Chairman and Chief Executive Officer, Robert L. Johnson, whereby the Company
agreed to loan R&S up to $10 million on a revolving basis. Loan advances bear
interest at the prime lending rate plus 2%, payable upon demand, and are secured
by 40,000 shares of the Company's common stock owned by Mr. Johnson.
Substantially all loan advances received by R&S have been used to purchase
Broadband C Block PCS licenses from the Federal Communications Commission. In
October 1997 the Federal Communications Commission revised its rules regarding
PCS C Block licenses, pursuant to which the Company is reassessing its interest
in acquiring an equity interest in R&S. Interest income earned from notes
receivable from R&S was $.7 million and $.3 million in fiscal years 1997 and
1996, respectively. Accrued interest related to notes receivable from R&S was $1
million and $.3 million at July 31, 1997 and July 31, 1996, respectively, and is
included in other assets on the accompanying balance sheets.
During May 1996, the Company purchased promissory notes in the aggregate
principal amount of $2.2 million from Mr. Johnson. In connection with this
transaction, Mr. Johnson guaranteed repayment of these notes plus certain other
related notes already held by the Company. All notes receivable guaranteed by
Mr. Johnson bear interest at the prime lending rate plus 2%, payable monthly;
are secured by certain real property; and mature at varying dates through the
Company's fiscal year ending July 31, 2001. Interest income earned from notes
receivable guaranteed by Mr. Johnson was $.4 million, $.2 million and $.2
million during fiscal years 1997, 1996 and 1995, respectively.
NOTE 5: INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in unconsolidated affiliates consisted of:
<TABLE>
<CAPTION>
In thousands of dollars
- - ---------------------------------------------------------------
July 31, 1997 1996
===============================================================
<S> <C> <C>
Investments in affiliated companies at equity $ 864 $3,147
Investments in affiliated companies at cost 6,000 -
- - ---------------------------------------------------------------
Total $6,864 $3,147
===============================================================
</TABLE>
INVESTMENTS IN AFFILIATED COMPANIES AT EQUITY
At July 31, 1997, the Company's investments in affiliated companies at
equity primarily consisted of a 49% interest in BET Movies/Starz!3, a cable
television programming service which broadcasts feature-length motion pictures
on a pay channel within the Starz! multiplex operated by Encore Media
Corporation. Pursuant to the terms of a Term Sheet executed in September 1997,
the Company is not required to make additional equity contributions to the
venture; however, is required to loan the venture up to $4 million through
December 31, 1997. Additionally, the Company is
EX13-18
<PAGE>
obligated to provide BET Movies/Starz!3 with certain volumes of advertising time
on BET through December 31, 1997.
INVESTMENTS IN AFFILIATED COMPANIES AT COST
During December 1996, the Company acquired a 15% interest in LaVan Hawkins
UrbanCityFoods, LLC ("UCF"), in consideration for $5 million. UCF is a
franchisee within the Burger King system, targeting development of restaurants
in traditionally underserved inner-city African-American communities. The
Company is committed to loan UCF up to $10 million, contingent upon the
achievement of certain operating results by UCF, which may be converted into an
additional ownership interest of up to 30%, in whole or in part, at the
Company's sole discretion. Subsequent to July 31, 1997, the Company advanced UCF
$5 million under its loan commitment.
During July 1997, the Company acquired a 19% interest in Cybersonic
Records, Inc. ("CRI"), in consideration for $1 million. CRI produces, publishes,
markets and distributes musical recordings under the Fully Loaded Records label.
The Company is committed to loan CRI up to $3 million, which may be converted
into an additional ownership interest of up to 30%, in whole or in part, at the
Company's sole discretion. Subsequent to July 31, 1997, the Company advanced CRI
$1 million under its loan commitment.
