FORM 10-KSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-22908
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BIG ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0385686
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organizatiion (Identification No.)
2255 GLADES ROAD, SUITE 237 WEST
BOCA RATON, FLORIDA 33431
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(Address of principal executive offices) (Zip Code)
(561) 998-8000
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter periods 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $7,611,113
The aggregate market value of the issuer's Common Stock, $.01 par value, held by
non-affiliates on March 21, 1997, based on the last sale price of the Common
Stock as reported by Nasdaq, was: $19,222,083.
As of March 21, 1997, there were 6,095,601 shares of the issuer's Common Stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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BIG ENTERTAINMENT, INC.
FORM 10-KSB
FOR THE YEAR ENDED
DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
Item 1. Description of Business............................................. 3
Item 2. Description of Property............................................ 17
Item 3. Legal Proceedings.................................................. 17
Item 4. Submission of Matters to a Vote of Securityholders................. 18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............19
Item 6. Management's Discussion and Analysis or Plan of Operation...........20
Item 7. Financial Statements................................................27
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................49
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................50
Item 10. Executive Compensation..............................................55
Item 11. Security Ownership of Certain Beneficial Owners and Management......59
Item 12. Certain Relationships and Related Transactions......................61
Item 13. Exhibits and Reports on Form 8-K....................................64
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FORWARD-LOOKING STATEMENTS
Big Entertainment, Inc. (the "Company" or "Big Entertainment") cautions
readers that certain important factors may affect the Company's actual results
and could cause such results to differ materially from any forward-looking
statements that may be deemed to have been made in this Form 10-KSB or that are
otherwise made by or on behalf of the Company. For this purpose, any statements
contained in this Form 10-KSB that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "expect," "believe," "anticipate," "intend,"
"could," "estimate," or "continue" or the negative other variations thereof or
comparable terminology are intended to identify forward-looking statements.
Factors that may affect the Company's results include, but are not limited to,
the Company's limited operating history and prior operating losses and
accumulated deficit, its dependence on its relationship with its authors, its
reliance on management, and its ability to compete in the entertainment,
publishing and retail industries. The Company is also subject to other risks
detailed herein or detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Big Entertainment is a diversified entertainment company, which owns
exclusive rights to certain original characters and concepts created by
best-selling authors and media celebrities, including, for example, Tom Clancy,
Leonard Nimoy, Gene Roddenberry, Mickey Spillane, Arthur C. Clarke, John Jakes,
Anne McCaffrey, Margaret Weis and Isaac Asimov. The Company uses illustrated
novels to introduce and develop new characters and concepts (collectively, its
"intellectual property") in the marketplace and then the Company seeks to
license these properties across all media, including films and television, and
in books, multimedia software, toys and other merchandise. The Company acquires
the rights to its intellectual properties pursuant to agreements that grant it,
on an exclusive basis, all rights in the intellectual property itself
(including, but not limited to, the right to license the intellectual property
for films, television, books, multimedia software, toys and other merchandise)
as well as the right to use the creator's name in the title of the intellectual
property.
The Company's intellectual properties include, among others: TOM
CLANCY'S NETFORCE; LEONARD NIMOY'S PRIMORTALS; ARTHUR C. CLARKE'S CRIOSPHINX;
GENE RODDENBERRY'S XANDER IN LOST UNIVERSE; ISSAC ASIMOV'S I/bullet/OBOTS;
MICKEY SPILLANE'S MIKE DANGER; JOHN JAKES' MULLKON EMPIRE; ANNE MCCAFFREY'S
ACORNA: THE UNICORN GIRL; ANNE MCCAFFREY'S SARABAND; MARGARET WEIS' TESTAMENT OF
THE DRAGON; TED WILLIAMS' MIRROR WORLD; NEIL GAIMAN'S MR. HERO -- THE NEWMATIC
MAN; NEIL GAIMAN'S TEKNOPHAGE; NEIL GAIMAN'S LADY JUSTICE; NEIL GAIMAN'S WHEEL
OF WORLDS; and CATHY CASH SPELLMAN'S MILLENNIUM. Certain of the Company's
intellectual properties are owned by a joint venture known as NetCo Partners
("NetCo Partners"), owned 50% by the Company and 50% by C.P. Group, Inc. ("C.P.
Group"), in which Tom Clancy is a substantial shareholder. See "--NetCo
Partners," below. The Company is continually negotiating with
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other best-selling authors to create and develop additional intellectual
properties for the Company and/or NetCo Partners to license for use in various
media and merchandise.
A number of the Company's and/or NetCo Partners' intellectual
properties have been licensed for use in books, feature films, television series
and merchandise by various licensees, including The ABC Television Network, a
division of The Walt Disney Company, for development of a television mini-series
based on TOM CLANCY'S NETFORCE; Warner Books (a division of Time-Warner, Inc.)
for hardcover and paperback book publishing rights; Playmates Toys, Inc. for a
line of toys; HarperCollins (a division of Rupert Murdoch's News Corporation)
for hardcover and paperback book publishing rights; Alliance Productions, Ltd.,
a division of Alliance Communications Corporation, the largest Canadian
entertainment company, for television rights; Sierra On-Line, a publisher of
interactive entertainment, productivity and educational software, for CD-ROM
rights; and Miramax Films (a division of The Walt Disney Company) for feature
film and television rights. The licensing agreements generally provide for the
payment by the licensee of advances to the Company or NetCo Partners, as the
case may be, as well as royalty payments based on sales after the advance has
been earned out. The Company and NetCo Partners are actively negotiating
additional licensing opportunities for their intellectual properties.
The Company has four operating divisions: the publishing division, the
licensing division, the book licensing and packaging division and the
entertainment retail division. The publishing and licensing divisions are the
primary means by which the Company utilizes its intellectual properties, the
publishing division by focusing on development of the Company's intellectual
properties through the publication of illustrated novels, and the licensing
division, by focusing on licensing the Company's intellectual properties for
books, feature films, television series, toys and merchandise, and interactive
multimedia products. The Company's book licensing and packaging division focuses
on developing and executing book projects, typically with bestselling authors.
The entertainment retail division focuses on developing, operating and
franchising the Company's in-line retail stores and retail kiosks known as
"Entertainment Super/bullet/Kiosks." The Company has recently entered into an
agreement with The ABC Television Network, a division of The Walt Disney Company
("ABC"), for the use of ABC programming in the Entertainment Super/bullet/Kiosks
in exchange for promotional and advertising spots for the Entertainment
Super/bullet/Kiosks on ABC affiliate television stations.
To support the development and growth of the Company's business, the
Company has entered into certain capital-raising transactions with strategic
investors, such as a long-term relationship established with the Simon-DeBartolo
Group, the largest U.S. shopping mall developer. See "Management's Discussion
and Analysis or Plan of Operation -- Liquidity and Capital Resources" under Item
6 of Part II of this Form 10-KSB.
INTELLECTUAL PROPERTIES
The Company's characters and other intellectual properties have been
developed pursuant to agreements with best-selling authors and media
celebrities, which agreements generally grant the Company all rights (including
all media rights) to the original intellectual property (which includes one or
more characters). The Company currently uses illustrated novels to introduce and
develop the intellectual properties. The Company actively seeks to license
the intellectual properties to third parties for use in various media. The
Company is generally
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obligated to pay the authors or celebrities royalties based on its sales of
illustrated novels utilizing the intellectual properties, and additional fees
based on amounts received by the Company from the licensing to third parties of
the rights to produce other products featuring the intellectual properties. The
Company seeks when possible to license its intellectual properties on terms that
provide to the Company advance payments against royalties to be earned and that
minimize the Company's additional development costs going forward.
The Company's current intellectual properties, which are owned either
directly by the Company or through NetCo Partners, include:
/bullet/ LEONARD NIMOY'S PRIMORTALS: Inspired by his research at the
SETI (Search for Extraterrestrial Intelligence) Program, the story by
Leonard Nimoy, actor, director and author (best known for his role as
"Spock" on STAR TREK), is about primordial creatures, some benign and
some deadly, abducted from Earth eons ago by space aliens, who are now
coming home to Earth.
/bullet/ TOM CLANCY'S NETFORCE: A narrative set in the year 2010
involving the policing of computer systems and the establishment of
NETFORCE, an elite enforcement division of the FBI whose specialty is
crimes on the world-wide Internet. The property is being developed for
NetCo Partners by Tom Clancy (the best-selling author of geopolitical
thrillers, including THE HUNT FOR RED OCTOBER, PATRIOT GAMES, CLEAR AND
PRESENT DANGER and EXECUTIVE ORDERS) in collaboration with Steve
Pieczenik, who previously collaborated with Mr. Clancy in the creation
of the best-selling TOM CLANCY'S OP-CENTER series of novels.
/bullet/ GENE RODDENBERRY'S XANDER IN LOST UNIVERSE: A space adventure,
based on a concept created by the late creator of STAR TREK, featuring
Xander, a cyborg clone who has been endowed with the secrets of the
Lost Universe. Pursuing him is Lady Sensua, an evil being of immense
power who wants those secrets, even if she must tear Xander apart to
get them.
/bullet/ ISAAC ASIMOV'S I/bullet/BOTS: A tale of seven android
superheroes, based on a concept created by the late Isaac Asimov
(author of more than 400 science and science fiction books and widely
regarded as the dean of 20th Century science fiction writers).
/bullet/ MICKEY SPILLANE'S MIKE DANGER: When Mike Danger, hard-boiled
private eye of the 1950s, wakes up in the year 2045, the peace-loving
citizens of the future are given a violent history lesson in 20th
Century crime fighting. The story is based on a concept created by
Mickey Spillane, a prolific best-selling mystery writer whose private
eye character "Mike Hammer" has been featured in comic strips, movies
and television series.
/bullet/ JOHN JAKES' MULLKON EMPIRE: A dynastic, Borgia-like family has
built an interstellar financial empire on the galactic garbage
business. The property was developed by the author John Jakes, whose
novels NORTH AND SOUTH, LOVE AND WAR, HEAVEN AND HELL and THE KENT
FAMILY CHRONICLES have all been on The New York Times' best-sellers
lists
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(Mr. Jakes is the first author to have had three titles appear
simultaneously on the best sellers lists) and have been made into
successful television mini-series.
/bullet/ TAD WILLIAMS' MIRROR WORLD: The story follows mirror-like
windows that appear outside New York, Los Angeles, London, Tokyo and
other major cities around the world, opening passages to a new and
dangerous universe. Mr. Williams is the author of best-selling novels
including the MEMORY, SORROW AND THORN trilogy, CALIBAN'S HOUR and
TAILCHASER'S SONG.
/bullet/ ANNE MCCAFFREY'S ACORNA: UNICORN GIRL: This tale unfolds when
a pod is found in deep space. From it emerges Acorna, part human, part
mythical creature, who is traveling the cosmos in search of her
origins. Ms. McCaffrey is the author of New York Times best-selling
fantasy novels, including THE DRAGON RIDERS OF PERN series.
/bullet/ MARGARET WEIS' TESTAMENT OF THE DRAGON: A dragon-possessed,
immortal human, seeks to track and destroy the evil dragon who controls
him. Ms. Weis is a New York Times best-selling author of numerous sword
and sorcery novels and has developed many popular role-playing games.
/bullet/ ARTHUR C. CLARKE'S CRIOSPHINX: Developed by Arthur C. Clarke,
the author of 2001: A SPACE ODYSSEY, about the revival of Alexander the
Great in the 21st Century.
/bullet/ NEIL GAIMAN'S MR. HERO -- THE NEWMATIC MAN: A whimsical tale
of a steam-powered, Victorian robot reactivated in modern Los Angeles
by a young street pantomime named Jenny. Mr. Gaiman is writer and
co-creator of the SANDMAN comic book series, which has been called the
"best monthly comic book in the world" by The Los Angeles Times and
which is being developed by Warner Bros. as a feature film. Mr. Gaiman
has also been voted the number one comic writer for the last three
years in COMIC BUYERS GUIDE reader polls.
/bullet/ NEIL GAIMAN'S TEKNOPHAGE: A character spin-off from MR. HERO
exploring the world and character of the sinister TeknoPhage, a
dinosaur-like C.E.O. who lives in a terrifying outerworld and
manipulates the lives of others.
/bullet/ NEIL GAIMAN'S LADY JUSTICE: When the scales of justice are
unbalanced, the Lady Justice entity possesses a wronged woman to serve
her cause, infusing the host body with great power. The woman must seek
justice until she finds victory or death.
/bullet/ NEIL GAIMAN'S WHEEL OF WORLDS: Interweaving the stories of
several of Gaiman's characters, this story also introduces Lady
Justice, a complex and powerful entity who seeks justice for the
wrongdoings of others by empowering unsuspecting women.
/bullet/ CATHY CASH SPELLMAN'S MILLENNIUM (working title): In the year
2018, the world as we know it has ceased to exist, leveled by nuclear
and environmental disasters. The United States has splintered, torn
into bits by advancing oceans and earthquakes. In the tattered remnants
of the former city of New York, the survivors of the disasters cope
with a strange new world containing mutants, robots, and
extraterrestrials.
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The Company is continually in negotiations with best-selling authors to
create additional concepts and characters.
PUBLISHING DIVISION
GENERAL. Big Entertainment's publishing division focuses on introducing
and developing the Company's intellectual properties to explore their potential
for licensing, through the publication and distribution of illustrated novels.
During 1996, the Company began reducing its comic book titles, which had
previously been a format also utilized by the Company to introduce and develop
its intellectual properties, and exited comic book publishing in the first
quarter of 1997. The Company's illustrated novels generally tell a story in one
issue, are targeted at a more sophisticated audience than typical comic book
readers and are generally sold by traditional book retailers. The Company
believes that its illustrated novels have a wider distribution potential for its
titles, longer shelf lives and higher initial retail prices as compared to comic
books. Retail cover prices of the Company's illustrated novels generally range
from $9.95 to $19.95.
The Company's philosophy is to produce high-quality publications
utilizing state-of-the-art graphics and publishing techniques. Big
Entertainment's illustrated novels are generally targeted primarily to young
adults and adult readers of all ages.
PRODUCTION. Generally, the production of an illustrated novel begins
with the development of a story line, conceived between six months and 12 months
in advance of the publication date. The story line serves as a guide for
writers, who develop the characters' actions and motivations into a plot and who
write the accompanying text. After the plot has been developed, an artist
translates the key elements of the story into appropriate graphics and other
pictorial depictions of the story's events, and collaborates with the writer in
the development of the accompanying text. The Company generally utilizes
freelance writers, whereas most of the graphics are prepared by the Company's
in-house art department. Editing is handled through the Company's book licensing
and packaging division, Tekno Books (see "Book Licensing and Packaging
Division," below). To date, the Company has not encountered any difficulty in
obtaining the services of the writers, artists and other personnel or entities
necessary to produce its illustrated novels and does not anticipate encountering
any such difficulty in the future.
PRINTING AND DISTRIBUTION. In November 1996, the Company entered into
an agreement with HarperCollins Publishers, Inc., a division of Rupert Murdoch's
News Corporation ("HarperCollins"), granting to HarperCollins certain rights to
publish, reproduce and distribute initially four of the Company's titles in
illustrated novel and hardcover and paperback book form (the "HarperCollins
Agreement"). Under the HarperCollins Agreement, HarperCollins has assumed all
responsibility for the printing and distribution of the covered titles.
HarperCollins has agreed to pay to the Company advances against royalties to be
earned, which advances the Company currently believes will cover its development
costs for the related title. Further, the HarperCollins Agreement will enable
the Company to significantly reduce its expenses after initial development of
the titles and will eliminate the Company's risk of return of unsold illustrated
novels or books. As of the date hereof, the Company has delivered several
manuscripts or completed books to HarperCollins, which are proceeding toward the
printing
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stage. The Company believes that alternative printing sources are available if
required, however.
In addition to the Company's agreement with HarperCollins, U.S. and
international distribution of the Company's illustrated novels, books and other
products is also handled by the Company's licensees or joint venturers, such as
Warner Books and Sierra On-Line (see "Licensing Division," below).
MARKETING. The Company has received extensive media coverage and has
been featured nationally on television programs (Good Morning America,
Entertainment Tonight, E! Entertainment Television, CNN's Showbiz Today, and the
Sci-Fi Channel) and in magazines (TV Guide, Rolling Stone, Mondo, Wizard,
Variety, Hollywood Reporter and Advertising Age) and newspapers (including The
New York Times, The Los Angeles Times, The San Francisco Chronicle and The
Chicago Sun Times). Marketing is also handled by the Company's licensees and
joint venturers, pursuant to their agreements with the Company.
LICENSING DIVISION
Big Entertainment's licensing division seeks to exploit the Company's
intellectual properties by licensing them for feature films, television series,
books and other merchandise such as apparel, toys, trading cards, posters and
similar items. The Company is represented in its efforts to secure book licenses
with publishers by the William Morris Agency.
In particular, the Company believes that successful feature films
and/or television series will significantly enhance the value of its
intellectual property that is the basis for such feature film and/or television
series, resulting in increased licensing and merchandising revenues.
In December 1996, NetCo Partners (see "NetCo Partners," below), reached
an agreement with ABC, a division of The Walt Disney Company, to develop and
license a television mini-series based on TOM CLANCY'S NETFORCE. The agreement
provides for a license fee paid to NetCo Partners of $8,000,000 for such
mini-series, plus other specified rights fees and profit participation for NetCo
Partners. All of such fees and profit participation are to be split equally
between the Company and C.P. Group, both of which are 50% partners of NetCo
Partners. In the event that NetCo Partners and ABC do not reach agreement as to
the teleplay for the mini-series, the agreement provides for the payment of $1.6
million to NetCo Partners. The mini-series based on TOM CLANCY'S NETFORCE is
currently scheduled to air for four hours over two nights during the sweeps
period in May 1998.
NetCo Partners has recently received proposals from three major book
publishers to license TOM CLANCY'S NETFORCE for publication as a series of young
adult and adult novels. NetCo Partners is considering such proposals, which
provide for the payment of license fees to NetCo Partners.
In September 1996, NetCo Partners entered into an agreement with
Playmates Toys, Inc. ("Playmates Toys") to develop, manufacture and market a
line of toys based on the TOM CLANCY'S NETFORCE. Playmates Toys, which
specializes in boys' action figures, is currently the master toy licensee of
STAR TREK(TM) and TEENAGE MUTANT NINJA TURTLES(TM). The agreement with Playmates
Toys provides for the payment to NetCo Partners of a $1,000,000 advance against
royalties to be earned by NetCo Partners under the agreement.
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In February 1996, the Company entered into an agreement (the "Alliance
Agreement") with Alliance Productions, Ltd. ("Alliance"), a division of Alliance
Communications Corporation, the largest Canadian entertainment company. Pursuant
to the Alliance Agreement, Alliance acquired an option for the rights to develop
JOHN JAKES' MULLKON EMPIRE as a television series to be aired both in the
U.S. and internationally. This option is for an 18-month period, which, for
certain additional consideration, may be extended by Alliance for an additional
12 months. In accordance with the Alliance Agreement, Alliance has hired a
writer to write a treatment for a two-hour script or a one-hour pilot script.
The Alliance Agreement also provides Alliance with 30-day first negotiation
rights with respect to motion pictures and CD-ROM licensing of JOHN JAKES'
MULLKON EMPIRE, and, under certain circumstances, to a limited extent and for a
limited duration, Alliance will be able to share in licensing and merchandising
revenues from the property.
Under the Alliance Agreement, Big Entertainment will receive specified
fees for each hour of any series developed, including the pilot, as well as a
percentage of any revenues Alliance receives with respect to the property. The
Alliance Agreement provides that the rights licensed to Alliance upon exercise
of its option will revert to Big Entertainment in three years, with certain
exceptions, or seven years, without exception, should Alliance fail to develop
the intellectual property in accordance with the terms of the Alliance
Agreement.
In April 1995, the Company entered into an agreement (the "Warner
Agreement"), pursuant to which Warner Books licensed from the Company the North
American rights to publish hardcover and paperback books based on LEONARD
NIMOY'S PRIMORTALS and GENE RODDENBERRY'S XANDER IN LOST UNIVERSE. As of the
date hereof, the first book under the Warner
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Agreement, LEONARD NIMOY'S PRIMORTALS, is scheduled to be published in April
1997 and the second book has been delivered pending acceptance for publication.
Pursuant to the Warner Agreement, the Company has received an advance upon
delivery of the LEONARD NIMOY'S PRIMORTALS manuscript and will also receive
royalties from the sale of books following publication. The Warner Agreement
also provides that the Company must submit exclusively to Warner Books
reasonably detailed proposals for the next books based upon each of the LEONARD
NIMOY'S PRIMORTALS and GENE RODDENBERRY'S XANDER IN LOST UNIVERSE titles. Warner
Books then has 30 days to exercise an option to publish the books, in which case
the parties will negotiate the amounts to be paid the Company in good faith.
After such time, the Company may submit the proposals to other publishers.
The Warner Agreement provides that within 18 months from the date each
manuscript is accepted, Warner Books is required to publish the manuscript,
first in hardcover and then in paperback. Should Warner Books fail to progress
according to the schedule, the Company may terminate the Warner Agreement and
retain the advance payments received from Warner Books.
In April 1995, the Company entered into an agreement (the "Miramax
Agreement"), pursuant to which Miramax Films (a division of The Walt Disney
Company) acquired the rights to MICKEY SPILLANE'S MIKE DANGER, NEIL GAIMAN'S MR.
HERO and GENE RODDENBERRY'S XANDER IN LOST UNIVERSE for feature film and
television (with certain ancillary rights) productions. In connection with the
Miramax Agreement, the Company received non-refundable payments of $250,000
during 1995. The Company is to also receive an ongoing 50% profit participation
(without overhead deductions by Miramax Films) in feature films and/or
television series made under the Miramax Agreement with no financial obligation
on the part of the Company. The Miramax Agreement provides that Miramax Films
will develop the aforementioned properties pursuant to a specified schedule.
Miramax has designated MICKEY SPILLANE'S MIKE DANGER as the first property to be
developed. By further agreement between the Company and Miramax Films, Miramax
Films has determined to also develop, in conjunction with its book division,
Miramax Books, and through The Walt Disney Company's publishing division,
Hyperion Books, a full-length novel based on MICKEY SPILLANE'S MIKE DANGER.
Miramax Films has contracted directly with Mickey Spillane to author such novel,
for which he has submitted a manuscript. It is expected that the MICKEY
SPILLANE'S MIKE DANGER film will be based on such novel. Publication of the
novel will entitle the Company, under the Miramax Agreement, to receive 50% of
the net profits from book sales. The negotiations related to the novel have
resulted in delays in the film production. Subject to certain exceptions,
failure to meet the progress to production schedule set forth in the Miramax
Agreement results in Miramax Films relinquishing its rights to the Company's
properties. The Company believes that Miramax Films has not met the development
and progress to production schedule for MICKEY SPILLANE'S MIKE DANGER. The
Company is in the process of reviewing its options under the Miramax Agreement,
which may include a reversion to the Company of the above-described film rights.
The Company has received expressions of interest in these rights from third
parties. Accordingly, the Company currently believes that if it determines to
revoke the rights, it will be able to re-license them to another studio or
production company.
The Company entered into a joint CD-ROM publishing venture with Sierra
On-Line ("Sierra") in September 1996. Pursuant to this venture, the Company will
receive 25% of Sierra's gross sales revenues from the CD-ROMs published, less
its related manufacturing and marketing costs (which costs are estimated to
total approximately $2.50 per disc as compared to an estimated retail price of
approximately $19.95 per disc). As the markets for multimedia and interactive
entertainment products and services continue to grow, the Company has begun
active development of its proprietary characters and concepts for interactive
multimedia products. The Company believes that new media represents a
significant source of opportunity in both on-line or networked and PC or video
game formats. The Company is actively pursuing participation in this market
through its licensing operations.
Merchandising of character-related products such as the Playmates Toys
line of toys is conducted principally through the grant of licenses to
independent third parties who would manufacture their own products incorporating
the Company's or NetCo Partners' characters and distribute such products through
their normal distribution channels as well as in specialty stores. Generally,
these licenses are expected to provide payment of royalties to the Company based
on specified percentages of the sales of licensed products. To date, products
featuring the Company's intellectual properties have included T-shirts, caps,
trading cards, posters, buttons and telephone calling cards. These products have
been sold through independent distributors and by the Company at its retail
outlets.
NETCO PARTNERS
In June 1995, the Company and C.P. Group, a company in which Tom Clancy
is a substantial shareholder, entered into an agreement to form NetCo Partners
(the "NetCo Joint Venture Agreement"). NetCo Partners, which is engaged in the
publishing and licensing of entertainment properties, including TOM CLANCY'S
NETFORCE, has to date entered into various licensing agreements. See "Licensing
Division," above.
The Company and C.P. Group are each 50% partners in NetCo Partners.
C.P. Group contributed to NetCo Partners all rights to TOM CLANCY'S NETFORCE,
and the Company contributed to NetCo Partners all rights to TAD WILLIAMS'
MIRRORWORLD and all its rights to ARTHUR C.
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CLARKE'S CRIOSPHINX, NEIL GAIMAN'S LIFERS, and ANNE MCCAFFREY'S SARABAND.
Although pursuant to the NetCo Joint Venture Agreement the Company is not
obligated to contribute any additional properties to NetCo Partners, the Company
and C.P. Group are working together to obtain rights from third parties to
additional entertainment properties for the NetCo Partners joint venture. For
example, the Company and C.P. Group jointly negotiated a contract with author
Cathy Cash Spellman to granting to NetCo Partners all rights to CATHY CASH
SPELLMAN'S MILLENNIUM.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement,
the Company is responsible for developing, producing, manufacturing,
advertising, promoting, marketing and distributing NetCo Partners' illustrated
novels and related products and for advancing all costs incurred in connection
therewith. All amounts advanced by the Company to fund NetCo Partners'
operations are treated as capital contributions of the Company and the Company
is entitled to a return of such capital contributions before distributions of
cash flow are split equally between the Company and C.P. Group. The NetCo Joint
Venture Agreement provides for an initial term (the "Development Term") of five
years, during which the partners will jointly develop the contributed
properties. The Development Term may be extended by the mutual consent of the
partners and shall terminate upon 30 days' notice to the Company by C.P. Group
should Mitchell Rubenstein cease to be the Chief Executive Officer of the
Company and Laurie S. Silvers cease to be the President of the Company. At the
end of the Development Term, any undeveloped properties (other than TOM CLANCY'S
NETFORCE) are to be returned to their respective contributing partners and any
properties in development or already developed will remain properties of the
joint venture, which will continue until its bankruptcy, dissolution or the sale
of all or substantially all of its assets.
BOOK LICENSING AND PACKAGING DIVISION
Big Entertainment's 51%-owned book licensing and packaging division,
Tekno Books, is a leading book packager of fiction and non-fiction, with
approximately 890 books published to date and in its library (approximately 172
published since the fourth quarter of 1994, when the Company acquired its
interest in Tekno Books) and approximately another 150 under contract that are
forthcoming. In addition to providing access to the Company of a number of
best-selling authors, Tekno Books creates book projects by developing concepts,
negotiating publishing agreements and executing substantially all aspects of the
book projects. Tekno Books has worked with approximately 50 New York Times
best-selling authors, including Tom Clancy, Jonathan Kellerman, Mary Higgins
Clark, Dean Koontz, Tony Hillerman, Robert Ludlum and Scott Turow, and numerous
media celebrities, including David Copperfield, Louis Ruykeyser and Willard
Scott. These books have been published with more than 30 publishers (including
HarperCollins, Doubleday, Random House, Simon & Schuster, Viking Penguin and
Warner Books), translated into 28 languages, and selected by 17 different book
clubs. Tekno Books is also a leading producer of novels and anthologies in the
science fiction, fantasy, mystery, horror and Western genres. During 1996, some
of the books completed by Tekno Books include DAVID COPPERFIELD'S BEYOND
IMAGINATION; GUILTY AS CHARGED, edited by Scott Turow; HOLMES FOR THE HOLIDAYS,
done under license from Dame Jean Conan Doyle; MURDER, THEY WROTE, done under
license from Universal Publishing; and 10 volumes in the NEW LIBRARY OF THE
UNIVERSE, by Isaac Asimov.
The Chief Executive Officer of Tekno Books is Dr. Martin H. Greenberg,
who is also a director of the Company and owns a 49% interest in Tekno Books.
See "Certain Relationships and Related Transactions -- Tekno Books" under Item
12 of Part III of this Form 10-KSB. Dr. Greenberg is the editor or author of
more than 600 books in various genre, including science fiction, fantasy,
mystery and adventure, and is widely regarded as the leading anthologist in
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trade publishing. Dr. Greenberg also was the 1995 recipient of the Ellery Queen
Award, presented by the Mystery Writers of America for Lifetime Achievement.
Since the acquisition of Tekno Books by the Company, the book licensing
and packaging division has contributed significantly to the Company's net
revenues and gross profits. The Company anticipates that Tekno Books' revenues,
which are derived primarily from cash advances from publishers paid upon the
acceptance of manuscripts and royalties from licensing such books, will continue
to grow during 1997. See "Management's Discussion and Analysis or Plan of
Operation -- Results of Operations" under Item 6 of Part II of this Form 10-KSB.
This division is also an excellent source for referring authors to the Company
for the development of entertainment properties.
Tekno Books also owns a 50% interest in Mystery Scene Magazine, a trade
journal of the mystery genre of which Dr. Greenberg is co-publisher. During
1995, the Company directly acquired an additional 25% interest in the magazine.
The Company plans to further develop this property in other media, including
offering a Mystery Scene Magazine forum through an on-line service.
ENTERTAINMENT RETAIL DIVISION
GENERAL. The Company's entertainment retail division is seeking to
establish a national chain of Entertainment Super/bullet/Kiosks to sell a
variety of entertainment products and merchandise, including T-shirts (such as
STAR WARS (TM) t-shirts), hats (such as X-FILES(TM)hats), action figures (such
as BATMAN(TM)action figures) and related items, CD-ROMS, trading cards, videos,
comic books, collectible art, and other entertainment merchandise. Entertainment
Super/bullet/Kiosks feature an innovative futuristic design intended to create
an exciting shopping environment that encourages browsing and impulse purchases.
The Company's Entertainment Super/bullet/Kiosks feature an overhead band of
video monitors, which display movie trailers and promotional spots. See "-- ABC
Programming Agreement," below. Big Entertainment believes that its innovative
state-of-the-art Entertainment Super/bullet/Kiosks designs and merchandise
displays play an important role in creating name recognition for the Company's
retail operations.
ENTERTAINMENT SUPER/bullet/KIOSK LOCATIONS AND SITE SELECTION. The
Company currently operates 27 Entertainment Super/bullet/Kiosks and one in-line
store. The following sets forth information with respect to the Company's
existing retail outlets:
LOCATION DATE OPENED
-------- -----------
The Mall of The Americas, Bloomington, Minnesota(1) September 1994
Tyrone Square, St. Petersburg, Florida October 1994
The Florida Mall, Orlando, Florida October 1994
Altamonte Mall, Altamonte Springs (Orlando), Florida October 1994
Lynnhaven Mall, Virginia Beach, Virginia October 1994
Miami International Mall, Miami, Florida November 1994
Sawgrass Mills, Sunrise, Florida November 1994
North Point Mall, Alpharetta (Atlanta), Georgia October 1995
St. Charles Towne Center, Waldorf, Maryland October 1995
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LOCATION DATE OPENED
-------- -----------
Lakeline Mall, Cedar Park, Texas November 1995
Barton Creek Square, Austin, Texas November 1995
Windsor Park Mall, San Antonio, Texas November 1995
North East Mall, Hurst, Texas November 1995
Newport Centre Mall, Jersey City, New Jersey November 1995
Pembroke Lakes Mall, Pembroke Pines, Florida November 1995
Charleston Town Center, Charleston, West Virginia May 1996
Tower Shops at Stratosphere, Las Vegas, Nevada May 1996
Gwinnett Place Mall, Duluth (Atlanta), Georgia July 1996
Town Center at Cobb, Kennesaw (Atlanta), Georgia July 1996
Crossgates Mall, Albany, New York June 1996
Holyoke Mall at Ingleside, Holyoke (Springfield),
Massachusetts June 1996
Greenwood Park Mall, Greenwood Park
(Indianapolis), Indiana August 1996
Tippecanoe Mall, Lafayette, Indiana August 1996
Orange Park Mall, Orange Park, Florida August 1996
West Oaks Mall, Ocoee, Florida October 1996
Ontario Mills Mall, Ontario, Canada November 1996
Volusia Mall, Daytona Beach, Florida November 1996
Coral Square Mall, Coral Springs, Florida November 1996
(1) In-line retail store
The Company currently plans to open approximately 10 additional
Entertainment Super/bullet/Kiosks and five in-line retail stores during 1997.
Big Entertainment's strategy for opening its Entertainment
Super/bullet/Kiosks is to seek prime locations in regional and major shopping
malls in geographic areas determined by management as having desirable
demographic characteristics. While the Company expects most of its future
outlets to be Entertainment Super/bullet/Kiosks, the Company may also open
additional traditional stores within shopping malls and in other locations.
Development of the Company's retail outlets has been and is expected to continue
to be accomplished through relationships established with major mall developers,
including the Simon-DeBartolo Group, one of the largest U.S. mall developers.
See "-- Financing Transactions," below.
ABC PROGRAMMING AGREEMENT. In March 1997, the Company entered into an
exclusive programming agreement with ABC, a division of The Walt Disney Company.
Under this programming agreement, the Company will run two times each hour on
the video monitors at each of its Entertainment Super/bullet/Kiosks a 12-minute
programming segment provided by ABC and its local affiliate television stations,
on an exclusive basis. The programming will be devoted to upcoming television
programs to appear on ABC (including ABC Entertainment, ABC News, ABC Daytime
and ABC Sports) and its affiliate television stations and new, non-repetitive
programming will be provided to the Company each month. The Company also agreed
to display ABC's logo
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and other promotional materials complementing the then-current video monitor
campaigns. In exchange for its agreement to run the ABC programming exclusively,
ABC affiliate stations in each market where the Company's Entertainment
Super/bullet/Kiosks are located are expected to run promotional and advertising
spots on the ABC affiliate stations featuring the Company's Entertainment
Superbullet/Kiosks. The Company has also agreed to sell at the Entertainment
Super/bullet/Kiosks, as part of its product mix, mutually selected ABC products
featuring the ABC logo or its programs (such as "Home Improvement" T-shirts and
"Monday Night Football" caps), on terms to be agreed upon. The Company believes
that this arrangement with ABC will provide its Entertainment
Super/bullet/Kiosks with a steady source of current programming for the
Entertainment Super/bullet/Kiosks that will appeal to the target customers of
the Entertainment Super/bullet/Kiosks, at no cost to the Company. Additionally,
the promotional spots featuring the Company's Entertainment Super/bullet/Kiosks
run by the ABC affiliate stations will provide the Company with substantial
television advertising in the markets where the retail units are located at no
additional expense to the Company. The Company anticipates beginning to run the
ABC programming on May 1, 1997.
FRANCHISING. As part of its expansion strategy, the Company is in the
process of implementing a franchise program and has engaged the services of an
experienced franchise sales firm to handle these sales. In the franchise
program, the Company seeks to offer through its wholly owned subsidiary, Big
Entertainment Franchise Corp., franchises in both the United States and
internationally to qualified and experienced area developers and franchisees who
are committed to the development of multiple Entertainment Super/bullet/Kiosks
in such areas. It is expected that area developers will either develop
Entertainment Super/bullet/Kiosks on their own or in conjunction with
sub-franchisees.
In December 1995, the Company entered into an agreement with Martin
Ergas, a non-affiliate of the Company, granting to Mr. Ergas certain exclusive
territorial franchise rights for Canada (excluding the Province of Alberta) for
a term of 10 years in exchange for a non-refundable franchise fee of $700,000
and providing for the purchase by Mr. Ergas of two fully outfitted and installed
Entertainment Super/bullet/Kiosks for $300,000. The Canadian franchise rights
granted to Mr. Ergas consist primarily of the right to open, operate and
sub-franchise Entertainment Super/bullet/Kiosks under the Company's name in the
specified territory. The nonrefundable franchise fee of $700,000 is expected to
be received during 1997 prior to the opening of the first two units and upon the
completion of certain training by the Company of employees of the franchisee.
The Entertainment Super/bullet/Kiosks are expected to be built and sold in late
1997.
The Company has filed its Uniform Franchise Offering Circular and the
terms of its standard area development and franchise agreements. The agreements
provide for an initial term with renewal options and payment of an initial
franchise fee upon execution, with additional fees paid upon the opening of each
Entertainment SuperoKiosk. In addition, franchisees will be required to pay a
continuing royalty based upon sales. The Company will also retain a substantial
portion of the revenues from advertising displayed on the video monitors of each
Entertainment SuperoKiosk. The terms and conditions of the area development and
franchise agreements will vary depending upon a number of factors, including the
experience and resources of the franchisee, the size and density of the covered
territory, the number of Entertainment Super/bullet/Kiosks to be developed, the
development schedule, capital requirements
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and other matters. In connection with the Company's planned sale of franchises,
the Company will be subject to Federal Trade Commission regulation, as well as
certain state laws regulating the offer and sale (and in some cases, the
negotiation) of franchises and certain rights of the continuing relationship
between the franchisor and franchisees.
FINANCING TRANSACTIONS. In addition to the sale of the Canadian
franchising rights described above, the Company has entered into a number of
transactions with a view toward the financing of its Entertainment
Super/bullet/Kiosks.
In November 1995, the Company entered into an agreement (the "Simon
Stock Purchase Agreement") to sell up to 320,000 shares of the Company's
Preferred Stock to Tekno Simon, LLC ("Tekno Simon"), an entity controlled by
Melvin Simon, Co-Chairman of the Simon-DeBartolo Group, the largest U.S. mall
developer. The proceeds from the sales of the Preferred Stock have been and are
being used to fund construction, installation and other costs directly related
to the opening of up to 25 Entertainment Super/bullet/Kiosks. As of the date
hereof, the Company has funded the development of a total of 20 Entertainment
Super/bullet/Kiosks through the sale of 217,600 shares of Series A Preferred
Stock and 44,650 shares of Series B Preferred Stock for an aggregate of
$1,600,000 pursuant to the Simon Stock Purchase Agreement. The Simon Stock
Purchase Agreement, which was originally to expire at the end of 1996, was
extended through March 31, 1997. See "Certain Relationships and Related
Transactions --Investments by Affiliate of Simon-DeBartolo Group" under Item 12
of Part III of this Form 10-KSB for additional information regarding Tekno
Simon's investments in the Company.
Contemporaneously with the Company's August 1995 private offering (see
"Certain Relationships and Related Transactions -- August 1995 Private Offering"
under Item 12 of Part III of this Form 10-KSB), the Company entered into an
agreement to sell to two investors, for $250,000 and $249,600, respectively,
immediately exercisable four-year warrants entitling each such investor to
purchase 120,000 shares of the Company's Common Stock at an exercise price of
$6.25 per share. One investor, who participated in the August 1995 private
offering, has paid for his warrant in full ($125,000 during the fourth quarter
of fiscal 1995 and $125,000 in January 1996) and the second investor, Martin
Ergas, who subsequently purchased Canadian franchise rights from the Company
(see "Franchising," above), paid $90,000 during 1995 and $149,600 during 1996,
and the balance of $10,000 is anticipated to be received in 1997.
In February 1996, the Company entered into a sale and leaseback
transaction (the "Sale-Leaseback") with Financing for Science, Inc. (the
"Lessor"). Pursuant to the Sale-Leaseback, the Company sold 18 Entertainment
Super/bullet/Kiosks to the Lessor for $1,080,000 and simultaneously leased the
Entertainment Super/bullet/Kiosks from the Lessor for a term of 39 months, with
rental payments of approximately $35,000 per month. The Sale-Leaseback does not
include the underlying mall leases for the sites of the Company's Entertainment
Super/bullet/Kiosks, with respect to which the Company remains liable. Upon
expiration of the lease under the Sale-Leaseback, the Company will have the
option to repurchase the Entertainment Super/bullet/Kiosks for their fair market
value, but in no event more than $108,000 in the aggregate. As collateral
security for the lease, the Company issued 225,000 shares of Common Stock into
escrow (the "Escrow Shares") which are held by an escrow agent. In the event
that the Company defaults under the agreements for the Sale-Leaseback, the
Escrow Shares will be released to the Lessor and the Lessor will generally have
all rights with respect to such shares of Common Stock as
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a secured party under the Uniform Commercial Code and such agreements, including
the right to conduct a sale of the Escrow Shares to satisfy the Company's
obligations to Lessor. While held in escrow, the Escrow Shares will be voted by
Lessor on all matters in accordance with the recommendations of management and
neither the escrow agent nor the Lessor will have any dispositive rights with
respect thereto. If there is no default under the terms of the Sale-Leaseback,
however, the Escrow Shares will be cancelled (resulting in a decrease in the
number of the Company's outstanding shares of Common Stock). As additional
consideration for the Sale-Leaseback, the Company also issued to the Lessor
warrants to purchase 26,739 shares of Common Stock, exercisable for four years
commencing on the first anniversary of the date of grant, at an exercise price
of $8.08 per share.
In December 1996, the Company sold 20,000 shares of its Series C
Preferred Stock in a private placement to a single accredited strategic investor
for an aggregate purchase price of $2,000,000. The Company received net proceeds
of approximately $1,723,844, after deducting fees of the placement agent and
other expenses of the private placement. The Company agreed to use not less than
50% of the net proceeds for the development, construction and operation of
Entertainment Super/bullet/Kiosks or in-line retail facilities, with the balance
to be used for general corporate purposes. See Note 8 to included in Part II,
Item 7 of this Form 10-KSB for a description of the terms of the Series C
Preferred Stock.
COMPETITION
GENERAL. Competition is generally intense in the areas of the
publishing and entertainment industries in which the Company operates. There are
a large number of substantial public and private companies competing with each
other in all aspects of the publishing and entertainment industry. The Company's
principal strategy and method of competition has been to obtain and develop
products based on titles and properties associated with best-selling authors and
media celebrities. The Company believes that such products will compete
favorably in the industry due in large part to the appeal resulting from the
name recognition of the authors and celebrities associated with such products.
The Company believes that it competes favorably based on the popularity of its
titles, visibility of its authors and retail price of its publications.
PUBLISHING. The Company's illustrated novels will compete against other
publications published by numerous other publishers. Although most of such other
publishers have greater financial and other resources than the Company, the
Company believes that its agreement with HarperCollins, one of the largest
publishers in the world, provides it with a greater ability to compete. There
can be no assurances, however, of the Company's continued ability to compete
with such other publishers. Competition in the book licensing and packaging
business is somewhat less intense than that in the other areas of the Company's
business, as it is based for the most part on unique, original concepts and
long-term relationships.
LICENSING. Numerous companies and individuals are engaged in the
business of licensing entertainment properties and characters in the
entertainment-related licensing market. The Company competes with a wide range
of other corporations as well as individuals in the licensing market.
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RETAILING. The Company's Entertainment Super/bullet/Kiosks compete for
sales with traditional periodical retailers such as newsstands, convenience
stores, drug stores, supermarkets, mass merchandisers, national bookstore
chains, as well as other specialty retailers such as toy stores, novelty and
comic book stores and hobby shops.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company has applied for U.S. and international trademark
registration of the name "Big Entertainment," as well as for trademark and
copyright protection for each of its titles and featured characters. As of the
date hereof, the Company has approximately 20 U.S. registered trademarks and
approximately 140 trademark applications are pending. As the Company's
properties are developed, the Company intends to apply for further trademark and
copyright protection in the United States and certain foreign countries.
Copyright protection in the United States on new publications extends
for a term of 75 years from the date of initial publication. Trade names and
trademark registration in the United States runs for a period of 10 years after
registration and may be renewed for an indefinite number of additional 10-year
periods upon showing of continued use.
EMPLOYEES
At March 21, 1997, Big Entertainment had a total of approximately 81
full-time and 123 part-time employees, 11 of whom were in executive and
administrative positions, six of whom were engaged in publication, production
and marketing activities and 187 of whom (including all part-time employees)
were engaged in retail operations. None of the Company's employees are
represented by a labor union, nor has the Company experienced any work
stoppages. The Company considers its relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 9,200 square feet of office space in
Boca Raton, Florida, for its executive offices. The lease of this office space
provides for a monthly basic rent of approximately $9,900 and expires on August
31, 2002, with one option to renew for an additional eight years. The Company
believes that suitable additional space, if required, is readily available on
favorable terms. The Company's retail outlets are occupied under leases with
terms that expire at various dates through 2004. The Company also leases 2,500
square feet of warehouse space in Broward County, Florida, which serves as a
distribution center for the merchandise for its Entertainment
Super/bullet/Kiosks, pursuant to a lease expiring September 30, 1998, at a
current monthly rental of approximately $1,010.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently has no material legal proceedings pending or
threatened.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
Big Entertainment, Inc.'s Common Stock is traded on The Nasdaq SmallCap
Market ("Nasdaq") under the symbol BIGE. The following table sets forth, for the
periods indicated below, the high and low closing bid quotations for the Common
Stock, as reported by Nasdaq. The quotations represent quotations between
dealers without adjustments for retail markups, markdowns or commissions and may
not necessarily represent actual transactions.
HIGH LOW
------ ------
1995
First Quarter........................................ $9 1/4 $7
Second Quarter....................................... $8 1/4 $6 1/2
Third Quarter........................................ $8 3/8 $6 1/2
Fourth Quarter....................................... $8 1/4 $5 3/4
1996
First Quarter........................................ $8 1/4 $6
Second Quarter....................................... $7 1/8 $5 1/2
Third Quarter........................................ $6 3/16 $5
Fourth Quarter....................................... $6 $4 7/8
HOLDERS OF COMMON STOCK
As of March 21, 1997, there were approximately 150 record holders of
the Company's Common Stock, not including security position listings. The
Company believes that there are more than 800 beneficial holders of the
Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and
currently intends to retain any future earnings to finance its operations and
the expansion of its business. Therefore, the payment of any cash dividends on
the Common Stock is unlikely in the foreseeable future. Any future determination
to pay cash dividends will be at the discretion of the Board of Directors and
will be dependent upon the Company's earnings, capital requirements and
financial condition and such other factors deemed relevant by the Board of
Directors.
SALES OF UNREGISTERED SECURITIES
See Notes 8 and 9 to the Financial Statements included in Part II, Item
7 of this Form 10-KSB with respect to sales of unregistered securities by the
Company during 1996. All of
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such sales were made pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included in Part II, Item 7 of this Report.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 ("FISCAL 1996") AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995 ("FISCAL 1995")
The following tables summarize the revenues, cost of sales and gross
profit or loss attributable to each of the Company's divisions for fiscal 1996
and fiscal 1995, respectively:
<TABLE>
<CAPTION>
INTELLECTUAL PROPERTY RETAIL
--------------------------------------------- --------------
BOOK LICENSING PUBLISHING ENTERTAINMENT TOTAL
LICENSING AND RETAIL
PACKAGING
------------- ----------- ------------ ------------- ----------
FISCAL 1996
<S> <C> <C> <C> <C> <C>
Net Revenues $ 2,200,664 $ 357,909 $ 922,598 $ 4,129,942 $7,611,113
Cost of sales 1,123,044 71,188 1,472,746 2,255,783 4,922,761
------------ --------- ----------- ------------ ----------
Gross profit (loss) $ 1,077,620 $ 286,721 $ (550,148) $ 1,874,159 $2,688,352
============ ========= =========== ============ ==========
FISCAL 1995
Net Revenues $ 1,154,821 $ 441,029 $ 2,689,720 $ 2,016,918 $6,302,488
Cost of sales 741,314 - 3,681,440 1,163,209 5,585,963
------------ --------- ----------- ----------- ----------
Gross profit(loss) $ 413,507 $ 441,029 $ (991,720) $ 853,709 $ 716,525
============ ========= =========== ============ ==========
</TABLE>
NET REVENUES
Revenues are generated through the Company's intellectual property
activities, including publishing, book licensing and packaging, and licensing,
and through its retail activities, which consist of the operations of the
Company's chain of Entertainment Super/bullet/Kiosks. Net revenues for fiscal
1996 increased by 21%, or $1,308,625, to $7,611,113 from $6,302,488 for fiscal
1995. During the last six months of fiscal 1996, net revenues increased by 46%,
or $1,324,207, to $4,817,215 from $2,863,008 as compared to the last six months
of fiscal 1995. The increase in net revenues is attributable to the continued
growth in the Company's entertainment retail and book licensing and packaging
divisions offset by a decrease in net revenues in the publishing division due to
the Company's planned reduction in comic books. The Company has subsequently
exited the comic book publishing business as described below.