NOTE 6: LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
In thousand of dollars
- - --------------------------------------------------------------------
July 31, 1997 1996
====================================================================
<S> <C> <C>
Unsecured revolving senior credit facility $ 44,500 $ 40,000
10.55% senior secured notes due January
15, 2001, interest payable semi-annually 9,500 11,000
Capital lease obligations 8,889 9,358
Other 104 202
- - ---------------------------------------------------------------------
Total 62,993 60,560
- - ---------------------------------------------------------------------
Less: Current portion (2,646) (2,067)
- - ---------------------------------------------------------------------
Non-current portion $ 60,347 $ 58,493
=====================================================================
</TABLE>
The Company has an unsecured revolving senior credit facility of up to $75
million, which expires December 31, 2000. Advances under the facility bear
interest at either the London Interbank Offered Rate plus a margin ranging from
.38% to .75%, depending upon certain financial ratios, or the prime lending
rate, at the Company's option. At July 31, 1997, interest rates for outstanding
advances ranged from 6% to 6.4%. A commitment fee based on the amount of the
unused facility is payable quarterly at rates ranging from .19% to .3% per
annum, based upon certain financial ratios.
The senior secured notes are secured by one of the Company's satellite
transponders. The loan agreements underlying the revolving senior credit
facility and the senior secured notes include several restrictive financial
covenants, one of which limits the amount of cash available for dividend
distributions. At July 31, 1997, $126 million was available for dividend
distribution.
Capital lease obligations are stated at the present value of future minimum
lease payments (Note 11) based on the Company's incremental borrowing rate at
the inception of each lease.
Long-term debt at July 31, 1997 matures $2.7 million in fiscal year 1998,
$3.1 million in fiscal year 1999, $3.3 million in fiscal year 2000, $47.8
million in fiscal year 2001, $.9 million in fiscal year 2002, and $5.2 million
thereafter.
EX13-19
<PAGE>
The carrying amount of advances under the revolving senior credit facility
approximate fair value at July 31, 1997 because interest rates are periodically
reset. The Company estimates the fair value of its senior secured notes to be
$11.6 million and $12.1 million at July 31, 1997 and July 31, 1996,
respectively.
Cash paid for interest, including interest capitalized, totaled $5.2
million, $4.2 million and $3.8 million during fiscal years 1997, 1996 and 1995,
respectively.
NOTE 7: CAPITAL STOCK
STOCK CHARACTERISTICS
The characteristics of the Company's Class A, Class B, and Class C common
stock are substantially identical except for voting and conversion rights. Class
A shareholders are entitled to one vote per share, while Class B and Class C
shareholders are entitled to ten votes per share. All classes vote together as a
single class except in the election of directors and as otherwise required by
law. Class A shareholders are entitled to elect 25% of the directors, and Class
B and Class C shareholders, voting together as a class, are entitled to elect
75% of the directors. Each share of Class B common stock is convertible at any
time and from time to time into one share of Class A common stock, and each
share of Class C common stock similarly is convertible into one share of Class B
common stock or Class A common stock.
TREASURY STOCK
During December 1995, the Company repurchased 1,518,300 shares of its
outstanding Class A common stock and 1,518,300 shares of its outstanding Class B
common stock beneficially owned by Time Warner, Inc. for $58.9 million. In
connection with this transaction, the Company and Time Warner, Inc. entered into
an agreement restricting for three years Time Warner, Inc.'s ability to initiate
or acquire a basic cable television network targeted at African-American viewers
resulting in a $5.3 million benefit for income tax reporting purposes, which has
been credited to additional paid-in capital for financial reporting purposes.
In addition to the shares repurchased from Time Warner, Inc., the Company
repurchased 149,800 and 301,800 shares of its Class A common stock at an
aggregate cost of $4.1 million and $4.6 million during the years ended July 31,
1997 and 1995, respectively.
STOCK OPTION PLAN
The Company has a single stock option plan: the BET Holdings, Inc. 1991
Executive Stock Option Plan (the Plan). Under the Plan, as amended, three
million shares of the Company's Class A common stock are reserved for grant to
key employees as options to purchase shares of Class A common stock (Options) or
stock appreciation rights (SARs). SARs permit optionees to surrender exercisable
Options for an amount equal to the excess of the fair value of the Company's
common stock over the Option exercise price when the right is exercised. Options
granted may be either incentive stock options, as defined by the Internal
Revenue Code, or non-qualified stock options. Options and SARs vest and become
exercisable over varying periods, which generally range from immediately upon
grant to four years. Upon vesting, outstanding Options and SARs remain
exercisable no longer than ten years subsequent to the grant date .