GROSS PROFIT
Overall Company gross profit increased by 275%, or $1,971,827, to
$2,688,352 for fiscal 1996 from $716,525 in fiscal 1995. As a percentage of net
revenues, gross profit increased to 35% in fiscal 1996 from
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11% in fiscal 1995. The increase in gross profit is primarily due to increases
in gross profit in the Company's book licensing and packaging and entertainment
retail divisions.
INTELLECTUAL PROPERTY
/bullet/BOOK LICENSING AND PACKAGING
NET REVENUES. Total net revenues from Tekno Books, which is 51% owned
by the Company, increased 91%, or $1,045,843, to $2,200,664 for fiscal 1996 from
$1,154,821 for fiscal 1995. Deferred revenues increased $276,751, to $419,488 at
December 31, 1996 from $142,737 at December 31, 1995. The increase in net
revenues in fiscal 1996, as compared to fiscal 1995 is attributable to an
increase in the number of books being executed and delivered in fiscal 1996 as
compared to fiscal 1995, as well as an increase in the advance payments of
royalties in fiscal 1996 as compared to fiscal 1995. The increase in deferred
revenues in fiscal 1996, as compared to fiscal 1995 is attributable to an
increase in advance payments of royalties in fiscal 1996 as compared to fiscal
1995, as well as an increase in the number of contracts for books being executed
in fiscal 1996 as compared to fiscal 1995. Tekno Books' net revenues consist of
the following two sources of revenue; (1) cash advances recognized as revenues
upon the acceptance by publishers of books, and (2) royalties on books licensed
to and published by third-party publishers. Tekno Books generates significant
cash flow from cash advances received upon the execution of publishing
agreements with publishers for books to be published in the future. Such cash
advances are recognized as revenue when the books to which they relate are
accepted by the publisher, resulting in a deferral of revenue recognition
following receipt of the cash advance. Historically, virtually all books
delivered by Tekno Books have been accepted. Additionally, Tekno Books has a
library of books totaling approximately 890 titles which generate royalty
payments to Tekno Books.
GROSS PROFIT. Gross profit for Tekno Books increased by 161%, or
$664,113, to $1,077,620 for fiscal 1996 from $413,507 for fiscal 1995. As a
percentage of revenues from book licensing and packaging, gross profit amounted
to 49% in fiscal 1996 as compared to 36% in fiscal 1995. The increase in gross
profit percentage in fiscal 1996, as compared to fiscal 1995, reflects an
increase in larger projects that generated increased revenues without increased
costs, consequently these projects generated higher margins.
/bullet/LICENSING
NET REVENUES. Net revenues from the licensing division amounted to
$357,909 for fiscal 1996 as compared to $441,029 for fiscal 1995, for a decrease
of 19%. The decrease in recorded net revenues primarily resulted from changes in
the nature and timing of the licensing agreements entered into by the Company in
fiscal 1996. While the amount of licensing net revenues decreased from fiscal
1995 to fiscal 1996, the number and potential dollar value of licensing
agreements entered into in fiscal 1996 increased significantly over fiscal 1995.
In addition, the Company has other licensing agreements that have either
generated revenues that have been deferred or that do not provide for advance
payments of royalties. The Company entered into a joint CD-ROM publishing
venture with Sierra On-Line in September 1996 for which the first royalty
payments were received in the first quarter of 1997.
Revenue recognition for licensing agreements takes place as each of the
Company's obligations under the various agreements are fulfilled, primarily in
reference to the Company's delivery of manuscripts under its books licensing
agreements and book packaging agreements.
GROSS PROFIT. Licensing gross profit percentage was 80% in fiscal 1996
as compared to 100% in fiscal 1995. The decrease in gross profit percentage in
fiscal 1996 is due to the costs that were payable for writers' fees against the
revenue recognized in 1996.
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/bullet/PUBLISHING
The Company now uses illustrated novels to introduce and develop its
intellectual properties, including characters and storylines as a means to
explore the potential of its intellectual properties for licensing them across
all media, including film, television, books, multimedia software, toys, apparel
and other merchandise. Cost of sales for the illustrated novel publishing
division represents direct costs in intellectual property development, including
character and storyline development, design, writing and illustration of
publications, plus printing, shipping and distribution costs. The Company does
not assign its intellectual properties any value for financial accounting
purposes, and does not therefore reflect them as assets on its financial
statements. Notwithstanding these accounting conventions, the Company believes
that these intellectual properties carry substantial value, which, although not
readily quantifiable, may be realized in potential future revenue streams
through licensing with no or minimal further development cost on the part of the
Company.
NET REVENUES. Net publishing revenues from the sale of illustrated
novels and comic books published by the Company decreased by 66%, or $1,767,122,
to $922,598 for fiscal 1996 from $2,689,720 for fiscal 1995, reflecting the
results of a shift in the Company's strategy in two areas, as listed below. (To
reflect this shift, the Company has changed the name of this division from Comic
Book and Illustrated Novel Publishing to Publishing.)
1) In preparation for expanding the Company's publishing business
through the introduction of illustrated novels, which are
longer in page length than comic books and have a higher cover
price (generally ranging from $9.95 - $19.95) than comic books
(generally $1.95 - $2.25), the Company began reducing the
number of comic book titles in January of 1996. The Company
believes that illustrated novels have a wider distribution
potential to the bookstore market for the Company's titles
than do comic books. Since most of the Company's titles in
development feature best-selling authors' names as part of the
titles, the Company believes that the vast number of their
readers are more likely to look for their titles in
traditional book stores and where books are generally sold
than in comic book stores. The implementation of this plan
resulted in a decrease in the number of titles published in
fiscal 1996 resulting in reduced revenue, yet it had a
positive effect by reducing the Company's gross loss from the
publishing division as well. The Company exited the comic book
publishing business in the first quarter of 1997 in order to
focus on illustrated novels as a means of introducing its
intellectual properties as hereinafter described.
2) In January of 1996, the Company began reducing the level of
shipments of comic book titles to the newsstand market, which
is a market that permits retailers to return unsold product,
as compared to the same period in 1995. This was done to seek
to enhance the sell-through percentage of comic books shipped.
In fiscal 1996, all newsstand shipments of comic books were
eliminated.
While revenues in this division have declined due to the impact of the Company's
shift in strategy as described above, the Company anticipates that the long-term
results of these actions will be favorable once titles are published as
illustrated novels and the full effects of its illustrated novel program are
recognized. The Company's agreement with HarperCollins Publishing, a division of
Rupert Murdoch's News Corporation, for a joint publishing program for hardcover
books, paperback books, and illustrated novels, eliminates the Company's risk
for returns in the newsstand and bookstore markets for entertainment properties
covered by this agreement. HarperCollins, with its expertise in the bookstore
and newsstand market, is handling all shipments of the illustrated novels
covered under the agreement and thus carries all the risk of returns. In
addition, all printing and distribution costs are borne by HarperCollins. The
agreement also calls for advances to be paid by HarperCollins
-22-
<PAGE>
to the Company, which are expected to cover all or most of the Company's costs
in producing the illustrated novels covered by the HarperCollins agreement, and
the Company will receive royalties on sales if and when the royalties on sales
exceed the advance payments. The Company commenced delivery of illustrated
novels to HarperCollins in the fourth quarter of 1996 and plans are for the
illustrated novels to begin to be released starting in the summer of 1997.
GROSS PROFIT/LOSS. The illustrated novel publishing division gross loss
decreased to ($550,148) for fiscal 1996 from ($991,720) in fiscal 1995, a
decrease of 45%. The decrease in gross loss was due to the Company's efforts to
control costs, including the reduction of shipments to the newsstand market
through the second quarter 1996 and the elimination of the Company making
newsstand shipments in fiscal 1996 as described above. As also noted above, the
Company has an agreement in place with HarperCollins for HarperCollins to handle
newsstand and bookstore distribution of certain titles, pursuant to which
HarperCollins will pay all printing and distribution costs, and the Company will
not be at risk for returns. The Company anticipates improvement in gross profit
in this division once illustrated novels are released by HarperCollins which is
scheduled to occur starting in the summer of 1997.
RETAIL
/bullet/ENTERTAINMENT RETAIL
NET REVENUES. The Company's entertainment retail division net revenues
increased by 105%, or $2,113,024, to $4,129,942 for fiscal 1996 from $2,016,918
for fiscal 1995. Net revenues are derived from sales of entertainment products
and merchandise, including T-shirts (such as STAR WARS(TM)T-shirts), hats (such
as X-FILES(TM)hats ), action figures (such as BATMAN(TM)action figures) and
related items, CD-ROMS, trading cards, videos, comic books, collectible art, and
other entertainment merchandise, at the Company's Entertainment
Super/bullet/Kiosks located in major malls in various parts of the United
States. The Company had 28 retail units in operation at December 31, 1996 as
compared to 17 retail units at December 31, 1995. The increase in revenues was
due to two factors: (1) an increase in the number of Entertainment
Super/bullet/Kiosks in operation, and (2) an increase in same store sales. In
the last six months of fiscal 1996, same store sales have significantly
increased, from a 3% increase in the month of July 1996 as compared to the month
of July 1995, escalating to a 27.5% increase in same store sales for the month
of December 1996 as compared the month of December 1995. Same store sales for
the fourth quarter of 1996 increased by 24.4% as compared to the fourth quarter
of 1995.
GROSS PROFIT. Gross profit for the entertainment retail division
increased by 120%, or $1,020,450, to $1,874,159 for fiscal 1996 from $853,709
for fiscal 1995. As a percentage of entertainment retail division revenues,
gross profit increased to 45% for fiscal 1996, from 42% for fiscal 1995. The
increase in gross profit was due in part to the procurement of preferred pricing
of merchandise which was obtained by the Company's enhanced bargaining power in
purchasing merchandise for resale due to the increased number of Company retail
units, and the resulting greater volume of purchases, as well as a gradual
evolution in the product mix to higher margin merchandise.
OPERATING EXPENSES
Total operating expenses consist of selling, general and administrative
expenses, salaries and benefits and amortization of goodwill and intangibles.
Total operating expenses decreased by 2%, or $208,268, to $8,795,656 for fiscal
1996 from $9,003,924 for fiscal 1995. As a percentage of net revenues, total
operating expenses decreased to 116% in fiscal 1996 from 143% in fiscal 1995.
The decrease in total operating expenses in fiscal 1996 as compared to total
operating expenses in fiscal 1995 reflects reductions in operating expenses in
the publishing division and corporate overhead offset by increases in salaries
and benefits related to increases in the entertainment retail division due to
the need to add overhead to support additional Entertainment
Super/bullet/Kiosks, including those units already rolled-out and in operation,
as well as those planned to be rolled-out over the next nine to twelve months.
Pre-opening and corporate overhead costs (necessary to support the additional
stores), are incurred and expensed prior to the opening of new stores. While the
Company gradually
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<PAGE>
reduced the publication of comic books during fiscal 1996 the overhead
reductions that were made were skewed to the later part of the year to insure
the publication of the last issues. Therefore, the full benefit of the overhead
reductions will not be felt until 1997.
OTHER (INCOME) EXPENSE
Other (income) expense for fiscal 1996 was $127,230 as compared to
$21,562 for fiscal 1995, representing increased interest expense due to the
interest portion of increased capitalized leases and interest accrued on the
$500,000, 8.5% convertible promissory note, which, as noted in the notes to the
financial statements, was converted to equity during May 1996.
NET LOSS
Net loss decreased by 21%, or $1,784,283, to $6,655,609 for fiscal
1996 as compared to a net loss of $8,439,892 for fiscal 1995. The decreased net
loss resulted from increased gross profit of the Company and decreased operating
expenses as described above. Net loss per share for fiscal 1996 was $1.23
compared to $1.95 per share in fiscal 1995, for a decrease in net loss per share
of 37%. The decrease in net loss per share in fiscal 1996 from fiscal 1995 is
attributable to both a decrease in net loss and an increase in the number of
shares outstanding.
SHAREHOLDERS EQUITY
Shareholder's Equity increased by 103%, or $2,123,390, to $4,191,867 at
December 31, 1996 as compared to shareholder's equity a net worth of $2,068,477
as of December 31, 1995. The increase in shareholder's equity is primarily due
to the public offering of the Company's stock (completed in the second quarter
of 1996) and the private placement of the Company's Series C Convertible
Preferred Stock (completed in the fourth quarter of 1996) offset by the 1996
loss.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents of
$1,675,852 and working capital of $1,285,093 compared to cash and cash
equivalents of $603,376 and a working capital deficit of $588,376 at December
31, 1995. Net cash used in operating activities during fiscal 1996 was
$6,133,454 primarily representing cash used to fund the Company's net loss. Net
cash used in investing activities was $1,284,806 and $8,487,736 in cash was
provided by financing activities for a total increase in cash and cash
equivalents of $1,069,476. Net cash used in operating activities during fiscal
1995 was $6,513,045 and net cash provided by financing and investing activities
was $4,542,559 and $1,334,471, respectively. Cash provided from investing
activities consisted primarily of proceeds from the sale of short-term
investments.
To facilitate the expansion of its entertainment retail division the
Company established a long-term relationship with the largest U.S. shopping mall
developer, the Simon DeBartolo Group and its Co-Chairman, Melvin Simon. Tekno
Simon, LLC ("Tekno Simon"), an affiliate of Mr. Simon, initially invested
$1,000,000 in shares of the Company's common stock in the Company's 1995 private
placement, and pursuant to the Simon Stock Purchase Agreement entered into in
November 1995, also invested an additional of $1,360,000 in shares of the
Company's preferred stock to fund the cost of developing 17 Entertainment
Super/bullet/Kiosks (at $80,000 per kiosk). Pursuant to this agreement, Tekno
Simon has acquired 217,600 shares of the Company's Series A Variable Rate
Convertible Stock (the Series A Preferred Stock"). The Company's agreement with
Tekno Simon was amended in October 1996 to extend the funding arrangement
through March 31, 1997, pursuant to which the Company may fund the development
of eight additional Entertainment Super/bullet/Kiosks. As of December 31, 1996
$160,000 in additional funding has been provided to the Company for the
development of two additional Entertainment Super/bullet/Kiosks. This amendment
also provided
-24-
<PAGE>
that the subsequent stock purchases will be of shares of the Company's Series B
Variable Rate Convertible Preferred Stock (the "Series B Preferred /stock") in
lieu of shares of the Company's Series A Preferred Stock. See Note 13 to the
Company's Financial Statements included in Part II, Item 7 of this Form 10-KSB
for a description of the terms of the Series A Preferred Stock and Series B
Preferred Stock.
In January 1996, the Company sold an 8.5% Promissory Convertible Note
to an investor in a private transaction for $500,000. On May 15, 1996, the
principal amount of the Note and interest accrued thereon was converted into
82,947 shares of the Company's common stock at a conversion rate of $6.25 per
share.
In February 1996, the Company entered into a sale-leaseback transaction
with a lessor. Pursuant to the sale-leaseback transaction, the Company sold 18
Entertainment Super/bullet/Kiosks to the lessor for $1,080,000 and
simultaneously leased the Entertainment Super/bullet/Kiosks from the lessor for
a term of 39 months with rental payments of approximately $35,000 per month. The
sale-leaseback transaction does not include the underlying mall leases for the
sites of the Company's Entertainment Super/bullet/Kiosks, with respect to which
the Company remains liable. Upon expiration of the lease, the Company will have
the option to repurchase the Entertainment Super/bullet/Kiosks for their fair
market value, but in no event more than $108,000 in the aggregate.
On April 29, 1996, the Company completed a public offering of its
common stock. The Company sold 1,000,000 shares of common stock at $6.00 per
share for net proceeds of approximately $4,873,465.
On December 20, 1996, the Company completed a private placement of its
Series C Preferred Stock. The Company sold 20,000 shares of Series C Preferred
Stock at $100 per share for a gross amount of $2,000,000. After deducting
expenses, including underwriting fees, filing fees, legal fees, accounting and
other expenses, the Company realized net proceeds of approximately $1,723,844.
The Series C Preferred Stock is convertible to Common Stock at $6.325 per share
or 316,205 shares of common stock.
The success of the Company's operations in future years is dependent on
its ability to generate adequate revenue to offset operating expenses. The
Company's management expects to require additional financing for the expansion
of its business, and in particular the growth of the Company's Entertainment
Super/bullet/Kiosks, and to support working capital requirements in future
years. The Company currently is exploring financing alternatives to allow the
Company to finance such expansion. However, there can be no assurance that such
financing alternatives will be available to the Company or will be implemented
on terms favorable to the Company. In the event such financing is not secured,
the Company's Chairman of the Board and Chief Executive Officer and the
Company's Vice Chairman and President, have indicated their intention to provide
the Company, if required, with an amount not to exceed $2,500,000 in order to
enable the Company to meet its working capital requirements for the balance of
1997; provided, however, that the commitment will terminate in the event the
Company raises no less than $2,500,000 from other sources. In the event that the
Company raises less than $2,500,000, the dollar amount of the commitment will be
reduced on a "dollar for dollar" basis to the extent of such funds raised by the
Company. The exact terms of any working capital provided to the Company will be
subject to negotiation with the Board of Directors.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects
of inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal and expects net revenues to be generally higher during the second and
fourth quarters of each fiscal year for its Tekno Books book licensing and
packaging division as a result of the general publishing
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<PAGE>
industry practice of paying royalties semi-annually and during the summer (when
schools and colleges are not in session) and holiday seasons for its
entertainment retail division. Accordingly, as the Company expands its chain of
Entertainment Super/bullet/Kiosks, it anticipates that its results of operations
will be increasingly affected by seasonality.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants.................... 28
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1995.................................................. 29
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995......................................... 30
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1996 and 1995..................... 31-32
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995........................................ 33
Notes to Consolidated Financial Statements............................ 34
27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Big Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of Big
Entertainment, Inc. (a Florida corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Big Entertainment, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 28, 1997.
28
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,675,852 $ 606,376
Trade receivables, net 95,547 244,598
Merchandise inventories 1,410,603 579,218
Prepaid expenses 654,255 343,235
Franchise fee receivable 700,000 700,000
Other current assets 64,167 104,899
------------ ------------
Total current assets 4,600,424 2,578,326
PROPERTY AND EQUIPMENT, net 2,349,108 1,940,915
INTANGIBLE ASSETS, net 491,265 873,838
GOODWILL, net 345,257 364,697
OTHER ASSETS 457,365 40,000
------------ ------------
$ 8,243,419 $ 5,797,776
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,021,264 $ 1,633,063
Accrued professional fees 98,520 134,721
Other accrued expenses 423,989 284,353
Deferred revenue 1,268,455 959,840
Current portion of capital lease obligations 503,103 154,725
------------ ------------
Total current liabilities 3,315,331 3,166,702
------------ ------------
CAPITAL LEASE OBLIGATIONS, less current portion 731,807 239,040
------------ ------------
MINORITY INTEREST 4,414 23,557
------------ ------------
COMMON STOCK SUBJECT TO REDEMPTION, $.01 par value, 50,000 shares -- 300,000
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 540,177 shares authorized;
none outstanding -- --
Series A variable rate convertible preferred stock, $6.25 stated
value, 217,600 shares authorized; 217,600 issued and outstanding
at December 31, 1996 and 128,000 shares issued and outstanding
at December 31, 1995. Liquidation preference of $1,388,491 at
December 31, 1996 1,360,000 800,000
Series B variable rate convertible preferred stock, $5.375 stated
value, 142,223 shares authorized; 29,767 issued and outstanding
at December 31, 1996. Liquidation preference of $186,049 at
December 31, 1996 160,000 --
Series C variable 4% rate convertible preferred stock, $100 stated
value, 100,000 shares authorized; 20,000 issued and outstanding
at December 31, 1996. Liquidation preference of $2,000,000 at
December 31, 1996 2,000,000 --
Common stock, $.01 par value, 25,000,000 shares authorized;
5,870,601 shares issued and outstanding at
December 31, 1996 and 4,723,876 issued and outstanding at
and December 31, 1995 58,706 47,239
Additional paid-in-capital 22,039,194 16,149,046
Warrants outstanding 566,600 302,000
Accumulated deficit (21,992,633) (15,229,808)
------------ ------------
Total shareholders' equity 4,191,867 2,068,477
------------ ------------
$ 8,243,419 $ 5,797,776
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
29
<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
NET REVENUES $ 7,611,113 $ 6,302,488
COST OF SALES 4,922,761 5,585,963
----------- -----------
Gross profit 2,688,352 716,525
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 4,969,883 5,970,475
Salaries and benefits 3,374,090 2,577,039
Amortization of goodwill and Intangibles 451,683 456,410
----------- -----------
Total operating expenses 8,795,656 9,003,924
----------- -----------
Operating loss (6,107,304) (8,287,399)
OTHER (INCOME) EXPENSE:
Interest (income) expense 182,700 (70,790)
Other, net (55,470) 92,352
----------- -----------
Loss before minority interest (6,234,534) (8,308,961)
MINORITY INTEREST (421,075) (130,931)
----------- -----------
Net loss $(6,655,609) $(8,439,892)
=========== ===========
Net loss per common and common
equivalent share $ (1.23) $ (1.95)
=========== ===========
Weighted average number of common
and common equivalent shares outstanding 5,477,595 4,320,914
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
30
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Additional
Common Preferred Preferred Preferred Paid-in
Stock Stock Series A Stock Series B Stock Series C Capital
------------ --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 40,625 $ -- $ -- $ -- $ 12,416,403
Payment of subscription receivable -- -- -- -- 160,000
Realized loss on securities classified
as available-for-sale -- -- -- -- --
Issuance of stock in connection with
antidilution rights 71 -- -- -- (71)
Services rendered as part of the
subscription agreement -- -- -- -- 26,019
Issuance of options in lieu of cash under
consulting agreement -- -- -- -- 87,500
Issuance of stock in connection with
acquisition of Fedora, Inc 43 -- -- -- 29,957
Issuance of warrants in connection with
services performed -- -- -- -- --
Issuance of stock in connection with
private placement 6,500 -- -- -- 3,429,238
Issuance of warrants in connection with
private placement -- -- -- -- --
Issuance of preferred stock series A to
Tekno Simon, LLC -- 800,000 -- -- --
Net loss for the year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 47,239 800,000 -- -- 16,149,046
Issuance of preferred stock series A to
Tekno Simon, LLC -- 560,000 -- -- --
Issuance of stock options in lieu of
cash under consulting agreements -- -- -- -- 100,000
Issuance of warrants -- -- -- -- --
Conversion of 8.5% Note 829 -- -- -- 517,590
Public issuance of stock 10,000 -- -- -- 4,863,465
Expiration of stock redemption 500 -- -- -- 299,500
Non-cash dividends on preferred stock 138 -- -- -- 78,149
Issuance of preferred stock series B to
Tekno Simon, LLC -- -- 160,000 -- --
Issuance of preferred stock series C
in private placement -- -- -- 2,000,000 (276,156)
Issuance of compensatory options -- -- -- -- 307,600
Net loss for the year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 58,706 $ 1,360,000 $ 160,000 $ 2,000,000 $ 22,039,194
============ ============ ============ ============ ============
</TABLE>
31
<PAGE>
(RESTUBBED FROM PREVIOUS TABLE)
<TABLE>
<CAPTION>
UNREALIZED
WARRANTS ACCUMULATED LOSS ON
OUTSTANDING DEFICIT INVESTMENTS TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ -- $ (6,789,916) $ (73,033) $ 5,594,079
Payment of subscription receivable -- -- -- 160,000
Realized loss on securities classified
as available-for-sale -- -- 73,033 73,033
Issuance of stock in connection with
antidilution rights -- -- -- --
Services rendered as part of the
subscription agreement -- -- -- 26,019
Issuance of options in lieu of cash under
consulting agreement -- -- -- 87,500
Issuance of stock in connection with
acquisition of Fedora, Inc -- -- -- 30,000
Issuance of warrants in connection with
services performed 87,000 -- -- 87,000
Issuance of stock in connection with
private placement -- -- -- 3,435,738
Issuance of warrants in connection with
private placement 215,000 -- -- 215,000
Issuance of preferred stock series A to
Tekno Simon, LLC -- -- -- 800,000
Net loss for the year -- (8,439,892) -- (8,439,892)
------------ ------------ ------------ ------------
Balance, December 31, 1995 302,000 (15,229,808) -- 2,068,477
Issuance of preferred stock series A to
Tekno Simon, LLC -- -- -- 560,000
Issuance of stock options in lieu of
cash under consulting agreements -- -- -- 100,000
Issuance of warrants 264,600 -- -- 264,600
Conversion of 8.5% Note -- -- -- 518,419
Public issuance of stock -- -- -- 4,873,465
Expiration of stock redemption -- -- -- 300,000
Non-cash dividend on preferred stock -- (107,216) -- (28,929)
Issuance of preferred stock series B to
Tekno Simon, LLC -- -- -- 160,000
Issuance of preferred stock series C
in private placement -- -- -- 1,723,844
Issuance of compensatory options -- -- -- 307,600
Net loss for the year -- (6,655,609) -- (6,655,609)
------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 566,600 $(21,992,633) $ -- 4,191,867
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
32
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,655,609) $(8,439,892)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH USED IN
OPERATING ACTIVITIES:
Depreciation and amortization 1,050,992 854,488
Services rendered as part of subscription agreement -- 26,019
Issuance of compensatory stock options and warrants 220,495 174,500
Minority interest 421,075 130,931
Loss on sale of marketable securities -- 92,352
Changes in assets and liabilities:
Trade receivables 149,051 214,366
Prepaid expenses (200,235) 150,508
Merchandise inventories (831,385) (325,842)
Other current assets 40,732 23,611
Other assets 12,514 --
Accounts payable (611,799) 396,085
Accrued professional fees (36,201) (184,833)
Deferred revenue 177,352 259,840
Other accrued expenses 129,564 114,822
----------- -----------
Net cash used in operating activities (6,133,454) (6,513,045)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in NetCo Partners (161,311) (40,000)
Cash used in acquisition, net of cash acquired -- (430,000)
Sale of short-term investments -- 2,816,805
Capital expenditures, net (633,607) (818,879)
Investment in patents and trademarks (49,670) (13,920)
Return of capital from Tekno Books to minority shareholder (440,218) (179,535)
----------- -----------
Net cash provided by (used in) investing activity (1,284,806) 1,334,471
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred stock 2,443,844 800,000
Proceeds from the issuance of common stock 4,873,465 3,435,738
Proceeds from the issuance of warrants 264,600 215,000
Proceeds from sale of 8.5% convertible promissory note 500,000 --
Proceeds from sale-lease back transaction 803,372 --
Repayments under capital lease obligations (397,545) (68,179)
Receipts of subscription receivable -- 160,000
----------- -----------
Net cash provided by financing activities 8,487,736 4,542,559
----------- -----------
Net increase (decrease) in cash and cash equivalent 1,069,476 (636,015)
CASH AND CASH EQUIVALENTS, beginning of period 606,376 1,242,391
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,675,852 $ 606,376
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 237,108 $ 35,882
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH RELATED ACTIVITIES:
In 1996, the Company, in connection with the sale-leaseback transaction
recorded property and equipment and capital lease obligations of $1,080,000,
prepaid expenses of $110,785, other assets of $165,843, and deferred gain of
$131,263.