EX13-20
<PAGE>
No SARs were issued or outstanding during fiscal years 1997, 1996 or 1995.
A summary of Option activity during fiscal years 1997, 1996 and 1995 is as
follows :
<TABLE>
<CAPTION>
=============================================================================
Weighted Weighted
Outstanding Average Exercisable Average
Stock Exercise Stock Exercise
Options Price Options Price
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at July 31, 1994 931,195 $ 13.45
Granted 1,032,500 17.50
- - -----------------------------------------------------------------------------
Outstanding at July 31, 1995 1,963,695 15.71 881,000 $ 14.59
Exercised (86,900) 15.49
Canceled (21,700) 17.50
- - -----------------------------------------------------------------------------
Outstanding at July 31, 1996 1,855,095 15.70 1,041,995 $ 15.02
Exercised (79,800) 15.95
Canceled (13,700) 17.50
- - -----------------------------------------------------------------------------
Outstanding at July 31, 1997 1,761,595 $ 15.67 1,320,195 $ 15.16
=============================================================================
</TABLE>
Significant option groups outstanding at July 31, 1997 and related weighted
average price and remaining life information is as follows:
<TABLE>
<CAPTION>
=======================================================================================
Weighted
Exercise Average Remaining
Options Options Price Exercise Life
Grant Date Outstanding Exercisable Range Price (Years)
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1992 66,915 66,915 $ 17.00 $ 17.00 5
Year ended July 31, 1993 550,280 550,280 $13.13-15.19 $ 13.23 6
Year ended July 31, 1994 228,000 179,000 $ 12.80 $ 12.80 7
Year ended July 31, 1995 916,400 524,000 $ 17.75 $ 17.75 8
=======================================================================================
</TABLE>
Class A common shares reserved for future grant totaled 1,035,400 and
1,021,700 at July 31, 1997 and July 31, 1996, respectively. No shares were
reserved for future grant at July 31, 1995. Stock-based compensation cost
approximated $.4 million, $.6 million and $.3 million during fiscal years 1997,
1996 and 1995, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1997, the Company adopted the 1997 Employee Stock
Purchase Plan (the ESPP), under which substantially all employees with at least
one year of service are eligible to participate. Under the ESPP, eligible
employees may purchase shares of the Company's Class A common stock via payroll
withholding on a quarterly basis at the lower rate of 85% of the per share
market price at the beginning or end of each calendar quarter. As of July 31,
1997, 3,443 shares of the Company's Class A common stock had been issued under
the ESPP and 146,557 shares were reserved for future issuance.
EX13-21
<PAGE>
NOTE 8: INCOME TAXES
The provision for income taxes from continuing and discontinued operations
consisted of the following:
<TABLE>
<CAPTION>
In thousands of dollars
- - ----------------------------------------------------------------------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
==================================================================================================================================
<S> <C> <C> <C>
CURRENT PROVISION
Federal $ 14,745 $ 11,339 $ 11,273
State 2,873 2,540 2,704
- - ----------------------------------------------------------------------------------------------------------------------------------
Total current provision 17,618 13,879 13,977
- - ----------------------------------------------------------------------------------------------------------------------------------
DEFERRED PROVISION
Federal (1,660) 1,258 1,038
State (198) 170 211
- - ----------------------------------------------------------------------------------------------------------------------------------
Total deferred (benefit) provision (1,858) 1,428 1,249
- - ----------------------------------------------------------------------------------------------------------------------------------
Total provision $ 15,760 $ 15,307 $ 15,226
==================================================================================================================================
</TABLE>
The consolidated effective income tax rates differed from the Federal
statutory income tax rate as a result of the following:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
============================================================================================
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes net of federal tax benefit 4.4 4.7 5.4
Operating loss of Emerge not includible for income tax purposes - - .5
Amortization of goodwill not deductible for income tax purposes .9 1.1 1.1
Other, net (.4) .2 1.3
- - --------------------------------------------------------------------------------------------
Effective income tax rate 39.9% 41.0% 43.3%
============================================================================================
</TABLE>
EX13-22
<PAGE>
Deferred income tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
In thousands of dollars
- - --------------------------------------------------------------------------------
July 31, 1997 1996 1995
================================================================================
<S> <C> <C> <C>
DEFERRED TAX LIABILITIES:
Depreciation and amortization $(5,063) $(2,372) $(5,949)
Other (107) (578) (330)
- - --------------------------------------------------------------------------------
Gross deferred tax liabilities (5,170) (2,950) (6,279)
- - --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Accrued compensation 248 212 600
Sales allowances 632 613 536
Accrued liabilities 629 276 276
Provision for loss on discontinued
operations 988 - -
Equity in losses of unconsolidated
affiliates 2,748 - -
Net operating loss carryforwards - 3,893 3,893
Other 982 1,120 491
- - --------------------------------------------------------------------------------
Gross deferred tax assets 6,227 6,114 5,796
- - --------------------------------------------------------------------------------
Deferred tax assets valuation allowance - (3,893) (3,893)
- - --------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $1,057 $(729) $(4,376)
================================================================================
</TABLE>
Effective December 31, 1996, the Company merged its wholly-owned
subsidiary, Emerge Communications, Inc. (ECI), which published Emerge magazine,
with another of the Company's wholly-owned subsidiaries. In connnection with the
merger the Company realized a $3.4 million benefit for income tax reporting
purposes related to the utilization of ECI's acquired operating loss
carryfowards. For financial reporting purposes, the valuation allowance was
reduced and the benefit was credited against $3.1 million of unamortized
goodwill related to the Company's acquisition of ECI, with the balance of $.3
million credited to the provision for income taxes.
Cash paid for income taxes totaled $12.7 million, $12.8 million and $16.8
million during fiscal years 1997, 1996 and 1995, respectively.
NOTE 9: EMPLOYEE BENEFITS
The Company sponsors a defined contribution employee savings plan under
which substantially all employees with at least six months of service are
eligible to participate. The Company matches one-half of voluntary participant
contributions to the savings plan, which range from 2% to 10% of eligible
participants' annual compensation. The Company also sponsors a discretionary
profit sharing bonus plan under which substantially all employees are eligible
to participate. Participants in the bonus plan are awarded annual bonuses, at
the discretion of the Company's management. Under the Company's executive
incentive plan, its executive officers are eligible to be awarded annual bonuses
of up to 60% of their base salary upon the achievement of certain individual and
corporate performance goals. Aggregate accrued contributions to the savings,
discretionary bonus and executive incentive plans totaled $2.4 million, $2.7
million and $2.3 million during fiscal years 1997, 1996 and 1995, respectively.
EX13-23
<PAGE>
NOTE 10: RELATED PARTY TRANSACTIONS
Affiliates of a shareholder subscribe to BET, BET on Jazz and Action Pay-
Per-View. Subscriber fees charged by the Company to the shareholder's affiliates
are substantially equivalent to fees charged to unrelated parties. A summary of
related party transactions follows:
<TABLE>
<CAPTION>
In thousands of dollars
- - --------------------------------------------------------------------------------
Year ended July 31, 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Subscriber revenues earned from
shareholder affiliates $16,382 $17,077 $21,042
Accounts receivable from shareholder
affiliates $2,201 $2,094 $4,965
================================================================================
</TABLE>
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company is a lessee under noncancelable operating leases for satellite
transponder, office space and land which expire at various dates through the
year 2013. Total rent expense for fiscal years 1997, 1996 and 1995 was $3
million, $2.1 million and $1.8 million, respectively.