In 1996 and 1995, the Company entered into capital lease transactions
totaling $158,252 and $299,976, respectively, for equipment.
In 1996, the Company recorded dividends on the preferred stock in the amount
of $107,216 of which $78,287 was paid through the issuance of 13,762 shares
of common stock and $28,929 is accrued as dividends payable.
In 1996, the Company converted the $500,000 8.5% Convertible Promissory Note,
plus accrued interest, into 82,947 shares of the Company's common stock at a
conversion rate of $6.25 per share.
In 1996, the common stock redemption option, granted to a
shareholder/director of the Company as part of the Tekno Books acquisition,
expired unexercised and accordingly $300,000 was reclassified from "Common
Stock Subject to Redemption" to $500 of common stock and $28,929 of Addtional
Paid-in Capital.
In 1995, the Company issued 4,292 shares of common stock totalling $30,000 in
connection with the purchase of Fedora, Inc.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
33
<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) BACKGROUND:
Big Entertainment, Inc. (the "Company") was incorporated in the state of Florida
on January 22, 1993. The Company is a diversified entertainment company, which
owns or controls the exclusive rights to certain original characters and
concepts created by best-selling authors and media celebrities such as Tom
Clancy, Leonard Nimoy, Gene Roddenberry, Mickey Spillane, Arthur C. Clarke, John
Jakes, Anne McCaffrey, Margaret Weis, and Isaac Asimov. The Company uses
illustrated novels to introduce and develop new characters and concepts
(collectively, its "intellectual property") in the marketplace and then the
Company seeks to license these properties across all media, including films and
television, books, multimedia software, toys, and other merchandise. The Company
acquires the rights to its intellectual properties pursuant to agreements that
grant it, on an exclusive basis, all rights in the intellectual property itself,
as well as the right to use the creator's name in the title of the intellectual
property.
The Company has four operating divisions: the publishing division, the licensing
division, the book licensing and packaging division, and the entertainment
division. The publishing and licensing divisions are the primary means by which
the Company utilizes its intellectual properties by focusing on development of
the Company's intellectual properties through the publication of illustrated
novels, and the licensing division, by focusing on licensing the Company's
intellectual properties for books, feature films, television series, toys and
merchandise, and interactive multimedia products. The Company's book licensing
and packaging division focuses on developing and executing book packages
projects, typically with bestselling authors. The entertainment retail division
focuses on developing, operating and franchising the Company's in-line retail
stores and retail kiosks known as "Entertainment Super/bullet/Kiosks."
Substantially all costs associated with the development of intellectual
properties are expensed as incurred in the Company's publishing division. There
can be no assurances that the Company will be able to generate sufficient
revenues from these activities to cover its costs and therefore, the Company may
continue to incur losses.
The Company owns 51% of Tekno Books, the Company's book packaging and licensing
division. It has 890 published books in its history and agreements with more
than 30 publishers to add approximately 150 titles. This division generates
revenue from new book projects in the form of advances paid by publishers, and
from royalties from the division's expanding library of book titles. This
division is also an excellent source for referring authors to the Company for
the development of entertainment properties.
In addition, the Company is a 50% partner in NetCo Partners. NetCo Partners was
formed in June 1995 as a joint venture owned 50% by the Company and 50% by C.P.
Group, Inc., a company in which Tom Clancy is a substantial shareholder.
34
<PAGE>
NetCo Partners is engaged in the publishing and licensing of entertainment
properties.
The Company operates as of December 31, 1996, 27 "Entertainment
Super/bullet/Kiosks" at various shopping malls and one in-line store in Mall of
America.
The Company, through its wholly owned subsidiary, Big Entertainment Franchise
Corp., is currently registered in several states and is in the process of
obtaining additional registrations, to offer Entertainment Super-Kiosk
franchises to third parties for franchise fees and royalties.
The Company has expended significant funds developing its intellectual property,
Entertainment Super/bullet/Kiosks and other businesses. Operating losses since
inception, including the development stage, have resulted in an accumulated
deficit of $21,992,633 at December 31, 1996.
The success of the Company's operations in future years is dependent on
its ability to generate adequate revenue to offset operating expenses. The
Company's management expects to require additional financing for the expansion
of its business, and in particular the growth of the Company's Entertainment
Super/bullet/Kiosks, and to support working capital requirements in future
years. The Company currently is exploring financing alternatives to allow the
Company to finance such expansion. However, there can be no assurance that such
financing alternatives will be available to the Company or will be implemented
on terms favorable to the Company. In the event such financing is not secured,
the Company's Chairman of the Board and Chief Executive Officer and the
Company's Vice Chairman and President, have indicated their intention to provide
the Company, if required, with an amount not to exceed $2,500,000 in order to
enable the Company to meet its working capital requirements for the balance of
1997; provided, however, that the commitment will terminate in the event the
Company raises no less than $2,500,000 from other sources. In the event the
Company raises less than $2,500,000, the dollar amount of the commitment will be
reduced on a "dollar for dollar" basis to the extent of such funds raised by the
Company. The exact terms of any working capital provided to the Company will be
subject to negotiation with the Board of Directors.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION-
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and its 51% and 50.5% owned subsidiaries, Tekno Books
and Fedora, Inc., respectively. All significant intercompany balances and
transactions have been eliminated in consolidation and a minority interest has
been established to reflect the outside ownership of Tekno Books and Fedora,
Inc. The Company's 50% ownership interest in NetCo Partners is accounted for
under the equity method of accounting.
ACCOUNTING ESTIMATES-
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
35
<PAGE>
CASH AND CASH EQUIVALENTS-
The Company considers all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents. Interest bearing amounts
included in cash and cash equivalents were $6,540 and $296,085 at December 31,
1996 and 1995, respectively.
TRADE RECEIVABLES-
Trade receivables consist of receivables from distributors of the Company's
publications and amounts due from publishers relating to signed contracts and is
net of an allowance for doubtful accounts of $39,982 and $54,518 at December 31,
1996 and 1995, respectively.
MERCHANDISE INVENTORIES-
Merchandise inventories consist of retail merchandise and are stated at cost.
Cost is determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT-
Property and equipment are carried at cost. Depreciation is provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives, which range from 3 to 5 years, on a straight-line
basis. Leasehold improvements are amortized over the lesser of the terms of the
respective leases or the service lives of the improvements.
INTANGIBLE ASSETS AND GOODWILL-
Purchase price allocations for the acquisition of Tekno Books and Fedora, Inc.
have been made in accordance with Accounting Principles Board Opinion No. 16
("APB 16"). Pursuant to APB 16, acquired tangible assets have been recorded at
estimated fair value and acquired liabilities at the present value of amounts
due. The excess of the purchase price, including liabilities assumed, over the
value assigned to net tangible assets acquired has been allocated to either
specifically identified intangibles or goodwill.
"Intangible Assets" consist of the following:
DECEMBER 31,
-------------------------------
1996 1995
------------- --------------
Book contracts acquired with Tekno Books $ 1,263,542 $ 1,263,542
Patents and trademarks 202,822 153,152
------------- -------------
1,466,364 1,416,694
Less accumulated amortization (975,099) (542,856)
------------- -------------
$ 491,265 $ 873,838
============= =============
36
<PAGE>
Book contracts are being amortized on a straight-line basis over a period of 3
years, the estimated period over which revenue from contracts is expected.
Patents and trademarks are being amortized on a straight-line basis over 17
years.
Goodwill relating to the acquisition of Tekno Books and Fedora, Inc., amounting
to $388,783, is being amortized on a straight-line basis over 20 years.
Accumulated amortization of goodwill totaled $43,526 and $24,086 as of December
31, 1996 and 1995, respectively.
The Company continually evaluates the amounts of recorded goodwill and
the period over which it is amortized by consideration of events and
circumstances that occur subsequent to its acquisition.
REVENUE RECOGNITION-
Revenue relating to sales at the Company's retail outlets is recognized at the
time of sale. Revenue on sales of the Company's comic books to distributors is
recognized at the time of shipment, net of estimated returns. Subsequent to
December 31, 1996, the Company exited the comic book publishing business.
The costs associated with the exit of the comic book publishing business were
not material.
Revenue relating to the Company's book packaging and licensing division
operations is recognized when the earnings process is complete, typically when a
publisher accepts a book for publishing. Advances received from publishers are
recorded as deferred revenues until the book is accepted by the publisher.
Revenues are recorded net of agents' fees. In the book packaging and licensing
division expenditures for co-editors and permission payments are also deferred
and recorded as prepaid expenses until the book is accepted by the publisher, at
which time such costs are expensed.
Royalty income from book sales is recognized as revenue when the Company is
notified by the publisher of such amounts.
Franchise fee revenue is recognized when all material services or conditions
relating to a franchise agreement have been substantially performed or
satisfied.
PRE-OPENING EXPENSES-
Pre-opening expenses related to new Entertainment Super/bullet/Kiosk openings
are expensed as incurred.
LOSS PER COMMON AND COMMON EQUIVALENT SHARE-
Loss per common and common equivalent share is computed by dividing net loss
after deducting dividends applicable to preferred stock, by the weighted average
number of common and common equivalent shares outstanding. Primary and fully
diluted loss per share are the same.
POST-RETIREMENT BENEFITS-
The Company does not currently provide post-retirement benefits for its
employees.
RECLASSIFICATIONS-
37
<PAGE>
Certain reclassifications were made to prior year statements to conform with the
current year's presentation.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable, approximate fair value due to the short maturity of the
instruments. The fair value of capital lease obligations is estimated using
quoted market prices, whenever available, or an appropriate valuation method and
approximates the carrying amount of capital lease obligations in the
accompanying consolidated balance sheets.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS:
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" ("SFAS 121") in 1996. SFAS 121 establishes accounting
standards for recording the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The adoption of SFAS 121 did not have a
material impact on the Company's financial position or results of its
operations.
The Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION in
1996. SFAS No. 123 allows either adoption of a fair value method of accounting
for stock-based compensation plans or continuation of accounting under
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and related interpretations with supplemental disclosures. The
Company has chosen to account for all stock based arrangements under which
employees receive shares of the Company's stock under APB 25 and make the
related disclosures under SFAS 123. Pro forma loss per share, as if the fair
value method had been adopted, are presented in Note 9. The adoption of SFAS No.
123 did not have a material impact on the Company's results of operations,
financial position or cash flows.
(5) FRANCHISE FEE RECEIVABLE:
In December 1995, the Company entered into an agreement with a warrant holder to
grant certain exclusive franchise rights to develop and open Entertainment
Super/bullet/Kiosks in Canada (excluding the Province of Alberta) for a term of
10 years in exchange for a nonrefundable franchise fee of $700,000 and to build
and sell two fully outfitted and installed Entertainment Super/bullet/Kiosks in
exchange for $300,000. The nonrefundable franchise fee of $700,000 is expected
to be received by the Company during 1997 upon completion of certain training by
the Company of employees of the franchisee and is included in Franchise fee
receivable and Deferred revenue in the accompanying 1996 and 1995 Consolidated
Balance Sheets.
38
<PAGE>
(6) PROPERTY AND EQUIPMENT:
Property and equipment (excluding equipment under capital leases) consists of:
DECEMBER 31,
------------------------
1996 1995
---------- ----------
Furniture and fixtures $ 179,690 $ 47,126
Entertainment Supero/bullet/Kiosks
and convention booths 753,125 1,358,817
Equipment 186,345 296,958
Leasehold improvements 289,311 219,569
----------- -----------
1,408,471 1,922,470
Less: accumulated depreciation and (333,969) (379,738)
amortization -- --
----------- -----------
$ 1,074,502 $ 1,542,732
=========== ===========
Equipment under capital leases consists of:
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
Equipment & Entertainment Supero/bullet/Kiosks $ 1,773,412 $ 507,557
Less: accumulated depreciation (498,806) (109,374)
----------- -----------
$ 1,274,606 $ 398,183
=========== ===========
Depreciation and amortization expense on property and equipment was $599,309 and
$398,078 for the years ended December 31, 1996 and 1995, respectively.
(7) CAPITAL LEASE OBLIGATIONS:
Future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of December 31, 1996 are as follows:
1997 $ 698,753
1998 551,624
1999 292,928
2000 1,470
------------
Minimum lease payments 1,544,775
Less amount representing interest (309,865)
------------
Present value of net minimum lease payments 1,234,910
Less current portion (503,103)
------------
Noncurrent portion $ 731,807
============
In February 1996, the Company entered into a sale and leaseback transaction (the
"Sale-Leaseback). Pursuant to the Sale-Leaseback, the Company sold 18
Entertainment Supero/bullet/Kiosks to the lessor for $1,080,000 (excluding
transaction costs of approximately $50,000) and simultaneously leased the
Entertainment Super/bullet/Kiosks from the lessor for a term of 39 months with
aggregate rental payments of approximately $35,000 per month. The Sale-Leaseback
does not
39
<PAGE>
include the underlying mall leases for the sites of the Company's Entertainment
Supero/bullet/Kiosks, with respect to which the Company remains liable. Upon
expiration of the lease, the Company will have the option to repurchase the
Entertainment Supero/bullet/Kiosks for their fair market value, but in no event
more than $108,000 in the aggregate. As collateral security for the lease, the
Company issued 225,000 shares of its common stock (the "Escrow Shares") which
are held by an escrow agent. In the event that the Company defaults under the
agreements for the Sale-Leaseback, the Escrow Shares will be released to the
lessor. While held in escrow, the Escrow Shares will be voted by the lessor on
all matters in accordance with the recommendations of management and neither the
escrow agent nor the lessor will have any dispositive rights with respect
thereto. As additional consideration for the Sale-Leaseback, the Company also
issued to the lessor warrants to purchase 26,739 shares of common stock,
exercisable for four years commencing on the first anniversary of the date of
grant, at an exercise price of $8.08 per share.
(8) OFFERING OF SECURITIES:
1995 PRIVATE PLACEMENT
On August 15, 1995, the Company sold 650,000 shares of its common stock for
$6.25 per share in a private placement offering (the "1995 Private Placement")
and realized net proceeds of $3,435,738, after deducting fees of the placement
agent and other professional fees and related expenses. In connection with this
offering, the Company granted to its placement agent five-year warrants to
purchase 13,000 additional shares of Common stock for $6.25 per share.
Contemporaneously with the private offering, the Company entered into agreements
to sell to two investors, for aggregate consideration of $499,600, immediately
exercisable four-year warrants to purchase an aggregate of 240,000 shares of
Common stock at an exercise price of $6.25 per share. During the years ended
December 31, 1996 and 1995, $284,600 and $215,000, respectively, of the total
consideration was received from these investors.
TEKNO SIMON, LLC
In November 1995, the Company signed an agreement (the "Stock Purchase
Agreement") to sell up to 320,000 shares of the Company's Series A Variable Rate
Convertible Preferred Stock (the "Series A Preferred Stock") to Tekno Simon, LLC
("Tekno Simon") , an affiliate of the Simon-DeBartolo Group, to fund the cost of
developing 25 Entertainment Super/bullet/Kiosks. The Stock Purchase Agreement
provides for shares of Series A Preferred Stock to be purchased by Tekno Simon
from time to time in installments of 12,800 shares each at a price $6.25 per
share. Each installment closes following the signing of each new lease between
the Company (or one of its affiliates) and the Simon-DeBartolo Group (formally
known as the Simon Property Group, L.P.) (or one of its affiliates) or any other
third party approved by Tekno Simon for a lease by the Company of shopping
center space for one of the Company's Entertainment Super/bullet/Kiosks. Neither
the Company, Simon-DeBartolo Group or any of their respective affiliates are
obligated to enter into such lease. Pursuant to the agreement, Tekno Simon has
acquired 217,600 and 128,000 aggregate shares of the Company's Series A
Preferred Stock as of December 31, 1996 and December 31, 1995, respectively..
The Series A Preferred Stock has a stated value of $6.25 per share and accrues
noncash dividends, payable quarterly in shares of common stock based on
prevailing market prices for the Company's common stock. The dividends accrue on
the stated value of the outstanding shares of Series A
40
<PAGE>
Preferred Stock at a variable rate equal to a specified bank prime rate,
adjusted quarterly, (8.25% as of December 31, 1996). During the two year period
commencing on November 28, 1995, the Series A Preferred Stock is convertible at
the option of the holders into shares of common stock on a one-for-one basis.
After the conversion period expires, the Series A Preferred Stock will be
redeemable at the Company's option for $7.1875 per share in cash. The holders of
the Series A Preferred Stock are entitled to vote together with the holders of
common stock on all matters, with each share of Series A Preferred Stock having
one vote. The Series A Preferred Stock has a liquidating preference of $7.1825
per share over common stock. The holders of Series A Preferred Stock have
certain demand and "piggyback" rights to have such shares (and the shares of
common stock issued as dividends thereon or into which such shares are
convertible) registered by the Company for sale by such holders under the
Securities Act of 1933, as amended. In addition, the Company and certain holders
of common stock have agreed that the Company shall appoint one nominee of Tekno
Simon to the Company's board of directors and that such shareholders shall vote
their shares for election of such nominee of the Company's board of directors.
The Company's agreement with Tekno Simon was amended in October 1996 to extend
the funding arrangement through March 31, 1997, pursuant to which the Company
may fund the development of up to eight additional Entertainment
Super/bullet/Kiosks and to change the future stock to be issued under the
agreement to the Company's Series B Variable Rate Convertible Preferred Stock
(the "Series B Preferred Stock"). As of December 31, 1996, $160,000 in
additional funding has been provided to the Company for the development of two
additional Entertainment Super/bullet/Kiosks pursuant to this amended agreement.
In the first quarter of 1997, an additional $80,000 was funded. The terms of the
Series B Preferred Stock are identical to those of the Series A Preferred Stock,
except that the purchase price per share of the Series B Preferred Stock will be
subject to adjustment on the earlier of March 31, 1997 or completion of all of
the fundings under the amended agreement, based on the market prices of the
Common Stock at the time of each such funding, but in no event shall the
purchase price be greater than $6.25 per share or less than $4.50 per share. As
of December 31, 1996, 29,767 shares of Series B Preferred Stock have been issued
to Tekno Simon at $5.375 per share (based on the initial purchase price as
provided in the amended agreement).
CONVERTIBLE PROMISSORY NOTE
In January 1996, the Company sold an 8.5% Promissory Convertible Note to an
investor in a private transaction for $500,000. On May 15, 1996, the principal
amount of the note and interest accrued thereon was converted into 82,947 shares
of the Company's common stock at a conversion rate of $6.25 per share.
SECONDARY OFFERING
In April, 1996 the Company completed a secondary public offering (the "Secondary
Offering") in which it sold 1,000,000 shares of common stock for $6.00 per
share. The Company realized net proceeds of $4,873,465 from the Secondary
Offering, after deducting underwriting and other professional fees and related
expenses. In connection with this offering, the Company granted the
underwriters, (i) options to purchase from the Company, for a period of five
years, up to 100,000 shares of Common Stock at an exercise price equal to 130%
of the public offering price; and (ii) a two-year advisory services consulting
agreement with an underwriter in consideration of a monthly fee of $2,500.
41
<PAGE>
SALE OF SERIES C CONVERTIBLE PREFERRED STOCK TO A SINGLE INVESTOR
On December 20, 1996, the Company sold 20,000 shares of 4% $100 Series C
Convertible Preferred Stock in a private placement offering (the "Sale of Series
C Convertible Preferred Stock to a Single Investor") and realized net proceeds
of $1,723,844 after deducting placement agent and other professional fees and
related expenses. In connection with the offering the Company granted to
designees of the placement agent five year options to purchase 47,430 shares of
common stock at an exercise price of $6.325 per share.
(9) STOCK OPTION PLANS:
1993 STOCK OPTION PLAN-
Under the Company's 1993 Stock Option Plan (the "1993 Plan"), 350,000 shares of
the Company's common stock are reserved for issuance upon exercise of options.
The 1993 Plan was amended by the Company's Board of Directors in August 1996 and
approved by the shareholders in the 1996 annual shareholders meeting to increase
the number of reserved shares from 350,000 to 1,000,000. The 1993 Plan is
designed to serve as an incentive for retaining qualified and competent
consultants and employees. The Stock Option Committee of the Company's Board of
Directors (the "Committee"), administers and interprets the 1993 Plan and is
authorized to grant options thereunder to all eligible consultants, employees
and officers of the Company.
The 1993 Plan provides for the granting of both "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code of 1986, as amended) and
nonqualified stock options. Options are granted under the 1993 Plan on such
terms and at such prices as determined by the Committee. Each option is
exercisable after the period or periods specified in the option agreement, but
no option can be exercised until six months after the date of grant, or after
the expiration of 10 years from the date of grant. Options granted under the
1993 Plan are not transferable other than by will or by the laws of descent and
distribution. The 1993 Plan also authorizes the Company to make loans to
employees to enable them to exercise their options. Such loans must (i) provide
for recourse to the optionee, (ii) bear interest at a rate no less than the rate
of interest payable by the Company to its principal lender at the time the loan
is made, and (iii) be secured by the shares of common stock purchased. No such
loans were made in either 1996 or 1995.
DIRECTORS STOCK OPTION PLAN-
The Company has established the Directors Stock Option Plan for directors, which
provides for automatic grants to each director of options to purchase shares of
the Company's common stock having a market value at the time of grant equal to
$25,000 (i) upon a person's election as a director and (ii) each year thereafter
upon such person's reelection as a director of the Company, in both instances at
an exercise price equal to the fair market value of the common stock on the date
of the grant. A total of 50,000 shares of common stock have been reserved for
issuance upon exercise of options granted under the Directors Stock Option Plan.