Minimum future lease payments under operating leases at July 31, 1997 were
as follows:
<TABLE>
<CAPTION>
In thousands of dollars
- - -------------------------------------------------------
Year ending July 31,
=======================================================
<S> <C>
1998 $1,753
1999 1,676
2000 1,312
2001 1,190
2002 560
Thereafter 1,034
- - -------------------------------------------------------
Total $7,525
=======================================================
</TABLE>
Minimum future payments under a capital lease for a satellite transponder (Note
6) at July 31, 1997 were as follows:
<TABLE>
<CAPTION>
In thousands of dollars
- - -------------------------------------------------------
Year ending July 31,
=======================================================
<S> <C>
1998 $1,320
1999 1,320
2000 1,422
2001 1,440
2002 1,440
Thereafter 6,360
- - -------------------------------------------------------
Total 13,302
Less: Amount representing interest (4,413)
- - -------------------------------------------------------
Present value of minimum lease payments $8,889
=======================================================
</TABLE>
The Company is engaged in various legal proceedings incidental to its
normal business activities. In the opinion of the Company's management, the
outcome of such proceedings will not have a material adverse effect on the
Company's financial position or results of operations.
EX13-24
<PAGE>
NOTE 12: EVENT SUBSEQUENT TO JULY 31, 1997
On September 10, 1997, the Board of Directors of the Company received a
letter (the "Letter") from Robert L. Johnson, the Company's Chairman and Chief
Executive Officer, and Liberty Media Corporation, a major shareholder of the
Company, to acquire, through a newly formed entity owned by them, all of the
Company's Common Stock which they do not own at a price per share of $48 cash
(the "Offer"). The Letter states that the Offer will be subject to financing on
terms and conditions acceptable to the offerors and other terms and conditions
customary to transactions of this nature, which could result in a significant
amount of debt funding by the Company or its successor. On September 16, 1997,
the Board of Directors of the Company announced that it had appointed an
independent committee to review and report to the Company's Board its evaluation
of the Offer.
Subsequent to receipt of the Offer, several legal complaints have been
filed, naming as defendants the Company and members of its Board of Directors.
The complaints allege, among other things, that the proposed transaction is a
product of unfair dealing, that the proposed transaction is grossly inadequate,
that the individual defendants have breached fiduciary duties owing to the
public holders of the Company's common stock, including failing to disclose
material information, and that the defendants have further breached their
fiduciary duties by acting in a manner designed to benefit themselves, at the
expense of the public holders of the Company's common stock. The complaints seek
preliminary and permanent injunctive relief, recision in the event the
transaction is consummated and compensatory damages. The Company believes the
claims are meritless and intends to defend them vigorously.
EX13-25
<PAGE>
BET HOLDINGS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF BET HOLDINGS, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of BET
Holdings, Inc. and its subsidiaries at July 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended July 31, 1997, 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.
/s/ PRICE WATERHOUSE LLP
- - ------------------------
Washington, D.C.
October 2, 1997
EX13-26
<PAGE>
BET HOLDINGS, INC.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly results of
operations for the years ended July 31, 1997 and 1996. Net income per common
share reported each quarter is based on the weighted average common and common
equivalent shares outstanding during each quarter. The sum of quarterly net
income per common share may not equal net income per common share reported for
each fiscal year due to changes in common and common equivalent shares
outstanding. Results of operations for the quarter ended July 31, 1997 includes
a charge related to the discontinuance of the Company's Color Code business
segment, as described in Management's Discussion and Analysis of Results of
Operations and Financial Condition.