Options granted under the Directors Stock Option Plan become exercisable in full
six months after the date of grant and expire five years after the date of
grant. The Board of Directors, at its discretion, may cancel all options granted
under the Directors Stock Option Plan that remain unexercised on the date of
consummation of certain corporate transactions described in the Directors Stock
Option Plan.
42
<PAGE>
A summary of stock option and warrant transactions for the years ended December
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS WARRANTS
----------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1994 76,408 $ 5.96 158,097 $ 12.84
Granted 348,051 7.20 253,000 6.25
Cancelled (11,012) 6.81 -- --
--------- --------- --------- ---------
OUTSTANDING AT DECEMBER 31, 1995 413,447 6.97 411,097 8.78
Granted 361,755 6.18 209,169 7.06
Cancelled (4,375) 7.79 -- --
--------- --------- --------- ---------
OUTSTANDING AT DECEMBER 31, 1996 770,827 $ 6.53 620,266 $ 8.20
========= ========= ========= =========
</TABLE>
At December 31, 1996, a total of 271,137 and 8,036 options were available for
future grant under the 1993 Plan and Directors Stock Option Plan, respectively.
Additionally, at December 31, 1996, 404,167 stock options and all warrants were
exercisable.
The weighted average fair value of options and warrants granted in 1996 and 1995
was $2.65 per share and $2.96 per share, respectively.
The exercise prices of some options differ from the market price of the stock on
the grant date. The following table summarizes weighted average exercise prices
and fair value of options and warrants granted whose exercise price equals,
exceeds or is less than the market price of the stock on the grant date:
1996 1995
---- ----
Exercise Price Equals Market Price
Weighted average exercise price 6.04 8.00
Weighted average fair value 2.79 3.45
Exercise Price Exceeds Market Price
Weighted average exercise price 7.39 8.00
Weighted average fair value 2.33 2.76
Exercise Price is Less Than Market Price
Weighted average exercise price 0.01 5.82
Weighted average fair value 7.05 3.07
The following table summarizes information about stock options and warrants
outstanding at December 31, 1996:
43
<PAGE>
OPTIONS OUTSTANDING EXERCISABLE
- ---------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------- ----------- ------------ --------- ----------- --------
$ .01 37,648 8.49 $ 0.01 21,764 $ 0.01
4.25-6.38 793,047 5.56 6.13 543,513 6.11
7.25-8.44 410,398 8.48 7.98 259,156 7.96
13.20 150,000 6.86 13.20 150,000 13.20
--------- ----------
.01-13.20 1,391,093 6.64 7.27 974,433 7.56
========= ==========
Had compensation cost for the 1993 Plan and the Directors Stock Option Plan been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have increased to the following pro forma amounts:
1996 1995
---------- -----------
Net Loss As Reported (6,655,609) (8,439,892)
Pro Forma (7,334,526) (8,575,203)
Loss Per Share As Reported (1.22) (1.95)
Pro Forma (1.34) (1.98)
Because the method of accounting prescribed under SFAS No. 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
The fair value of each option grant is estimated on the date of the grant using
an option pricing model with the following weighted average assumptions used for
grants in 1996 and 1995: risk free interest rate of 6.1%; expected lives of 2
years for two year options, 3 years for four year options and 4 years for five
year options and ten year options; and expected volatility of 50.2%.
In 1996, the Company recorded selling, general and administrative expense of
$120,495 related to stock options granted on various dates throughout the year
to non-employees of the Company. An additional $84,380 of compensation cost was
capitalized representing the value of 26,739 stock options issued in connection
with the sale leaseback transaction (See Note 7). In addition, the Company
capitalized $102,725 of deferred publishing costs related to 75,000 options
granted to an outside consultant, of which 50,000 options were vested at
December 31, 1996.
(10) INCOME TAXES:
The Company is in a loss position for both financial and tax reporting purposes.
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" which requires, among other things, recognition of
future tax benefits measured at enacted rates attributable to deductible
temporary differences between financial statement and income tax bases of assets
and liabilities and to tax net operating loss carryforwards to the extent that
realization of said benefits is "more likely than not". The primary item giving
rise to such deferred tax asset is a loss carryforward of approximately
$20,146,000 as a result of the operating losses incurred for the
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<PAGE>
period from inception (January 22, 1993) to December 31, 1996. However, due to
the uncertainty of the Company's ability to generate taxable income in the
future, and, to the extent taxable income is generated in the future, the
uncertainty as to the Company's ability to utilize its loss carryforwards
subject to the "ownership change" provisions of Section 382 of the U.S. Internal
Revenue Code, the Company has established a valuation allowance for the full
amount of the deferred tax asset.
The loss carryforwards expire as follows:
2009 $ 530,000
2010 5,065,000
2011 7,990,000
2012 6,561,000
-------------
$20,146,000
(11) MAJOR CUSTOMERS:
For the year ended December 31, 1995 sales to two customers (comic book
distributors) comprised 17.1% and 17.2%, respectively, of net revenues.
In 1996, neither of these customers accounted for a significant percentage of
revenue which reflects the shift in the Company's strategy to expand its
publishing business though the introduction of illustrated novels and its
simultaneous reduction in the publication of comic books.
(12) NETCO PARTNERS:
In June 1995, the Company and C.P. Group, Inc., a company in which Tom Clancy is
a substantial shareholder ("C.P. Group"), entered into an agreement to form
NetCo Partners (the "NetCo Joint Venture Agreement"). NetCo Partners is engaged
in the publishing and licensing of entertainment properties, including TOM
CLANY'S NETFORCE.
The Company and C.P. Group are each 50% partners in NetCo Partners. C.P. Group
contributed to NetCo Partners all rights to TOM CLANCY'S NETFORCE, and the
Company contributed to NetCo Partners all rights to TAD WILLIAMS' MIRRORWORLD
and all its rights to ARTHUR C. CLARKE'S CRIOSPHINX, NEIL GAIMAN'S LIFERS, and
ANNE MCCAFFREY'S SARABAND.. Although pursuant to the NetCo Joint Venture
Agreement the Company is not obligated to contribute any additional properties
to NetCo Partners, the Company and C.P. Group are working together to obtain
rights from third parties to additional entertainment properties for the NetCo
Partners joint venture. For example, the Company and C.P. Group jointly
negotiated a contract with author Cathy Cash Spellman granting to NetCo Partners
all rights to CATHY CASH SPELLMAN'S MILLENNIUM.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement, the Company
is responsible for developing, producing, manufacturing, advertising, promoting,
marketing and distributing NetCo Partners' illustrated novels and related
products and for advancing all costs incurred in connection therewith. All
amounts advanced by the Company to fund NetCo Partners' operations are treated
as capital contributions of the Company and the Company is entitled to a return
of such capital contributions before distributions of cash flow are split
equally between the Company and C.P. Group. The NetCo Joint Venture Agreement
provides for an initial term (the "Development Term") of 5 years during which
the partners will jointly develop the contributed properties. The Development
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Term may be extended by the mutual consent of the partners and shall terminate
upon 30 days notice to the Company by C.P. Group should Mitchell Rubenstein
cease to be Chief Executive Officer of the Company and Laurie S. Silvers cease
to be the President of the Company. Upon termination of the Development Term,
any undeveloped properties (excluding TOM CLANCY'S NETFORCE) are to be returned
to their respective contributing partner and any properties in development or
already developed are to be properties of the joint venture which shall continue
until its bankruptcy, dissolution or the sale of all or substantially all its
assets.
Through December 31, 1996 pursuant to the NetCo Partners Joint Venture Agreement
the Company made net advancements of approximately $201,000 to NetCo Partners
for development costs of NetCo Partners' entertainment properties and issued
compensatory stock options valued at $102,725 for the benefit of NetCo Partners.
The Company is entitled to reimbursement of these amounts from NetCo Partners.
After this amount is distributed to the Company, excess cash flow of NetCo
Partners, if any, will be split 50% to the Company and 50% to C.P. Group.
In September 1996, NetCo Partners, signed a master toy licensing agreement with
Playmates Toys, Inc., a toy company for a diverse line of toys including action
figures, accessories and vehicles, to be based on TOM CLANCY'S NETFORCE, an
entertainment property owned by NetCo Partners. The agreement calls for advance
payments aggregating one million dollars to NetCo Partners by Playmates Toys
against future royalties (based on a percentage of the selling price of the
licensed products sold by Playmates Toys, Inc.) as earned at later dates. NetCo
Partners delivered character sketches upon which the licensed products will be
based to Playmates Toys, Inc. in October 1996 and an advance payment of $125,000
was received in November 1996. An additional advance payment of $125,000 was
received in the first quarter of 1997. Payments in excess of $1,000,000 will be
payable to NetCo Partners if royalties (based on a percentage of the selling
price of the licensed products sold by Playmates Toys, Inc.) exceed $1,000,000.
In addition, NetCo Partners has licensed TAD WILLIAMS' MIRRORWORLD to
HarperCollins for publication as an illustrated novel.
(13) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES-
The Company conducts its operations in various leased facilities, including
retail locations, and under leases that are classified as operating leases for
financial statement purposes. Certain leases provide for payment of real estate
taxes, common area maintenance, insurance, and certain other expenses,
including, in some instances, contingent rentals based on sales. Lease terms
expire at various dates through the year 2004. Also, certain equipment used in
the Company's operations is leased under operating leases. A schedule of fixed
operating lease commitments at December 31, 1996 follows:
1997 $ 1,309,713
1998 1,005,836
1999 932,059
2000 822,837
2001 474,697
Thereafter 394,431
--------------
Total $ 4,939,573
==============
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Rent expense, including equipment rentals, was $1,175,443 and $637,536 during
1996 and 1995 respectively, and is included in Selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
EMPLOYMENT AGREEMENTS-
Effective July 1, 1993, the Company entered into five year employment agreements
with each of Mitchell Rubenstein, to serve as Chairman of the Board and Chief
Executive Officer, and Laurie Silvers, to serve as Vice Chairman of the Board
and President . Mitchell Rubenstein and Laurie Silvers are also shareholders in
the Company. The terms of each of the employment agreements will automatically
be extended for successive one year terms unless the Company or the executive
gives written notice to the other at least 90 days prior to the then scheduled
expiration date. Each of the employment agreements provides for an annual salary
of $200,000 (subject to cost-of-living increases), an annual bonus of an amount
determined by the Board of Directors (but not less than $25,000), and an
automobile allowance of $650 per month. Each employment agreement generally
provides that the executive will continue to receive his or her salary until the
expiration of the terms of the employment agreements if the executive's
employment is terminated by the Company for any reason other than death,
disability or cause (as defined in the employment agreements), or for a period
of 12 months after termination of the employment agreement as a result of the
executive's disability, and that the executive's estate will receive a lump-sum
payment equal to one year's base salary plus a pro rata portion of any bonus to
which the executive is entitled upon termination of the employment agreement by
reason of the executive's death. A termination by the Company of the employment
of one of the executives will constitute a termination without cause of the
other executive for purposes of the employment agreements. Each employment
agreement also prohibits the executive from directly or indirectly competing
with the Company for one year after termination of the employment agreement for
any reason except the Company's termination of the executive's employment
without cause. If a Change of Control (as defined in the employment agreements)
occurs, the employment agreements provide for the continued employment of the
executives until the earlier of two years following the Change of Control or the
then scheduled expiration date of the term of employment. In addition, following
a Change of Control, if the executive's employment is terminated by the Company
other than for cause or by reason of the executive's death or disability, or by
the executive for certain specified reasons (such as a reduction of the
executive's compensation or diminution of the executive's duties), the executive
will receive a lump-sum cash payment equal to three times the executive's then
existing base salary and most recent annual bonus. Mitchell Rubenstein and
Laurie Silvers each received compensation for the years ended December 31, 1996
and 1995 of $241,611 and $224,196, respectively, which is included in Salaries
and benefits in the accompanying Consolidated Statements of Operations.
CONSULTING AGREEMENTS-
The Company has entered into consulting agreements, with various experts in the
industry, which expire through March 2003. Four of the these consultants (two of
which are Directors of the Company) have the option to receive either cash or
stock options to purchase the Company's common stock, exercisable for nominal
consideration, in consideration for services rendered. The number of shares
under such options are determined based on the fair market value of the
Company's common stock at the date of grant. During 1996 and 1995, each of the
four consultants received stock options with a fair market value of $25,000 and
$21,875, respectively, which is reflected as an addition to Additional
paid-in-capital in the accompanying Consolidated Statements of Shareholders'
Equity. Total expenses relating to these agreements for each of the
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years ended December 31, 1996 and 1995 was $100,000 and $114,400, respectively,
and is included in Selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations.
The minimum future obligation on the above agreements at December 31, 1996 is
$50,000 due in 1997.
SHAREHOLDER/DIRECTOR CONSULTING AGREEMENT-
The Company is obligated under a ten year consulting agreement, which expires
November 2003, to pay the Chief Executive Officer of its book licensing and
packaging division (who is also one of its shareholders/directors) $30,000 per
year for services. The agreement can be terminated by either the Company or the
shareholder/director beginning in January 1998 or under certain other
conditions.
Additionally, as a result of the Company entering into a financing transaction
to raise capital in excess of $1,000,000 through the sale of the Company's
securities within nine months of the date of the agreement entered into as part
of the acquisition of Tekno Books, this shareholder/director had the option to
require the Company to purchase, at $6.00 per share, 50,000 shares of the
Company's common stock. The carrying value of these shares of $300,000 is
reflected as "Common Stock Subject to Redemption" in the accompanying
consolidated balance sheet as of December 31, 1995. The common stock redemption
option expired unexercised on June 13, 1996. Accordingly, the $300,000 was
reclassified to common stock and additional paid-in capital as reflected in the
consolidated balance sheet as of December 31, 1996.
AGREEMENT WITH INVESTMENT BANKERS-
In August 1996, the Company entered into an agreement with an investment banker
(the "Strategic Advisor") to provide financial and strategic advisory services.
As consideration for services performed under this agreement, the Company has
paid the Strategic Advisor an annual retainer fee consisting of $25,000 in cash
and issued four-year warrants to purchase 35,000 shares of the Company's common
stock at $5.138 per share, the then market value of the stock.
48
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Mitchell Rubenstein(1)(2)...... 43 Chairman and Chief Executive Officer
Laurie S. Silvers(1)........... 45 Vice Chairman, President, Secretary
and Publisher
Dr. Martin H. Greenberg(1)..... 56 Chief Executive Officer of Tekno
Books and Director
Harry Hoffman(2)............... 69 Director
Dr. Lawrence Gould(2).......... 66 Director
Jules L. Plangere, Jr.......... 76 Director
E. Donald Lass................. 59 Director
Deborah J. Simon............... 40 Director
John W. Waller, III............ 45 Director
- ----------
(1) Member of Compensation Committee
(2) Member of Stock Option Committee
MITCHELL RUBENSTEIN is a founder of the Company and has served as its
Chairman of the Board and Chief Executive Officer since its inception in January
1993. Mr. Rubenstein was a founder of the Sci-Fi Channel, a 24-hour national
cable television network devoted to science fiction, fantasy and horror
programming, which was acquired from Mr. Rubenstein and Laurie S. Silvers by USA
Network (a partnership of Viacom and the Universal division of The Seagram
Company, Ltd.) in March 1992. Mr. Rubenstein served as President of the Sci-Fi
Channel from January 1989 to March 1992 and served as Co-Vice Chairman of the
Sci-Fi Channel from March 1992 to March 1994. Prior to founding the Sci-Fi
Channel, Mr. Rubenstein practiced law for 10 years, including as a partner
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with Rubenstein & Silvers, a law firm that specialized in entertainment, cable
television and broadcasting law, from 1981 to 1989. Mr. Rubenstein also co-owned
and served as an executive officer of several cable television systems
(including Flagship Cable Partners, which owned a cable television system
serving Boynton Beach and portions of Palm Beach County, Florida) from 1983 to
1989. Mr. Rubenstein received a J.D. degree from University of Virginia School
of Law in 1977 and a Masters in Tax Law from New York University School of Law
in 1979. Together with Ms. Silvers, Mr. Rubenstein was named Co-Business Person
of the Year, City of Boca Raton, Florida, in 1992. Mr. Rubenstein is married to
Laurie S. Silvers.
LAURIE S. SILVERS is a founder of the Company and has served as its
Vice Chairman, President and Secretary since its inception in January 1993. Ms.
Silvers also serves as the Company's Publisher. Ms. Silvers was a founder of the
Sci-Fi Channel, of which she served as Chief Executive Officer from January 1989
to March 1992 and Co-Vice Chairman from March 1992 to March 1994. Prior to
founding the Sci-Fi Channel, Ms. Silvers practiced law for 10 years, including
as a partner with Rubenstein & Silvers, a law firm that specialized in
entertainment, cable television and broadcasting law, from 1981 to 1989. Ms.
Silvers also co- owned and served as an executive officer of several cable
television systems (including Flagship Cable Partners, which owned a cable
television system serving Boynton Beach and portions of Palm Beach County,
Florida) from 1983 to 1989 and co-owned a television station from 1990 to 1991.
Ms. Silvers received a J.D. degree from University of Miami School of Law in
1977. Ms. Silvers has also served on the Board of Directors of the Pine Crest
Preparatory School, Inc. since 1993. She has been a member of the Pine Crest
Preparatory School, Inc. Board of Advisors (Boca Raton Campus) since 1987, and
also currently serves as its Chairman. Ms. Silvers has served as a member of the
executive Advisory Board of the School of Business of Florida Atlantic
University since 1996, and has been a member of the Economic Council of Palm
Beach County since 1995. Together with Mr. Rubenstein, Ms. Silvers was voted
Co-Business Person of the Year, City of Boca Raton, Florida, in 1992, and has
been a keynote speaker at various business symposia, including one held at
Harvard Business School. Ms. Silvers is married to Mitchell Rubenstein.
DR. MARTIN H. GREENBERG has served as a director of the Company since
July 1993, and as a consultant to the Company from February 1993 to December
1994. Since December 1994, Dr. Greenberg has served as Chief Executive Officer
of Tekno Books, 51% of which is owned by the Company and 49% of which is owned
by Dr. Greenberg. Dr. Greenberg was President and a principal shareholder of
Tomorrow, Inc., a company engaged in book licensing and packaging, from 1990
until its acquisition by the Company in 1994. See "Certain Relationships and
Related Transactions -- Tekno Books Acquisition." Dr. Greenberg is also
co-publisher of MYSTERY SCENE MAGAZINE, a trade journal of the mystery genre of
which the Company owns a majority interest, and a member of the Board of
Advisors of the Sci-Fi Channel. Dr. Greenberg is widely regarded as the leading
anthologist in trade publishing, and has served as editor or author of more than
600 books in various genre, including science fiction, fantasy, mystery and
adventure. Dr. Greenberg also is the 1995 recipient of the Ellery Queen Award,
presented by the Mystery Writers of America for Lifetime Achievement.
HARRY T. HOFFMAN has served as a director of the Company since July
1993. Prior to his retirement in 1991, Mr. Hoffman served as President and Chief
Executive Officer of Waldenbooks, Inc., a leading national retailer of books,
magazines and related items, from 1979
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to 1991, and as President and Chief Executive Officer of Ingram Book Company, a
national book wholesaler, from 1968 to 1978.
DR. LAWRENCE GOULD has served as a director of the Company since July
1993. Dr. Gould served as an executive officer of M/A-COM, Inc., a New York
Stock Exchange listed company engaged in the manufacture of electronic
components for the defense industry, from 1962 to 1982, including as Chief
Executive Officer (1975 to 1982), President (1969 to 1975) and Executive Vice
President and Chief Operating Officer (1962 to 1969); he also served as Chairman
of the Board of M/A-COM, Inc. from 1978 to 1982 and as a consultant to that
company from 1982 to 1990. Dr. Gould's primary business activities since 1990
have been as Chairman of the Board and principal of several private companies,
including Gould Enterprises, Inc. (resort development) and Point Sebago
Enterprises, Inc. (management of the Point Sebago, Maine resort), since 1974,
and Chairman of the Board of Point Sebago Camp Sunshine, Inc., a not-for-profit
corporation, since 1985.
JULES L. PLANGERE, JR. has served as a director of the Company since
July 1993. Mr. Plangere has been Chairman of the Board of Asbury Park Press,
Inc. ("Asbury Park Press"), the owner of ASBURY PARK PRESS, New Jersey's second
largest newspaper since 1980 and has served Asbury Park Press in various
capacities since 1947, including Chief Executive Officer (1980 to 1991),
Publisher of ASBURY PARK PRESS (1977 to 1991), President and General Manager
(1974 to 1977) and Production Manager (1954 to 1974). In addition, Mr. Plangere
has been Chairman of the Board of New Jersey Press, Inc., of which Asbury Park
Press is a wholly owned subsidiary, since May 1991. Mr. Plangere is a former
director of the New Jersey State Chamber of Commerce and a trustee and former
chairman of the Monmouth College Board of Trustees.
E. DONALD LASS has served as a director of the Company since July 1993.
Mr. Lass has been President and Chief Executive Officer of New Jersey Press
since May 1991, President and Chief Executive Officer of Asbury Park Press since
1980 and 1991, respectively, and Editor and Publisher of ASBURY PARK PRESS since
1991. Mr. Lass is a member of numerous trade organizations, including the
American Society of Newspaper Editors, the American Newspaper Publishers
Association, the Society of Newspaper Design, the National Association of
Broadcasters and the National Association of Television Programming Executives,
and has served as Chairman (1989) and President (1988) of the New Jersey Press
Association and as President (1989) of the New Jersey Press Foundation. Mr. Lass
currently serves as Chairman of the New Jersey State Committee on Press Freedom
and Press Responsibility, a director of the Journalism Resources Institute at
Rutgers University, a member of the Board of Visitors of Columbia University
Graduate School of Journalism, and a member of the Board of Overseers of Rutgers
University.
DEBORAH J. SIMON has served as a director of the Company since November
1995. Ms. Simon has held the position of Senior Vice President of Simon Property
Group, now the Simon-DeBartolo Group, an Indianapolis-based real estate
development and management firm that is listed on the New York Stock Exchange,
since 1991. Prior to that, Ms. Simon served as Vice President -- Western Region
Leasing of the Simon Property Group. Prior to serving as
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a leasing representative, Ms. Simon served as director of internal
communications and assistant director of training at the Simon Property Group.
She also has been an independent producer, with several television credits to
her name. A native of Indianapolis, Ms. Simon attended the University of
Southern California. She is a member of the International Council of Shopping
Centers and is a graduate of that organization's leasing institute. She
currently serves on the Board of Directors of the Indianapolis Children's
Museum, Indiana Repertory Theatre, Indianapolis Museum of Art and Circle
Centre's Youth Investment Fund.
JOHN W. WALLER, III was elected to serve as a director of the Company
in 1996. Mr. Waller is the Chairman of Waller Capital Corporation, a cable
television investment banking firm that he founded in 1982. Prior to founding
Waller Capital Corporation, Mr. Waller served as a divisional manager for Home
Box Office, Inc. ("HBO"), with responsibility for HBO's relationship with more
than 300 cable operators in the middle-Atlantic states. Prior to working with
HBO, Mr. Waller served as financial analyst in the corporate treasurer's office
of Time, Inc., the parent company of HBO. A native of Alexandria, Virginia, Mr.
Waller holds an undergraduate degree and a master's degree in Business
Administration from the University of Virginia. Mr. Waller serves on the Board
of Directors of Convergent Media Systems Corporation and Winthrop Opportunity
Funds, and is a member of the James Madison Council of the Library of Congress.
The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board. The Company's directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified.
Pursuant to the Simon Stock Purchase Agreement, Tekno Simon has the
right to designate one nominee to the Company's Board of Directors until such
time as Tekno Simon holds less than 25% of the sum of (i) the shares of Series A
Preferred Stock purchased pursuant to the Simon Stock Purchase Agreement (or
shares of Common Stock issued or issuable upon conversion thereof) and (ii) the
shares of Common Stock purchased by Tekno Simon in the Company's August 1995
private offering. Certain principal shareholders of the Company, including
Mitchell Rubenstein, Laurie S. Silvers, Asbury Park Press and Dr. Martin H.
Greenberg, have agreed to vote their shares of Common Stock in favor of the
election of Tekno Simon's nominee to the Board of Directors. Tekno Simon's
current nominee on the Board of Directors is Deborah J. Simon. See "Certain
Relationships and Related Transactions -- Preferred Stock Investment by Tekno
Simon."