<TABLE>
<CAPTION>
In thousands of dollars, except per share amounts
- - -----------------------------------------------------------------------------------------------------------------------
Three Month Periods in Fiscal Year 1997 ended October 31 January 31 April 30 July 31
=======================================================================================================================
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Operating Revenues $ 35,942 $ 36,553 $ 40,792 $ 40,940
Operating Expenses 23,569 23,964 26,224 26,695
- - -----------------------------------------------------------------------------------------------------------------------
Income From Operations 12,373 12,589 14,568 14,245
- - -----------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 6,587 7,197 7,162 7,076
Discontinued Operations (482) (603) (873) (2,277)
- - -----------------------------------------------------------------------------------------------------------------------
Net Income $ 6,105 $ 6,594 $ 6,289 $ 4,799
=======================================================================================================================
INCOME PER COMMON SHARE
Income From Continuing Operations $ .38 $ .41 $ .41 $ .40
Discontinued Operations (.03) (.03) (.05) (.13)
- - -----------------------------------------------------------------------------------------------------------------------
Net Income $ .35 $ .38 $ .36 $ .27
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
In thousands of dollars, except per share amounts
- - ------------------------------------------------------------------------------------------------------------------------
Three Month Periods in Fiscal Year 1996 ended October 31 January 31 April 30 July 31
========================================================================================================================
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Operating Revenues $ 32,750 $ 32,712 $ 32,411 $ 34,402
Operating Expenses 21,693 21,615 22,632 23,498
- - ------------------------------------------------------------------------------------------------------------------------
Income From Operations 11,057 11,097 9,779 10,904
- - ------------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 5,750 5,828 5,287 5,813
Discontinued Operations - (49) (53) (513)
- - ------------------------------------------------------------------------------------------------------------------------
Net Income $ 5,750 $ 5,779 $ 5,234 $ 5,300
========================================================================================================================
INCOME PER COMMON SHARE
Income From Continuing Operations $ .29 $ .32 $ .30 $ .33
Discontinued Operations - - - (.03)
- - ------------------------------------------------------------------------------------------------------------------------
Net Income $ .29 $ .32 $ .30 $ .30
========================================================================================================================
</TABLE>
EX13-27
<PAGE>
BET HOLDINGS, INC.
PRICE RANGE OF COMMON STOCK
BET Holdings, Inc. Class A Common Stock has traded since October 30,
1991 on the New York Stock Exchange ("NYSE") under the symbol BTV. The
approximate number of holders of record of Class A stock as of October 27, 1997
was 636.
The following table sets forth the high and low per-share sales price
for the past eight quarters ended July 31, 1997.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------
Quarter ended 1997 1996
- - ---------------------------------------------------------
<S> <C> <C>
October 31 $30.000-23.500 $22.000-17.625
- - ---------------------------------------------------------
January 31 $29.875-24.625 $25.125-20.000
- - ---------------------------------------------------------
April 30 $31.375-26.375 $32.125-24.750
- - ---------------------------------------------------------
July 31 $40.000-27.250 $30.000-24.500
- - ---------------------------------------------------------
</TABLE>
To date, the Company has not declared, paid, or anticipated paying any
dividends on its Common Stock.
EX13-28
<PAGE>
Exhibit 23
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-67146 and 52-1742995) and in the Prospectuses
constituting part of the Registration Statements on Forms S-3 (Nos. 33-80006 and
33-68414) of BET Holdings, Inc. of our report dated October 2, 1997 appearing in
the Annual Report to Shareholders which is incorporated in the Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedule, which appears on page 21 of this Form 10-K.
/s/ Price Waterhouse LLP
- - -------------------------------
PRICE WATERHOUSE LLP
Washington, D.C.
October 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1996
<PERIOD-START> AUG-01-1996 AUG-01-1995
<PERIOD-END> JUL-31-1997 JUL-31-1996
<CASH> 7,094 4,247
<SECURITIES> 0 0
<RECEIVABLES> 36,267 29,178
<ALLOWANCES> 1,833 1,543
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,065 14,170
<PP&E> 115,819 99,928
<DEPRECIATION> 30,734 23,146
<TOTAL-ASSETS> 173,511 150,731
<CURRENT-LIABILITIES> 22,517 21,628
<BONDS> 60,347 58,493
0 0
0 0
<COMMON> 421 420
<OTHER-SE> 87,997 66,329
<TOTAL-LIABILITY-AND-EQUITY> 173,511 150,731
<SALES> 154,227 132,275
<TOTAL-REVENUES> 154,227 132,275
<CGS> 49,715 44,490
<TOTAL-COSTS> 100,452 89,488
<OTHER-EXPENSES> 2,985 280
<LOSS-PROVISION> 490 599
<INTEREST-EXPENSE> 4,197 4,162
<INCOME-PRETAX> 46,593 38,395
<INCOME-TAX> 18,571 15,717
<INCOME-CONTINUING> 28,022 22,678
<DISCONTINUED> 4,235 615
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,787 22,063
<EPS-PRIMARY> 1.36 1.20
<EPS-DILUTED> 1.36 1.20
</TABLE>