In connection with the Company's public offering consummated in April
1996, the Company has also agreed, for the one year period from consummation of
the offering, to elect one designee of the lead underwriter to the Board of
Directors of the Company. The Underwriter's nominee to the Board of Directors is
John W. Waller, III.
OTHER SIGNIFICANT PERSONNEL
Although not executive officers of the Company, the following
individuals play a significant role in the Company's operations:
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PHILIP R. EGGEN, the Company's Senior Vice President -- Retail
Operations, has served as an officer of the Company since March 1994. Prior to
joining the Company, Mr. Eggen served as District Manager for South Florida for
Blockbuster Entertainment Corporation ("Blockbuster") from April 1989 to
February 1994, where his responsibilities included supervising approximately 200
employees through store managers, as well as enforcing compliance with corporate
policies on store appearance, operational standards and customer service.
JAMES TRINDADE, the Company's Senior Vice President -- Corporate
Operations/Real Estate, has served as an officer of the Company since August
1993. Prior to joining the Company, Mr. Trindade was the owner and President of
Realty Marketing Corporation, a privately owned real estate brokerage,
development and management company, since 1976. Mr. Trindade is a former
director of the Palm Beach County Association of Realtors and a member of the
Florida and National Associations of Realtors.
DEAN JOLLIFFE has served as the Company's Director of Retail Operations
since October 1995. From April 1991 until October 1995, Mr. Jolliffe was
employed at Blockbuster where he held a number of positions in operations
management, most recently that of Franchise Operations Manager, where his
responsibilities included overseeing more than 1,500 employees in 132
Blockbuster Video stores. Mr. Jolliffe provides the Company with more than 20
years of experience within the fields of operations and multi-unit management.
BETH KRUMPER joined the Company in February 1995 as Director of Human
Resources. Before joining the Company, Ms. Krumper was with Blockbuster for more
than five years, where she held a number of positions in Blockbuster's Human
Resources department and was responsible for human resources for all
company-owned video stores in the Southeast and for all Golf and Games, Block
Party, corporate and regional Blockbuster employees.
MELISSA FORZLY joined the Company as Controller in January 1996. Prior
to joining the Company, Ms. Forzly was Controller of Pharmacy Services
Group/Managed Healthcare Systems, Inc., a mail-order pharmaceutical company,
where she supervised the accounting department and was responsible for all
set-up, implementation and reporting of all financial information. Ms. Forzly
also has extensive financial experience in the retail industry. Ms. Forzly is a
graduate of Boston University.
LARRY SEGRIFF joined the Company in July 1994 as Vice President of
Tekno Books. For at least five years prior thereto, Mr. Segriff was a
self-employed writer and editor, and since 1993 has also served as assistant
editor of MYSTERY SCIENCE MAGAZINE. Mr. Segriff is the author of more than a
dozen science fiction, fantasy, mystery and horror short stories. His story,
"Unkindest Cut," appeared in THE YEAR'S 25 FINEST CRIME AND MYSTERY STORIES
(FOURTH ANNUAL EDITION), published by Carroll & Graf. SPACER DREAMS, his first
novel, was published by Baen Books in November 1995. Mr. Segriff is also the
co-editor of the multiple-award-winning THE FINE ART OF MURDER (Carroll & Graf,
1993) and the recently published anthology FUTURE NET (DAW Books).
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COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's outstanding Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock. Such persons are required by SEC regulation to
furnish the Company with copies of all such reports they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company or written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10% beneficial owners for the
year ended December 31, 1996 have been complied with.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table sets forth the
aggregate compensation paid in 1996, 1995 and 1994 to the Chief Executive
Officer and to the President, the only other executive officer of the Company
whose total annual salary and bonus during 1996 was $100,000 or more (the Chief
Executive Officer and the President are sometimes referred to herein together as
the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION AWARDS
--------------------------------------------------- -------------
OTHER SHARES
ANNUAL UNDERLYING
COMPENSATION OPTIONS/SARS
NUMBER AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) (#)
- ----------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Mitchell Rubenstein, 1996 208,811 25,000 7,800(1) 75,000(2)
Chief Executive Officer 1995 199,200 25,000 7,800(1) 72,500(2)
1994 151,800 40,000 7,800(1)
Laurie S. Silvers, 1996 208,811 25,000 7,800(1) 75,000(2)
President 1995 199,200 25,000 7,800(1) 72,500(2)
1994 151,800 40,000 7,800(1)
<FN>
- ----------
(1) Represents a car allowance paid to the Named Executive Officer.
(2) Represents options granted under the Company's 1993 Stock Option Plan (the "1993
Plan").
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS. Effective July 1, 1993, the Company entered into
five year employment agreements with each of Mitchell Rubenstein, the Company's
Chairman and Chief Executive Officer, and Laurie S. Silvers, the Company's Vice
Chairman and President. The terms of each of the employment agreements are
automatically extended for successive one-year
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terms unless the Company or the Named Executive Officer gives written notice to
the other at least 90 days prior to the then-scheduled expiration date. Each of
the employment agreements provides for an annual salary currently set at
$200,000 (subject to automatic cost-of-living increases), an annual bonus in an
amount determined by the Board of Directors (but not less than $25,000) and an
automobile allowance of $650 per month.
Each employment agreement provides that each of the Named Executive
Officers will continue to receive his or her salary until the expiration of the
term of the employment agreements if the Named Executive Officer's employment is
terminated by the Company for any reason other than death, disability or Cause
(as defined in the employment agreements), or for a period of 12 months after
termination of the employment agreement as a result of the Named Executive
Officer's disability, and that the Named Executive Officer's estate will receive
a lump sum payment equal to one year's base salary plus a pro rata portion of
any bonus to which the Named Executive Officer is entitled upon termination of
the employment agreement by reason of the Named Executive Officer's death.
The term "Cause" is defined in the employment agreements to mean (a) a
Named Executive Officer's act or omission which constitutes a willful and
material breach of such Named Executive Officer's employment agreement which is
not cured within 30 days after such Named Executive Officer's receipt of notice
of such breach, (b) a Named Executive Officer's fraud, embezzlement or
misappropriation of the Company's assets or property, or (c) a Named Executive
Officer's conviction for a criminal act that is a felony. A termination by the
Company of one of the Named Executive Officer's employment without Cause will
constitute a termination without Cause of the other Named Executive Officer for
purposes of the employment agreements. Each employment agreement also prohibits
the Named Executive Officer from directly or indirectly competing with the
Company for one year after termination of the employment agreement for any
reason except the Company's termination of the Named Executive Officer's
employment without Cause.
If a Change of Control (as defined in the employment agreements)
occurs, the employment agreements provide for the continued employment of the
Named Executive Officers until the earlier of two years following the Change of
Control or the then-scheduled expiration date of the term of employment. The
term "Change of Control," as used in the employment agreements, is defined to
mean (a) any person's or group's acquisition of 20% or more of the combined
voting power of the Company's outstanding securities, or (b) in the event of any
cash tender or exchange offer, merger or other business combination, sale of
assets or contested election, the persons who were directors of the Company
prior to such transaction ceasing to constitute a majority of the Board of
Directors following the transaction. In addition, following a Change in Control,
if the Named Executive Officer's employment is terminated by the Company other
than for Cause or by reason of the Named Executive Officer's death or
disability, or by the Named Executive Officer for certain specified reasons
(such as a reduction of the Named Executive Officer's compensation or diminution
of the Named Executive Officer's duties), the Named Executive Officer will
receive a lump sum cash payment equal to three times the Named Executive
Officer's then-existing base salary and most recent annual bonus.
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<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information concerning individual grants of stock options made during the fiscal
year ended December 31, 1996 to each of the Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR PRICE ($/SHARE) DATE
- ------------------- ------------- --------------- --------------- ----------
<S> <C> <C> <C> <C>
Mitchell Rubenstein 75,000 44% $6.38 5/16/06
Laurie Silvers 75,000 44% $6.38 5/16/06
<FN>
- ----------
(1) Represents options granted under the 1993 Plan. Such options vest in
four equal installments over a four-year period commencing one year from
the date of grant.
</FN>
</TABLE>
STOCK OPTIONS HELD AT END OF 1996. The following table indicates the
total number and value of exercisable and unexercisable stock options held by
each Named Executive Officer as of December 31, 1996. No options were exercised
by the Named Executive Officers during the year ended December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Mitchell Rubenstein 18,125 129,375 -- --
Laurie S. Silvers 18,125 129,375 -- --
<FN>
- ----------
(1) There were no in-the-money options for the Named Executive Officers
at December 31, 1996.
</FN>
</TABLE>
LONG-TERM INCENTIVE AND PENSION PLANS. The Company does not have any
long-term incentive or pension plans.
COMPENSATION OF DIRECTORS. Directors of the Company who are neither
employees nor consultants ("non-employee directors") are compensated at the rate
of $1,000 for each meeting of the Board of Directors attended, and all directors
are reimbursed for travel and lodging expenses in connection with their
attendance at meetings. The Company has established for the non-employee
directors the Director's Stock Option Plan (the "Directors Plan"), which
provides for automatic grants to each non-employee director of options to
purchase shares of Common
57
<PAGE>
Stock having a market value at the time of grant equal to $25,000 (i) upon a
person's election as a director and (ii) each year thereafter upon such person's
reelection as a director of the Company, in both instances at an exercise price
equal to the fair market value of the Common Stock on the date of the grant. A
total of 50,000 shares of Common Stock have been reserved for issuance upon
exercise of options granted under the Directors Plan. Options granted under the
Directors Plan become exercisable six months after the date of grant and expire
five years after the date of grant. The Board of Directors, in its discretion,
may cancel all options granted under the Directors Plan that remain unexercised
on the date of consummation of certain corporate transactions described in the
Directors Plan. The Directors Plan will terminate in July 2003 unless sooner
terminated under the provisions thereof. As of March 21, 1997, options to
purchase 29,464 shares of Common Stock were outstanding under the Directors Plan
as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES SUBJECT EXERCISE EXPIRATION
NAME OF DIRECTOR TO OPTIONS PRICE GRANT DATE DATE
---------------- --------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Dr. Lawrence Gould 3,125 $8.00 11/1/93 11/1/03
4,762 $5.25 8/23/96 8/23/01
Harry T. Hoffman 3,125 $8.00 11/1/93 11/1/03
4,762 $5.25 8/23/96 8/23/01
Deborah J. Simon 4,166 $6.00 11/8/95 11/8/05
4,762 $5.25 8/23/96 8/23/01
John W. Waller, III 4,762 $5.25 8/23/96 8/23/01
</TABLE>
See "Certain Transactions -- Consulting Agreements" for a description
of consulting agreements between the Company and certain of its directors.
STOCK OPTION PLAN. Under the 1993 Plan, 1,000,000 shares of Common
Stock are reserved for issuance upon exercise of options. The 1993 Plan is
designed to serve as an incentive for retaining qualified and competent
consultants and employees. The Stock Option Committee of the Company's Board of
Directors (the "Committee") administers and interprets the 1993 Plan and is
authorized to grant options thereunder to all eligible consultants and
employees, including officers of the Company.
The 1993 Plan provides for the granting of both "incentive stock
options" (as defined in Section 422 of the Code) and nonqualified stock options.
Options are granted under the 1993 Plan on such terms and at such prices as
determined by the Committee. Each option is exercisable after the period or
periods specified in the option agreement, but no option can be exercised until
six months after the date of grant or more than 10 years from the date of grant.
Options granted under the 1993 Plan are not transferable other than by will or
by the laws of descent and distribution. The 1993 Plan also authorizes the
Company to make loans to optionees
58
<PAGE>
to enable them to exercise their options. Such loans must provide for recourse
to the optionee, be interest-bearing and be secured by the shares of Common
Stock purchased.
Except for certain options granted and to be granted pursuant to the
consulting agreements (see "Certain Relationships and Related Transactions --
Consulting Agreements"), the exercise price of all options granted under the
1993 Plan will not be less than 85% of fair market value of Common Stock on the
date of grant.
As of March 21, 1997, options to purchase 770,827 shares of Common
Stock were outstanding under the 1993 Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. All
compensation decisions during 1996 were made by the Compensation Committee,
which consisted of Mitchell Rubenstein and two independent directors, Harry T.
Hoffman and Dr. Lawrence Gould. No changes to the compensation of either of the
Named Executive Officers were made in 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 21, 1997 by (i)
each of the shareholders of the Company who owns more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) the Chief
Executive Officer of the Company, and (iv) all directors and executive officers
of the Company as a group. Except as otherwise indicated, the Company believes
that all beneficial owners named in the table have sole voting and investment
power with respect to all shares of Common Stock beneficially owned by them.
PERCENTAGE OF
NAME AND ADDRESS OF NUMBER OF SHARES BENEFICIAL
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OWNERSHIP
- ---------------------------------------- ------------------ -------------
Mitchell Rubenstein(2)................. 1,736,705 28.4%
Laurie S. Silvers(2)................... 1,736,705 28.4%
Asbury Park Press, Inc.(3)............. 758,229 12.2%
Tekno Simon, LLC(4).................... 400,562 6.3%
Dr. Martin H. Greenberg(5)............. 254,062 4.2%
Harry T. Hoffman(6).................... 7,887 *
Dr. Lawrence Gould(6).................. 7,887 *
Jules L. Plangere, Jr.(7)(8)........... 9,764 *
E. Donald Lass(7)(8)................... 9,764 *
Deborah J. Simon(9).................... 8,928 *
John W. Waller, III (10)............... 4,762 *
59
<PAGE>
PERCENTAGE OF
NAME AND ADDRESS OF NUMBER OF SHARES BENEFICIAL
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OWNERSHIP
- ---------------------------------------- ------------------ ------------
All directors and executive officers
of the Company as a group (nine
persons)(7)(9)(11)................... 2,039,759 32.9%
* Less than 1%
(1) The business address of Mr. Rubenstein and Ms. Silvers is 2255 Glades Road,
Suite 237 West, Boca Raton, Florida 33431; the business address of Asbury
Park Press, Inc. is 3601 Highway 66, Neptune, New Jersey 07754; and the
business address of Tekno Simon, LLC is 115 W. Washington Street,
Indianapolis, Indiana 46204.
(2) All of such shares owned by Mr. Rubenstein and Ms. Silvers are held by them
as tenants by the entirety. Includes for each of Mr. Rubenstein and Ms.
Silvers 18,125 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of the date hereof.
(3) Includes 100,000 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(4) Includes 192,000 shares of Series A Preferred Stock and 44,650 shares of
Series B Preferred Stock. The Series A Preferred Stock and Series B
Preferred Stock vote together with the Common Stock as a single class
(except as required by law), with the Series A Preferred Stock and Series B
Preferred Stock having one vote per share.
(5) Includes (i) 91,667 shares of Common Stock owned by Dr. Greenberg's spouse,
and (ii) 24,028 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(6) Represents shares of Common Stock issuable pursuant to currently
exercisable stock options.
(7) Does not include 758,229 shares of Common Stock beneficially owned by
Asbury Park Press, of which Messrs. Plangere and Lass are directors and
executive officers, with respect to which shares Messrs. Plangere and Lass
disclaim beneficial ownership.
(8) Includes shares of Common Stock issuable pursuant to currently exercisable
stock options held by each of Messrs. Plangere and Lass.
(9) Includes 4,166 shares of Common Stock issuable pursuant to stock options
which become exercisable within 60 days of the date hereof. Does not
include the shares of Common Stock, Series A Preferred Stock and Series B
Preferred Stock owned by Tekno Simon, with respect to which Ms. Simon
disclaims beneficial ownership. Tekno Simon is controlled by Melvin Simon,
Deborah J. Simon's father.
(10) Includes 109,270 shares of Common Stock issuable pursuant to options
exercisable within 60 days of the date hereof.
60
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ASBURY PARK PRESS
Asbury Park Press, which owns the second largest newspaper in New
Jersey, is a principal shareholder of the Company, having invested an aggregate
of approximately $2,250,000 in the Company both before its initial public
offering and in its 1995 private offering (see "August 1995 Private Offering,"
below and "Security Ownership of Certain Beneficial Owners and Management" under
Item 11 of Part III of this Form 10-KSB).In July 1993, Mitchell Rubenstein and
Laurie S. Silvers entered into a stock option agreement with Asbury Park Press,
at the request of Asbury Park Press, pursuant to which they granted Asbury Park
Press a two-year option to purchase a number of shares of Common Stock equal to
2.5% of the total number of shares of the Company's common stock outstanding
from time to time from them for an exercise price of $250,000. In January 1995,
Asbury Park Press exercised the option and purchased 98,229 shares of Common
Stock from Mr. Rubenstein and Ms. Silvers. Asbury Park Press has no further
rights to purchase additional shares of Common Stock from Mr. Rubenstein and Ms.
Silvers. In July 1995, the Company granted Asbury Park Press an option to
purchase 100,000 shares of Common Stock at a price of $6.13 per share. Such
option is exercisable until July 2000. The Company currently has no other
outstanding agreements with Asbury Park Press.
TEKNO BOOKS
During the fourth quarter of 1994, the Company acquired a controlling
interest in the book licensing and packaging business (now called Tekno Books)
conducted by Dr. Martin H. Greenberg, a director of the Company, and Tomorrow,
Inc., a corporation owned by Dr. Greenberg and his wife, Rosalind Greenberg (the
"Tekno Books Acquisition"). The total purchase price was $1,600,000, $500,000 of
which was paid in cash and the balance of which was paid in shares of the
Company's Common Stock valued at the then-current market price. As a result of
this acquisition, the book licensing and packaging business formerly conducted
by Dr. Greenberg and Tomorrow, Inc. is now held in Tekno Books, 51% of which is
owned by the Company and 49% of which is owned by Dr. Greenberg. Dr. Greenberg
serves as Chief Executive Officer of Tekno Books.
The Tekno Books Acquisition was effected through the following
transactions: (i) a newly formed subsidiary of the Company merged with Tomorrow,
Inc., whereupon Dr. Greenberg and his wife, Rosalind Greenberg, the sole
shareholders of Tomorrow, Inc., received an aggregate of 183,334 shares of
Common Stock in exchange for their shares; (ii) following the merger, Tomorrow,
Inc. (which was then a wholly owned subsidiary of the Company) and Dr. Greenberg
formed a partnership ("Tekno Books"), to which Tomorrow, Inc. contributed all of
its assets in exchange for a 34.375% interest and Dr. Greenberg contributed
substantially all of his rights, including royalties and other income, to
market, sell and distribute books, magazines and other publications packaged,
printed, produced, published and/or otherwise created by him or pursuant to any
contract between him and any author or collaborator in exchange for a 65.625%
interest; and (iii) the Company purchased from Dr. Greenberg a 16.625% interest
in Tekno Books for $500,000 cash. The Company also agreed to repurchase up to
50,000 of the shares of Common Stock issued to Dr. Greenberg and his wife in the
Tekno
61
<PAGE>
Books Acquisition at a price of $6.00 per share if either (i) the Company raised
in excess of $1,000,000 in capital through the sale of its securities prior to
September 9, 1995 and they so elect, or (ii) they otherwise request the Company
to do so at certain times prior to May 1996. The Greenbergs did not exercise
such rights and such rights have expired.
CONSULTING AGREEMENTS
In February 1993, the Company entered into a consulting agreement with
Dr. Martin H. Greenberg pursuant to which Dr. Greenberg agreed to render
advisory and consulting services to the Company, including identifying
best-selling authors to create characters for the Company and negotiating
agreements with such authors, arranging for the publication of prose novels and
anthologies for children and adults based on the Company's characters and comic
books, and attending trade shows and conventions on the Company's behalf. The
consulting agreement will expire in November 2003, unless terminated earlier,
which termination may only take place under certain conditions. Pursuant to the
consulting agreement, in November 1993 Dr. Greenberg began receiving consulting
fees of $30,000 per year and was granted options to purchase 6,250 shares of
Common Stock at an exercise price of $8.00 per share. In connection with the
Tekno Books Acquisition, the consulting agreement was amended on December 9,
1994 (i) to provide that Dr. Greenberg will have the exclusive right to package
novelizations based on the Company's entertainment properties, and (ii) in lieu
of future annual stock option grants to which Dr. Greenberg was entitled under
the original agreement, to grant Dr. Greenberg options to purchase 17,778 shares
of Common Stock at an exercise price of $8.4375 per share.
In July 1993, the Company entered into consulting agreements with each
of Messrs. Jules L. Plangere, Jr. (Chairman of the Board of Asbury Park Press,
which owns the second largest newspaper in New Jersey), E. Donald Lass
(President and Chief Executive Officer of Asbury Park Press), Robert E. McAllan
(President of Press Broadcasting Company, Inc., a subsidiary of Asbury Park
Press) and Alfred D. Colantoni (Chief Financial Officer of Asbury Park Press and
other subsidiaries and affiliates of New Jersey Press) (individually, a
"Consultant" and collectively, the "Consultants"), pursuant to which each
Consultant agreed, in his individual capacity, to render advisory and consulting
services to the Company with respect to the publishing, communications and
printing industries. In consideration for their services, each Consultant
receives at the end of each six-month period during the term of the agreements
$12,500, at the option of the Consultant, in cash or in stock options
exercisable for nominal consideration, to purchase a number of shares of Common
Stock having a market value at the time of payment equal to $12,500. The
consulting agreements were scheduled to expire in July 1995. In May 1995, the
Company extended the term of the consulting agreements for a two-year period,
provided that all subsequent compensation thereunder shall be payable solely in
stock options.
AUGUST 1995 PRIVATE OFFERING
In August 1995, the Company sold 650,000 shares of its Common Stock for
$6.25 per share in a private offering and realized gross proceeds of $4,062,500
and net proceeds of $3,435,738, after deducting fees of the placement agent and
other professional fees and related expenses. Pursuant to registration rights
granted in connection with the private offering, the
62
<PAGE>
Company has registered the 650,000 shares of Common Stock sold therein for
resale under the Securities Act by the holders thereof. Asbury Park Press and
Tekno Simon each invested in the private offering $1,000,000 for 160,000 shares
of Common Stock. Contemporaneously with the private offering, the Company also
entered into an agreement to sell to two investors, for $250,000 and $249,600,
respectively, immediately exercisable four-year warrants to purchase an
aggregate of 240,000 shares of Common Stock at an exercise price of $6.25 per
share. One investor, who participated in the August 1995 private offering, has
paid for his warrant in full and the second investor, Martin Ergas, who
subsequently purchased Canadian franchise rights from the Company, paid $90,000
during 1995 and $149,600 during 1996, and the balance is expected to be received
in 1997.
INVESTMENTS BY AFFILIATE OF SIMON-DEBARTOLO GROUP
To facilitate expansion of its entertainment division, the Company
established a long-term relationship with the largest U.S. shopping mall
developer, the Simon-DeBartolo Group (formerly known as the Simon Property
Group), and its Co-Chairman, Melvin Simon. Tekno Simon, an affiliate of Mr.
Simon, initially invested $1,000,000 in shares of the Company's Common Stock in
the Company's August 1995 private placement. See "August 1995 Private Offering,"
above. Additionally, pursuant to the Simon Stock Purchase Agreement entered into
in November 1995, Tekno Simon has also invested a total of $1,600,000. Of such
investment, $1,360,000 was used to acquire 217,600 shares of Company's Series A
Preferred Stock to fund the costs of developing 17 Entertainment
Super/bullet/Kiosks and $240,000 was used to acquire 44,650 shares of the
Company's Series B Preferred Stock to fund the costs of developing three
additional kiosks (at $80,000 per kiosk). The Simon Stock Purchase Agreement was
amended in October 1996 to extend the funding arrangement for the remaining
eight kiosks, which was originally to expire at the end of 1996, through March
31, 1997. The agreement provides that the shares are to be purchased by Tekno
Simon from time to time in installments following the signing of each new lease
between the Company (or one of its affiliates) and the Simon-DeBartolo Group (or
one of its affiliates) or any other third party approved by Tekno Simon for a
lease by the Company of shopping center space for one of the Company's
Entertainment Super/bullet/Kiosks. Neither the Company, Simon-DeBartolo Group,
nor any of their respective affiliates are obligated to enter into any such
lease, however.
The Series A Preferred Stock has a stated value of $6.25 per share and
accrues non-cash dividends, payable quarterly in shares of Common Stock based on
prevailing market prices for the Common Stock. The dividends accrue on the
stated value of the outstanding shares of the Series A Preferred Stock at a
variable rate equal to a specified bank prime rate (8.25% as of the date
hereof). During the two-year period commencing on November 28, 1995, the Series
A Preferred Stock is convertible at the option of the holder into shares of
Common Stock on a one-for-one basis. After the conversion period expires, the
Series A Preferred Stock will be redeemable at any time after November 28, 1997
at the Company's option for $7.1875 per share
63
<PAGE>
in cash. Except as otherwise required by law, the holders of the Series A
Preferred Stock will be entitled to vote together with the holders of Common
Stock on all matters, with each share of Series A Preferred Stock having one
vote. The Series A Preferred Stock will have a liquidation preference of $7.1825
per share over the Common Stock. The holders of the Series A Preferred Stock
have certain demand and "piggyback" registration rights to have such shares and
the shares of Common Stock issued upon conversion thereof or as dividends
thereunder registered by the Company for sale by such holders under the
Securities Act.
The terms of the Series B Preferred Stock are identical to those of the
Series A Preferred Stock, except that the purchase price per share of the Series
B Preferred Stock will be subject to adjustment on the earlier of March 31, 1997
or completion of all of the fundings under the amended stock purchase agreement,
based on the market prices of the Common Stock at the time of each such funding,
but in no event shall the purchase price be greater than $6.25 per share or less
than $4.50 per share. As of the date hereof, 44,650 shares of Series B Preferred
Stock are currently issuable under the amended stock purchase agreement (based
on the initial purchase price of $5.375 per share as provided in the amended
agreement, subject to adjustment as described above).
Pursuant to the Simon Stock Purchase Agreement, Tekno Simon has the
right to designate one nominee to the Company's Board of Directors until such
time as Tekno Simon holds less than 25% of the sum of (i) the shares of Series A
Preferred Stock purchased pursuant to the stock purchase agreement (or shares of
Common Stock issued or issuable upon conversion thereof), and (ii) the shares of
Common Stock purchased by Tekno Simon in the Company's August 1995 private
offering. Certain principal shareholders of the Company, including Mitchell
Rubenstein, Laurie S. Silvers, Asbury Park Press and Dr. Martin H. Greenberg,
have agreed to vote their shares of Common Stock in favor of the election of
Tekno Simon's nominee to the Board of Directors. Tekno Simon's current nominee
on the Board of Directors is Deborah J. Simon.
The Simon-DeBartolo Group and other affiliates of Tekno Simon are party
to various leases with the Company for certain of the Company's Entertainment
Super/bullet/Kiosks and its in-line store at the Mall of America.
APPROVAL OF AFFILIATED TRANSACTIONS
All existing transactions between the Company and its directors,
executive officers and principal shareholders are and all such future
transactions will be on terms no less favorable than could be obtained from
unaffiliated third parties and have been and will be approved by a majority of
the independent, disinterested directors of the Company.
64
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
INCORPORATED BY
EXHIBIT DESCRIPTION REFERENCE FROM
- ------- ----------- --------------
3.1 Amended and Restated Articles of Incorporation (*)
3.2 Bylaws (2)
4.1 Form of Common Stock Certificate (2)
4.3 Rights Agreement dated as of August 23, 1996 between
the Company and American Stock Transfer & Trust
Company, as Rights Agent (3)
4.2 Form of Warrant Agreement between the Company and
RAS Securities Corp.(including form of Representative's
Warrant) (2)
10.1 Executive Compensation Plans and Arrangements (1)(2)
(a) Employment Agreement between the
Company and Mitchell Rubenstein
(b) Employment Agreement between the Company and (1)(2)
Laurie S. Silvers
(c) 1993 Stock Option Plan (1)(2)
(d) Directors Stock Option Plan (1)(2)
10.2 Form of Indemnification Agreement between the
Company and each of its Directors and Officers (1)(2)
10.3 Consulting Agreement dated February 7, 1993, between (2)
the Company and Dr. Martin H. Greenberg, and Amendment
dated as of July 14, 1993
10.4 Form of Consulting Agreement between the Company and (1)(2)
each of Jules L. Plangere, Jr., E. Donald Lass, Robert E.
McAllan and Alfred D. Colantoni
10.5 Subscription Agreement dated July 19, 1993, between the (2)
Company and Asbury Park Press, Inc.
10.6 Subscription Agreements between the Company and each (2)
of Messrs. James Fisher, Martin H. Greenberg and Louis
Taylor
10.7 Sublease and Assignment Agreement dated June 1, 1993, (2)
between Titan I Corp. and the Company
10.8 Form of Agreement between the Company and authors (2)
10.9 Amendment No. 2 to Consulting Agreement, between the (1)(4)
Company and Martin H. Greenberg
65
<PAGE>
10.10 Agreement and Plan of Merger among the Company, (4)
Tomorrow, Inc., Dr. Martin H. Greenberg and Rosalind
Greenberg; Partnership Agreement between Tomorrow,
Inc. and Dr. Martin H. Greenberg and Amendment No. 1
thereto; Purchase Agreement between Dr. Martin H.
Greenberg and the Company Agreement dated April 24,
1995 with Warner Books
10.11 Agreement dated April 24, 1995 with Warner Books (5)
10.12 Agreement dated April 27, 1995 with Miramax Films (5)
10.13 Netco Partners Joint Venture Agreement dated June 29, (5)
1995 with C.P. Group, Inc.
10.14 Preferred Stock Purchase Agreement dated November 8, 1995 (6)
between the Company and Tekno Simon LLC
10.15 Registration Rights Agreement dated November 8, 1995 (6)
with Tekno Simon, LLC
10.16 Voting Agreement dated November 8, 1995 with Tekno (6)
Simon, LLC
10.17 Franchise Agreement with Martin Ergas (7)
10.18 Master Equipment Lease Agreement with Financing for (7)
Science International, Inc.
10.19 Agreement dated February 22, 1996 with Alliance (7)
Communications
10.20 Amendment dated as of October 15, 1996 to Preferred (*)
Stock Purchase Agreement dated November 8, 1995
66
<PAGE>
10.21 Preferred Stock Purchase Agreement dated as of December (*)
20, 1996 and Auric Partners Limited
27.1 Financial Data Schedule (for SEC use only) (*)
* Filed as an exhibit to this Form 10-KSB.
(1) Management compensation plan or arrangement.
(2) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 33-69294).
(3) Incorporated by reference from the exhibit filed with the Company's
Current Report on Form 8-K dated August 23, 1996.
(4) Incorporated by reference from the exhibit filed with the Company's
Report on Form 8-K (Event of December 13, 1994).
(5) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995,
as amended.
(6) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1995, as amended.
(7) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 333-1224).
(B) REPORTS ON FORM 8-K:
None
67
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BIG ENTERTAINMENT, INC.
Date: March 28, 1997 By: /s/ MITCHELL RUBENSTEIN
-------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
(Principal executive officer and
principal financial and accounting
officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
Date: March 28, 1997 /s/ MITCHELL RUBENSTEIN
-------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
Date: March 28, 1997 /s/ LAURIE S. SILVERS
-------------------------------------
Laurie S. Silvers, Vice Chairman and
President
Date: March 28, 1997 /s/ MARTIN H. GREENBERG
-------------------------------------
Martin H. Greenberg, Director
Date: March 28, 1997 /s/ HARRY T. HOFFMAN
-------------------------------------
Harry T. Hoffman, Director
Date: March 28, 1997 /s/ LAWRENCE GOULD
-------------------------------------
Lawrence Gould, Director
Date: March 28, 1997 /s/ JULES L. PLANGERE, JR.
-------------------------------------
Jules L. Plangere, Jr., Director
Date: March 28, 1997 /s/ E. DONALD LASS
-------------------------------------
E. Donald Lass, Director
68
<PAGE>
Date: March 28, 1997 /s/ DEBORAH J. SIMON
-------------------------------------
Deborah J. Simon, Director
Date: March __, 1997 ------------------------------------
John W. Waller, III, Director
69
<PAGE>
BIG ENTERTAINMENT, INC.
FORM 10-KSB
DECEMBER 31, 1996
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGE
- ----------- ------------
3.1 Amended and Restated Articles of Incorporation ............... *
10.20 Amendment dated as of October 15, 1996 to Preferred *
Stock Purchase Agreement dated November 8, 1995 .............
10.21 Preferred Stock Purchase Agreement dated as of December *
20, 1996 and Auric Partners Limited .........................
27.1 Financial Data Schedule (for SEC use only) .................. *
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
ORIGINAL ARTICLES OF INCORPORATION FILED
WITH THE FLORIDA DEPARTMENT OF STATE ON
JANUARY 22, 1993
The shareholders of BIG ENTERTAINMENT INC. (the "Corporation") have duly
adopted the following Amended and Restated Articles of Incorporation pursuant to
the provisions of Sections 607.0704, 607.1003 and 607.1007 of the Florida
Business Corporation Act:
ARTICLE I
NAME
The name of the corporation is BIG ENTERTAINMENT, INC. (the
"Corporation").
ARTICLE II
PRINCIPAL OFFICE
The address of the principal office and the mailing address of the
Corporation is 2255 Glades Road, Suite 237 West, Boca Raton, Florida 33431.
ARTICLE III
CAPITAL STOCK
The total number of shares of stock which the Corporation shall have the
authority to issue is twenty-six million (26,000,000) shares, consisting of (i)
twenty-five million (25,000,000) shares of common stock, par value $0.01 per
share (the "Common Stock") and (ii) one million (1,000,000) shares of preferred
stock, par value $0.01 per share (the "Preferred Stock").
The designations and the preferences, limitations and relative rights of
the Common Stock and the Preferred Stock of the Corporation are as follows:
A. PROVISIONS RELATING TO THE COMMON STOCK
1. VOTING RIGHTS.
<PAGE>
(a) Except as otherwise required by law or as may be provided by the
resolutions of the Board of Directors authorizing the issuance of any class or
series of Preferred Stock, as provided in Section B of this Article III, all
rights to vote and all voting power shall be vested exclusively in the holders
of the Common Stock.
(b) The holders of the Common Stock shall be entitled to one vote per
share on all matters submitted to a vote of shareholders, including, without
limitation, the election of directors.
2. DIVIDENDS. Except as otherwise provided by law or as may be provided by
the resolutions of the Board of Directors authorizing the issuance of any class
or series of Preferred Stock, as provided in Section B of this Article III, the
holders of the Common Stock shall be entitled to receive when, as and if
provided by the Board of Directors, out of funds legally available therefor,
dividends payable in cash, stock or otherwise.
3. LIQUIDATING DISTRIBUTIONS. Upon any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, and after
payment or provision for payment of the debts and other liabilities of the
Corporation, and except as may be provided by the resolutions of the Board of
Directors authorizing the issuance of any class or series of Preferred Stock, as
provided in Section B of this Article III, the remaining assets of the
Corporation shall be distributed pro-rata to the holders of the Common Stock.
B. PROVISIONS RELATING TO THE PREFERRED STOCK.
1. GENERAL. The Preferred Stock may be issued from time to time in one or
more classes or series, the shares of each class or series to have such
designations, powers, preferences, rights, qualifications, limitations and
restrictions thereof as are stated and expressed herein and in the resolution or
resolutions providing for the issue of such class or series adopted by the Board
of Directors as hereinafter prescribed.
2. PREFERENCES. Authority is hereby expressly granted to and vested in the
Board of Directors to authorize the issuance of the Preferred Stock from time to
time in one or more classes or series, to determine and take necessary
proceedings fully to effect the issuance and redemption of any such Preferred
Stock, and, with respect to each class or series of the Preferred Stock, to fix
and state by the resolution or resolutions from time to time adopted providing
for the issuance thereof the following:
(a) whether or not the class or series is to have voting rights, full
or limited, or is to be without voting rights;
(b) the number of shares to constitute the class or series and the
designations thereof;
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<PAGE>
(c) the preferences and relative, participating, optional or other
special rights, if any, and the qualifications, limitations or restrictions
thereof, if any, with respect to any class or series;
(d) whether or not the shares of any class or series shall be
redeemable and if redeemable the redemption price or prices, and the time or
times at which and the terms and conditions upon which, such shares shall be
redeemable and the manner of redemption;
(e) whether or not the shares of a class or series shall be subject to
the operation or retirement of sinking funds to be applied to the purchase or
redemption of such shares for retirement, and if such retirement or sinking fund
or funds be established, the annual amount thereof and the terms and provisions
relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash, stock of
the Corporation, or other property, the conditions upon which and the times when
such dividends are payable, the preference to or the relation to the payment of
the dividends payable on any other class or classes or series of stock, whether
or not such dividend shall be cumulative or noncumulative, and if cumulative,
the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof that the holders
of any class or series thereof shall be entitled to receive upon the voluntary
or involuntary dissolution of, or upon any distribution of the assets of, the
Corporation;
(h) whether or not the shares of any class or series shall be
convertible into, or exchangeable for, the shares of any other class or classes
or of any other series of the same or any other class or classes of the
Corporation and the conversion price or prices or ratio or ratios or the rate or
rates at which such conversion or exchange may be made, with such adjustments,
if any, as shall be stated and expressed or provided for in such resolution or
resolutions; and
(i) such other special rights and protective provisions with respect to
any class or series as the Board of Directors may deem advisable.
The shares of each class or series of the Preferred Stock may vary from
the shares of any other class or series thereof in any or all of the foregoing
respects. The Board of Directors may increase the number of shares of Preferred
Stock designated for any existing class or series by a resolution adding to such
class or series authorized and unissued shares of the Preferred Stock not
designated for any other class or series. The Board of Directors may decrease
the number of shares of the Preferred Stock designated for any existing class or
series by a resolution, subtracting from such class or series unissued shares of
the Preferred Stock designated for such class or series and the shares so
subtracted shall become authorized, unissued and undesignated shares of the
Preferred Stock.
C. SHARE RECLASSIFICATION
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<PAGE>
On the date of filing of these Amended and Restated Articles of
Incorporation with the Department of State of the State of Florida, each issued
and outstanding share of the Corporation's previously authorized Class A Voting
Common Stock, par value $.01 per share ("Class A Stock"), shall thereby and
thereupon be classified and converted into one (1) validly issued, fully paid
and nonassessable share of Common Stock reflecting a conversion ratio of 1:1.
Each certificate that heretofore represented shares of Class A Stock shall now
represent the number of shares of Common Stock into which the shares of Class A
Stock represented by such certificate were reclassified and converted; PROVIDED,
HOWEVER, that each person holding of record a stock certificate or certificates
that represented shares of Class A Stock shall receive, upon surrender of each
such certificate or certificates, a new certificate or certificates evidencing
and representing the number of shares of Common Stock to which such person is
entitled.
ARTICLE IV
DIRECTORS
The Board of Directors of the Corporation shall consist of at least one
Director, with the exact number of Directors to be fixed from time to time in
the manner provided in the Company's Bylaws.
ARTICLE V
REGISTERED OFFICE AND REGISTERED AGENT
The street address of the Corporation's registered office in the State of
Florida is 2255 Glades Road, Suite 237 West, Boca Raton, Florida 33431, and the
name of its registered agent at such address is Mitchell Rubenstein.
ARTICLE VI
INDEMNIFICATION
This Corporation shall indemnify and shall advance expenses on behalf of
its officers and directors to the fullest extent not prohibited by law either
now or hereafter.
IN WITNESS WHEREOF, the undersigned has executed these Amended and
Restated Articles of Incorporation this ___ day of November, 1993.
BIG ENTERTAINMENT, INC.
By:/s/ LAURIE SILVERS
----------------------------
Laurie S. Silvers, President
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<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
FOR
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF SERIES A VARIABLE RATE CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation.
FIRST: DESIGNATION OF SERIES A VARIABLE RATE CONVERTIBLE PREFERRED STOCK
Of the 1,000,000 shares of Preferred Stock, par value $.01 per
share, authorized pursuant to Article III of the Company's Articles
of Incorporation, Two Hundred Seventeen Thousand Six Hundred
(217,600) of such shares are hereby designated as the Series A
Variable Rate Convertible Preferred Stock (the "Series A Preferred
Stock"). Shares of Series A Preferred Stock are sometimes referred to
below as "Series A Preferred Stock."
The powers, designations, preferences, and relative, participating,
optional or other special rights of the Series A Preferred Stock authorized
hereunder and the qualifications, limitations and restrictions of such
preferences and rights are as follows:
1. STATED VALUE. The Stated Value of each Series A Preferred Share is
$6.25.
2. DIVIDENDS.
(a) Each outstanding share of Series A Preferred Stock shall accrue
and cumulative dividends on the Stated Value thereof from and after the date of
issuance at a variable rate (the "Dividend Rate") equal to the prime rate (the
"Prime Rate") publicly disclosed and designated as such from time to time by
J.P. Morgan Bank, New York, New York (or Citibank, N.A., New York, New York if
no prime rate is designated by J.P. Morgan Bank), and such dividends shall be
paid only in shares of the Company's Common Stock, par value $.01 per share
("Common Stock"), except as provided in the following paragraph (b). Shares of
Common Stock are sometimes referred to herein as "Common Shares." The Dividend
Rate in effect upon the date of filing of these Articles of Amendment is 8 3/4%.
Once a Dividend Rate is established such rate shall remain in effect unchanged
until adjusted as provided herein. The Dividend Rate shall be adjusted quarterly
on, and effective as of, each January 1, April 1, July 1 and October 1, by
adjusting the Dividend Rate to the extent required so that the Dividend Rate
equals the prevailing Prime Rate in effect on such date. Cumulated dividends
shall be
<PAGE>
distributed quarterly in arrears, promptly after each March 31, June 30 and
December 31 (each such date being a "Distribution Date"), to the record
holder(s) of the Series A Preferred Shares on the applicable Distribution Date.
Dividends shall be paid in shares of the Company's Common Stock in an amount
having an aggregate "Market Value" (as defined in Section 8 below) on the
Distribution Date equal to the amount of the cumulated and unpaid dividends to
be distributed.
(b) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon the distribution of dividends on the Series
A Preferred Stock. Any fractional interest in a dividend share of Common Stock
to which a holder of Series A Preferred Shares would otherwise be entitled shall
be paid in cash (computed to the nearest cent) based on the Market Value of a
Common Share on the applicable Distribution Date.
3. CONVERSION.
(a) Each Series A Preferred Share shall be and is convertible at the
sole option of the holder thereof, into one (1.0) share of Common Stock at any
time during the two-year period (the "Conversion Period") commencing upon the
date of the Closing of the first Installment under that certain Preferred Stock
Purchase Agreement, dated as of October __, 1995, between Tekno Simon, LLC, an
Indiana limited liability company ("Tekno Simon"), and the Company. Upon a
holder's timely exercise of this conversion option in accordance with the
following paragraph (b) of this Section 3, such holder shall also be entitled to
receive all unpaid dividends that have cumulated or accrued on Series A
Preferred Shares being converted, with such dividends to be determined and paid
in accordance with Section 2 hereof as if the "Distribution Date" is the day on
which the shares are surrendered for conversion.
(b) In order to exercise this conversion option, the holder of any
Series A Preferred Shares to be converted shall surrender and deliver to the
Company, no later than the fifth day prior to the expiration of the Conversion
Period, the certificate(s) representing such shares, together with a notice of
election to convert in such form as the Company may reasonably require, duly
completed and signed by the holder. Upon the proper delivery of such documents,
the conversion to be effected thereby shall be effective as of the date of such
delivery.
(c) Promptly after the effective date of a holder's conversion of
Series A Preferred Shares in accordance with this Section 3, the Company shall
issue and deliver to such holder a certificate or certificates for the number of
full shares of Common Stock issuable to the holder (i) pursuant to the holder's
conversion of Series A Preferred Shares in accordance with the provisions of
this Section 3, and (ii) in payment of any unpaid dividends on the converted
shares as provided under paragraph (a) of this Section 3. The fractional
interest in one share of Common Stock arising upon the conversion, if any, shall
be settled as provided in paragraph (c) below.
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<PAGE>
(d) All shares of Common Stock delivered upon conversion of the
Series A Preferred Stock shall be duly and validly issued and fully paid and
nonassessable. Upon the effective date of a holder's conversion of Series A
Preferred Shares, such converted Series A Preferred Shares shall no longer be
deemed to be outstanding and all rights of the holder with respect to such
shares shall immediately terminate except the right to receive the shares of
Common Stock issuable upon such conversion.
(e) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon conversion of the Series A Preferred Stock.
Any fractional interest in one share of Common Stock resulting from a holder's
conversion of Series A Preferred Shares shall be paid in cash (computed to the
nearest cent) based on the Market Value (as defined in Section 8 below) of a
Common Share on the effective date of the conversion.
(f) In the event that, prior to the expiration of the Conversion
Period, the Company (1) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock, (2) subdivides (by "stock split" or
otherwise) its outstanding Common Stock into a greater number of shares, or (3)
combines (by "reverse stock split" or otherwise) its outstanding Common Stock
into a smaller number of shares, the number of Common Shares into which each
outstanding Series A Preferred Share is convertible under this Section 3 shall
be proportionately adjusted so that the holder of each Preferred Share
thereafter surrendered for conversion pursuant to this Section 3 shall be
entitled to receive the number of shares of Common Stock which he would have
been entitled to receive had the Series A Preferred Share been effectively
converted immediately prior to the happening of such event.
(g) In the event that, prior to the expiration of the Conversion
Period, there occurs any consolidation of the Company with, or merger of the
Company with or into, any other entity that results in a reclassification,
change, conversion, exchange or cancellation of outstanding shares of Common
Stock or any sale or transfer of all or substantially all of the assets of the
Company, each holder of shares of the Series A Preferred Stock then outstanding
shall have the right thereafter (and until the expiration of the Conversion
Period) to convert the Series A Preferred Shares held by the holder into the
kind and amount of securities, cash and other property which the holder would
have been entitled to receive upon such reclassification, change, consolidation,
merger, sale or transfer if the holder had held the Common Shares issuable upon
the conversion of the holder's Series A Preferred Shares immediately prior to
the reclassification, change, consolidation, merger, sale or transfer.
(h) The Company shall at all times reserve and keep available, free
from preemptive rights and other encumbrances, out of the aggregate of its
authorized but unissued shares of Common Stock, for the purpose of effecting
conversions of the Series A Preferred Shares, the full number of shares of
Common Stock deliverable upon the conversion of all outstanding Series A
Preferred Shares.
(i) The Company shall list the shares of Common Stock required to be
delivered upon conversion of the Series A Preferred Shares, prior to the
delivery thereof, upon
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<PAGE>
each national securities exchange or NASDAQ, if any, upon which the outstanding
Common Stock is listed at the time of delivery.
4. REDEMPTION.
(a) All of the outstanding Series A Preferred Shares shall be
redeemable by the Company at any time after the expiration of the Conversion
Period (except for Series A Preferred Shares as to which the holder or holders
thereof have timely exercised the conversion thereof in accordance with Section
3 hereof), upon not less than 30 nor more than 60 calendar days' prior written
notice by the Company to the holder or holders of Series A Preferred Shares, at
a redemption price per Series A Preferred Share of $7.1875. In addition to the
redemption price for each Series A Preferred Share redeemed from a holder
pursuant to this Section 4, upon such redemption the Company shall also pay such
holder $7.1875 for each share of Common Stock (or fraction thereof) constituting
cumulated and unpaid dividends on the shares redeemed. For purposes of this
paragraph, the number of Common Shares constituting unpaid dividends shall be
determined in accordance with Section 2 hereof as if the "Redemption Date" (as
defined in paragraph (b) below) is the "Distribution Date."
(b) Notice of any such redemption of the Series A Preferred Shares,
specifying the date fixed by the Board of Directors for the redemption (the
"Redemption Date"), the place of redemption and the redemption price, shall be
given by first-class mail to each holder of record of the shares to be redeemed,
at his address of record, not less than 30 nor more than 60 calendar days prior
to the Redemption Date.
(c) Upon the Redemption Date, all rights of the holders of the Series
A Preferred Shares to be redeemed shall cease with respect to such shares and
such shares shall not, after the Redemption Date, be deemed to be outstanding
and shall not have the status of Preferred Stock.
(d) The Series A Preferred Shares are not subject or entitled to the
benefit of a sinking fund.
5. PREEMPTIVE RIGHTS. Shares of the Series A Preferred Stock are not
entitled to any preemptive rights to acquire any unissued shares of any capital
stock of the Company, now or hereafter authorized, or any other securities of
the Company, whether or not convertible into shares of capital stock of the
Company or carrying a right to subscribe to or acquire any such shares of
capital stock.
6. VOTING. The holders of shares of Series A Preferred Stock will be
entitled to vote such shares (with each share having one vote) together with
holders of shares of Common Stock as a single class on all matters, including
the election of directors, except as otherwise required by law. Except as set
forth in the preceding sentence or as required by law, the shares of the Series
A Preferred Stock shall not have any voting powers, either general or special.
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<PAGE>
7. LIQUIDATION PREFERENCE.
(a) Upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the shares of the Series A Preferred
Stock shall be entitled to receive out of the assets of the Company available
for distribution to stockholders under applicable law, before and in priority to
any payment or distribution of assets by any means whatsoever that is made on
the Common Stock or on any other class or series of capital stock of the Company
ranking junior to the Series A Preferred Stock upon liquidation, the amount of
(i) $7.1825 per Series A Preferred Share, plus (ii) $7.1825 for each share of
Common Stock (or fraction thereof) constituting cumulated and unpaid dividends
on the outstanding Series A Preferred Shares (for purposes of this clause (ii),
the number of Common Shares constituting unpaid dividends shall be determined in
accordance with Section 2 hereof as if the "Distribution Date" is the date upon
which the first payment of any portion of the amount referenced in the foregoing
clause (i) is paid). The term "Liquidation Preference" as used herein means the
sum of the amounts referenced in the foregoing clauses (i) and (ii). The sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property and assets of the
Company shall not be deemed a dissolution, liquidation or winding up of the
Company for the purposes of this Section 7, nor shall the merger or
consolidation of the Company into or with any other corporation or association
or the merger or consolidation of any other corporation or association into or
with the Company, be deemed to be a dissolution, liquidation or winding up of
the Company for the purposes of this Section 7.
(b) After the payment in full of the Liquidation Preference in cash
to the holders of the Series A Preferred Shares, as provided in the foregoing
paragraph (a), the holders of the Series A Preferred Stock shall have no further
right or claim to any of the remaining assets of the Company, except as
otherwise provided herein or as otherwise required by law.
8. MARKET VALUE. The "Market Value" of a share of Common Stock as of any
specified date (the "Value Date") shall be the average of the last reported sale
prices per share on each of the twenty Trading Days (as defined below)
immediately preceding the second day prior to the Value Date. The last reported
sale price for any Trading Day shall be (1) the last reported sale price, or the
closing bid price if no sale occurred, of the Common Stock on the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"),
or any similar system of automated dissemination of quotations of securities
prices then in common uses, if so quoted, or (2) if Common Stock prices are not
quoted as described in clause (1), the mean between the high bid and low asked
quotations for the Common Stock as reported by the National Quotation Bureau
Incorporated if at least two securities dealers have inserted both bid and asked
quotations for the Common Stock on at least five of the ten preceding days, or
(3) if the Common Stock is listed or admitted for trading on any national
securities exchange, the last sale price, or the closing bid price if no sale
occurred, of the Common Stock on the principal securities exchange on which the
Common Stock is listed, or (4) if Common Stock prices are not quoted as
described in the foregoing clauses (1), (2) or (3) but are quoted on any
national securities or central market system other than as described above, the
last reported sale price shall be determined in the manner set forth in the
foregoing clause (2) if bid and asked
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<PAGE>
quotations are reported but actual transactions are not, and in the manner set
forth in clause (3) of the preceding sentence if actual transactions are
reported. If the Market Value of a share of Common Stock cannot be determined
under the foregoing provisions of this Section 8 because such provisions are
inapplicable by their terms, then the Market Value shall be determined by an
independent appraiser jointly selected by the Board of Directors and Tekno
Simon, provided, however, that if Tekno Simon is not a holder of Series A
Preferred Shares at such time, the appraiser shall be selected by the Board of
Directors subject to approval of the appraiser by the holders of a majority of
the outstanding Series A Preferred Shares. As used herein, the term "Trading
Days" means (a) if the Common Stock is quoted on NASDAQ or any similar system of
automated dissemination of quotations of securities prices, days on which trades
may be made on such system, or (b) if not quoted as described in clause (a),
days on which quotations are reported by the National Quotation Bureau
Incorporated, or (c) if the Common Stock is listed or admitted for trading on
any national securities exchange, days on which such national securities
exchange is open for business, or (d) if the Common Stock is quoted on any
national securities or central market system referenced in clause (4) above,
days on which trades may be made or prices are quoted on such system, as the
case may be.
9. RANK. The Series A Preferred Stock shall rank senior as to payment of
dividends and rights upon voluntary or involuntary liquidation, dissolution or
winding up of the Company as to all classes and series of capital stock of the
Company outstanding as of the date of these Articles of Amendment. The Company
shall not hereafter issue any shares of Preferred Stock or other capital stock
ranking senior to, or on parity with, the Series A Preferred Stock as to the
payment of dividends or rights upon voluntary or involuntary liquidation,
dissolution or winding up of the Company, without the prior consent of the
holders of at least 75% of the outstanding Series A Preferred Shares. Any shares
of Series A Preferred Stock which shall at any time have been converted or
redeemed or otherwise reacquired by the Company shall after such redemption,
reacquisition or conversion, have the status of authorized but unissued shares
of Preferred Stock, without designation as to the status of authorized but
unissued shares of Preferred Stock, without designation as to class or series
until such shares are once more designated as part of a particular class or
series of Preferred Stock by the Board of Directors.
10. REPORTS AND NOTICES. So long as any shares of the Series A Preferred
Stock shall be outstanding, the Company shall provide to the holder or holders
of such shares copies of all annual, quarterly and other reports of the Company
and copies of all stockholder notices of the Company when and as furnished to
the holders of the Common Stock.
11. WAIVER BY PREFERRED SHAREHOLDERS. Except as expressly provided for
herein or as otherwise required by law, any rights or benefits of the Series A
Preferred Stock and the holders thereof provided herein may be waived as to all
outstanding Series A Preferred Shares and the holders thereof by the consent of
the holders of at least seventy-five percent (75%) of the outstanding Series A
Preferred Shares.
12. HOLDER. The term "holder" as used in this Designation of Series A
Variable Rate Convertible Preferred Stock means a record holder of any shares of
Series A Preferred Stock.
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<PAGE>
SECOND: ADOPTION OF AMENDMENTS TO ARTICLES OF INCORPORATION
These Articles of Amendment to Articles of Incorporation and the
amendments to the Company's Articles of Incorporation set forth herein were
adopted and approved by the Company's Board of Directors without shareholder
action on November 8, 1995, pursuant to Section 607.0602 of the Florida Business
Corporation Act, and shareholder action was not required.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the 8th day of November, 1995.
BIG ENTERTAINMENT, INC., a corporation
organized and existing under the Florida
Business Corporation Act
By:/s/ MITCHELL RUBENSTEIN
------------------------------------
Mitchell Rubenstein, Chairman of the
Board, Director and Chief Executive
Officer
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<PAGE>
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
FOR
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF SERIES B VARIABLE RATE CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation.
FIRST: DESIGNATION OF SERIES B VARIABLE RATE CONVERTIBLE PREFERRED STOCK
Of the 1,000,000 shares of Preferred Stock, par value $.01 per share,
authorized pursuant to Article III of the Company's Articles of Incorporation,
One Hundred Forty-Two Thousand, Two Hundred Twenty Three (142,223) of such
shares are hereby designated as the Series B Variable Rate Convertible Preferred
Stock (the "Series B Preferred Stock"). Shares of Series B Preferred Stock are
sometimes referred to below as "Series B Preferred Shares."
The powers, designations, preferences, and relative, participating,
optional or other special rights of the Series B Preferred Stock authorized
hereunder and the qualifications, limitations and restrictions of such
preferences and rights are as follows:
1. STATED VALUE. The initial Stated Value of each Series B Preferred Share
is $5.375. On the earlier to occur of March 31, 1997 or the Closing of the 25th
Installment (the "Termination Date") under that certain Preferred Stock Purchase
Agreement, dated as of November 8, 1995 and amended as of October 15, 1996 (the
"Purchase Agreement") between Tekno Simon, LLC, an Indiana limited liability
company ("Tekno Simon") and the Company, the Stated Value of each Series B
Preferred Share shall be adjusted (the "Final Stated Value") so that it shall
equal the average of the Subsequent Stated Values determined at the time of
closing each Installment under the Purchase Agreement held subsequent to October
15, 1996, but in no event greater than $6.25 per share or less than $4.50 per
share. As used herein, the "Subsequent Stated Value" for a closing shall equal
the "Market Value" of the Common Stock as of the date of such closing.
PREPARED BY:
Nina S. Gordon, Esquire
Fla. Bar No. 0535309
Broad and Cassel
201 S. Biscayne Blvd., Ste. 3000
Miami, FL 33131
<PAGE>
2. DIVIDENDS.
(a) Each outstanding share of Series B Preferred Stock shall accrue
and cumulate dividends on the Stated Value thereof from and after the date of
issuance at a variable rate (the "Dividend Rate") equal to the prime rate (the
"Prime Rate") publicly disclosed and designated as such from time to time by
J.P. Morgan Bank, New York, New York (or Citibank, N.A., New York, New York if
no prime rate is designated by J.P. Morgan Bank), and such dividends shall be
paid only in shares of the Company's Common Stock, par value $.01 per share
("Common Stock"), except as provided in the following paragraph (b). Shares of
Common Stock are sometimes referred to herein as "Common Shares." The Dividend
Rate in effect upon the date of filing of these Articles of Amendment is 8-1/4%.
Once a Dividend Rate is established such rate shall remain in effect unchanged
until adjusted as provided herein. The Dividend Rate shall he adjusted quarterly
on, and effective as of each January 1, April 1, July 1 and October 1, by
adjusting the Dividend Rate to the extent required so that the Dividend Rate
equals the prevailing Prime Rate in effect on such date. Cumulated dividends
shall be distributed quarterly in arrears, promptly after each March 31, June
30, September 30 and December 31 (each such date being a "Distribution Date"),
to the record holder(s) of the Series B Preferred Shares on the applicable
Distribution Date. Dividends shall be paid in shares of the Company's Common
Stock in an amount having an aggregate "Market Value" (as defined in Section 8
below) on the Distribution Date equal to the amount of the cumulated and unpaid
dividends to be distributed.
(b) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon the distribution of dividends on the Series
B Preferred Stock. Any fractional interest in a dividend share of Common Stock
to which a holder of Series B Preferred Shares would otherwise be entitled shall
be paid in cash (computed to the nearest cent) based on the Market Value of a
Common Share on the applicable Distribution Date.
3. CONVERSION.
(a) Each Series B Preferred Share shall be and is convertible, at the
sole option of the holder thereof, into one share of Common Stock at any time
until the second anniversary of the date of the Closing of the first Installment
under the Purchase Agreement (the "Conversion Period"). Upon a holder's timely
exercise of this conversion option in accordance with the following paragraph
(b) of this Section 3, such holder shall also be entitled to receive all unpaid
dividends that have cumulated or accrued on the Series B Preferred Shares being
converted, with such dividends to be determined and paid in accordance with
Section 2 hereof as if the "Distribution Date" is the day on which the shares
are surrendered for conversion.
(b) In order to exercise this conversion option, the holder of any
Series B Preferred Shares to be converted shall surrender and deliver to the
Company, no later than the fifth day prior to the expiration of the Conversion
Period, the certificate(s) representing such shares, together with a notice of
election to convert in such form as the Company may reasonably require, duly
completed and signed by the holder. Upon the proper delivery of such
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documents, the conversion to be effected thereby shall be effective as of the
date of such delivery.
(c) Promptly after the effective date of a holder's conversion of
Series B Preferred Shares in accordance with this Section 3, the Company shall
issue and deliver to such holder a certificate or certificates for the number of
full shares of Common Stock issuable to the holder (i) pursuant to the holder's
conversion of Series B Preferred Shares in accordance with the provisions of
this Section 3, and (ii) in payment of any unpaid dividends on the converted
shares as provided under paragraph (a) of this Section 3. The fractional
interest in one share of Common Stock arising upon the conversion, if any, shall
be settled as provided in paragraph (e) below.
(d) All shares of Common Stock delivered upon conversion of the Series
B Preferred Stock shall be duly and validly issued and fully paid and
nonassessable. Upon the effective date of a holder's conversion of Series B
Preferred Shares, such converted Series B Preferred Shares shall no longer be
deemed to be outstanding and all rights of the holder with respect to such
shares shall immediately terminate except the right to receive the shares of
Common Stock issuable upon such conversion.
(e) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon conversion of the Series B Preferred Stock.
Any fractional interest in one share of Common Stock resulting from a holder's
conversion of Series B Preferred Shares shall be paid in cash (computed to the
nearest cent) based on the Market Value (as defined in Section 8 below) of a
Common Share on the effective date of the conversion.
(f) In the event that, prior to the expiration of the Conversion
Period, the Company (1) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock, (2) subdivides (by "stock split" or
otherwise) its outstanding Common Stock into a greater number of shares, or (3)
combines (by "reverse stock split" or otherwise) its outstanding Common Stock
into a smaller number of shares, the number of Common Shares into which each
outstanding Series B Preferred Share is convertible under this Section 3 shall
be proportionately adjusted so that the holder of each Preferred Share
thereafter surrendered for conversion pursuant to this Section 3 shall be
entitled to receive the number of shares of Common Stock which he would have
been entitled to receive had the Series B Preferred Share been effectively
converted immediately prior to the happening of such event.
(g) In the event that, prior to the expiration of the Conversion
Period, there occurs any consolidation of the Company with, or merger of the
Company with or into, any other entity that results in a reclassification,
change, conversion, exchange or cancellation of outstanding shares of Common
Stock or any sale or transfer of all or substantially all of the assets of the
Company, each holder of shares of the Series B Preferred Stock then outstanding
shall have the right thereafter (and until the expiration of the Conversion
Period) to convert the Series B Preferred Shares held by the holder into the
kind and amount of securities, cash and other property which the holder would
have been entitled to receive upon such reclassification,
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change, consolidation, merger, sale or transfer if the holder had held the
Common Shares issuable upon the conversion of the holder's Series B Preferred
Shares immediately prior to the reclassification, change, consolidation, merger,
sale or transfer.
(h) The Company shall at all times reserve and keep available, free
from preemptive rights and other encumbrances, out of the aggregate of its
authorized but unissued shares of Common Stock, for the purpose of effecting
conversions of the Series B Preferred Shares, the full number of shares of
Common Stock deliverable upon the conversion of all outstanding Series B
Preferred Shares.
(i) The Company shall list the shares of Common Stock required to be
delivered upon conversion of the Series B Preferred Shares, prior to the
delivery thereof, upon each national securities exchange or NASDAQ, if any, upon
which the outstanding Common Stock is listed at the time of delivery.
4. REDEMPTION.
(a) All of the outstanding Series B Preferred Shares shall be
redeemable by the Company at any time after the expiration of the Conversion
Period (except for Series B Preferred Shares as to which the holder or holders
thereof have timely exercised the conversion thereof in accordance with Section
3 hereof), upon not less than 30 nor more than 60 calendar days' prior written
notice by the Company to the holder or holders of Series B Preferred Shares, at
a redemption price per Series B Preferred Share equal to 115% of the Final
Stated Value. In addition to the redemption price for each Series B Preferred
Share redeemed from a holder pursuant to this Section 4, upon such redemption
the Company shall also pay such holder an amount equal to 115% of the Final
Stated Value for each share of Common Stock (or fraction thereof) constituting
cumulated and unpaid dividends on the shares redeemed. For purposes of this
paragraph, the number of Common Shares constituting unpaid dividends shall be
determined in accordance with Section 2 hereof as if the "Redemption Date" (as
defined in paragraph (b) below) is the "Distribution Date."
(b) Notice of any such redemption of the Series B Preferred Shares,
specifying the date fixed by the Board of Directors for the redemption (the
"Redemption Date"), the place of redemption and the redemption price shall he
given by first class mail to each holder of record of the shares to be redeemed,
at his address of record, not less than 30 nor more than 60 calendar days prior
to the Redemption Date.
(c) Upon the Redemption Date, all rights of the holders of the Series B
Preferred Shares to be redeemed shall cease with respect to such shares, and
such shares shall not, after the Redemption Date, be deemed to be outstanding
and shall not have the status of Preferred Stock.
(d) The Series B Preferred Shares are not subject or entitled to the
benefit of a sinking fund.
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5. PREEMPTIVE RIGHTS. Shares of the Series B Preferred Stock are not
entitled to any preemptive rights to acquire any unissued shares of any capital
stock of the Company, now or hereafter authorized, or any other securities of
the Company, whether or not convertible into shares of capital stock of the
Company or carrying a right to subscribe to or acquire any such shares of
capital stock.
6. VOTING. The holders of shares of Series B Preferred Stock will be
entitled to vote such shares (with each share having one vote) together with
holders of shares of Common Stock and shares of the Company's Series A Variable
Rate Preferred Stock (the "Series A Preferred Stock") as a single class on all
matters, including the election of directors, except as otherwise required by
law. Except as set forth in the preceding sentence or as required by law, the
shares of the Series B Preferred Stock shall not have any voting powers, either
general or special.
7. LIQUIDATION PREFERENCE.
(a) Upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the shares of the Series B Preferred
Stock shall be entitled to receive out of the assets of the Company available
for distribution to stockholders under applicable law, before and in priority to
any payment or distribution of assets by any means whatsoever that is made on
the Common Stock or on any other class or series of capital stock of the Company
ranking junior to the Series B Preferred Stock upon liquidation, the amount of
(i) the Final Stated Value per Series B Preferred Share, plus (ii) the Final
Stated Value for each share of Common Stock (or fraction thereof) constituting
cumulated and unpaid dividends on the outstanding Series B Preferred Shares (for
purposes of this clause (ii), the number of Common Shares constituting unpaid
dividends shall be determined in accordance with Section 2 hereof as if the
"Distribution Date" is the date upon which the first payment of any portion of
the amount referenced in the foregoing clause (i) is paid). The term
"Liquidation Preference" as used herein means the sum of the amounts referenced
in the foregoing clauses (i) and (ii). The sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all the property and assets of the Company shall not be deemed
a dissolution, liquidation or winding up of the Company for the purposes of this
Section 7, nor shall the merger or consolidation of the Company into or with any
other corporation or association or the merger or consolidation of any other
corporation or association into or with the Company, be deemed to be a
dissolution, liquidation or winding up of the Company for the purposes of this
Section 7.
(b) After the payment in full of the Liquidation Preference in cash to
the holders of the Series B Preferred Shares, as provided in the foregoing
paragraph (a), the holders of the Series B Preferred Stock shall have no further
right or claim to any of the remaining assets of the Company, except as
otherwise provided herein or as otherwise required by law.
8. MARKET VALUE. The "Market Value" of a share of Common Stock as of any
specified date (the "Value Date") shall be the average of the last reported sale
prices per share on each of the twenty Trading Days (as defined below)
immediately preceding the second day
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prior to the Value Date. The last reported sale price for any Trading Day shall
be (1) the last reported sale price, or the closing bid price if no sale
occurred, of the Common Stock on the National Association of Securities Dealers,
Inc. Automated Quotation System ("NASDAQ"), or any similar system of automated
dissemination of quotations of securities prices then in common uses, if so
quoted, or (2) if Common Stock prices are not quoted as described in clause (1),
the mean between the high bid and low asked quotations for the Common Stock as
reported by the National Quotation Bureau Incorporated if at least two
securities dealers have inserted both bid and asked quotations for the Common
Stock on at least five of the ten preceding days, or (3) if the Common Stock is
listed or admitted for trading on any national securities exchange, the last
sale price, or the closing bid price if no sale occurred, of the Common Stock on
the principal securities exchange on which the Common Stock is listed, or (4) if
Common Stock prices are not quoted as described in the foregoing clauses (1),
(2) or (3) but are quoted on any national securities or central market system
other than as described above, the last reported sale price shall be determined
in the manner set forth in the foregoing clause (2) if bid and asked quotations
are reported but actual transactions are not, and in the manner set forth in
clause (3) of the preceding sentence if actual transactions are reported. If the
Market Value of a share of Common Stock cannot be determined under the foregoing
provisions of this Section 8 because such provisions are inapplicable by their
terms, then the Market Value shall be determined by an independent appraiser
jointly selected by the Board of Directors and Tekno Simon, provided, however,
that if Tekno Simon is not a holder of Series B Preferred Shares at such time,
the appraiser shall be selected by the Board of Directors subject to approval of
the appraiser by the holders of a majority of the outstanding Series B Preferred
Shares. As used herein, the term "Trading Days" means (a) if the Common Stock is
quoted on NASDAQ or any similar system of automated dissemination of quotations
of securities prices, days on which trades may be made on such system, or (b) if
not quoted as described in clause (a), days on which quotations are reported by
the National Quotation Bureau Incorporated, or (c) if the Common Stock is listed
or admitted for trading on any national securities exchange, days on which such
national securities exchange is open for business, or (d) if the Common Stock is
quoted on any national securities or central market system referenced in clause
(4) above, days on which trades may be made or prices are quoted on such system,
as the case may be.
9. RANK. The Series B Preferred Stock shall rank PARI PASSU as to payment
of dividends and rights upon voluntary or involuntary liquidation, dissolution
or winding up of the Company with the Company's Series A Preferred Stock. The
Series B Preferred Stock shall rank senior as to payment of dividends and rights
upon voluntary or involuntary liquidation, dissolution or winding up of the
Company as to all classes and series of capital stock of the Company outstanding
as of the date of these Articles of Amendment. The Company shall not hereafter
issue any shares of Preferred Stock or other capital stock ranking senior to, or
on parity with, the Series B Preferred Stock as to the payment of dividends or
rights upon voluntary or involuntary liquidation, dissolution or winding up of
the Company, without the prior consent of the holders of at least 75% of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock. Any
shares of Series B Preferred Stock which shall at any time have been converted
or redeemed or otherwise reacquired by the Company shall, after such redemption,
reacquisition or conversion, have the status of authorized but unissued shares
of Preferred Stock,
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without designation as to class or series until such shares are once more
designated as part of a particular class or series of Preferred Stock by the
Board of Directors.
10. REPORTS AND NOTICES. So long as any shares of the Series B Preferred
Stock shall be outstanding, the Company shall provide to the holder or holders
of such shares copies of all annual, quarterly and other reports of the Company
and copies of all stockholder notices of the Company when and as furnished to
the holders of the Common Stock.
11. WAIVER BY PREFERRED SHAREHOLDERS. Except as expressly provided for
herein or as otherwise required by law, any rights or benefits of the Series B
Preferred Stock and the holders thereof provided herein may be waived as to all
outstanding Series B Preferred Shares and the holders thereof by the consent of
the holders of at least seventy-five percent (75%) of the outstanding Series B
Preferred Shares.
12. HOLDER. The term "holder" as used in this Designation of Series B
Variable Rate Convertible Preferred Stock means a record holder of any shares of
Series B Preferred Stock.
SECOND: ADOPTION OF AMENDMENTS TO ARTICLES OF INCORPORATION
These Articles of Amendment to Articles of Incorporation and the
amendments to the Company's Articles of Incorporation set forth herein were
adopted and approved by the Company's Board of Directors without shareholder
action on December 9, 1996, pursuant to Section 607.0602 of the Florida Business
Corporation Act, and shareholder action was not required.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized Officer of
the Company as of the 9th day of December, 1996.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
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<PAGE>
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
FOR
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF 4% $100 SERIES C CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation.
FIRST: DESIGNATION OF 4% $100 SERIES C CONVERTIBLE PREFERRED STOCK
Of the 1,000,000 shares of preferred stock, par value $.01 per share,
authorized pursuant to Article III of the Company's Articles of Incorporation,
100,000 of such shares are hereby designated as the 4% $100 Series C Convertible
Preferred Stock (the "Series C Preferred Stock"). Shares of Series C Preferred
Stock are sometimes referred to herein as "Series C Preferred Shares."
The powers, designations, preferences, and relative, participating,
optional or other special rights of the Series C Preferred Stock authorized
hereunder and the qualifications, limitations and restrictions of such
preferences and rights are as follows:
13. STATED VALUE. The Stated Value of each Series C Preferred Share is
$100.
14. DIVIDENDS.
(a) Each outstanding share of Series C Preferred Stock shall accrue and
cumulate dividends on the Stated Value thereof from and after the date of
issuance at the rate of 4% per annum (the "Dividend Rate"). Dividends, when
declared on the Series C Preferred Stock, shall have accrued from the date of
issuance or thereafter, from the most recent date on which dividends were
payable, and shall be payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year (each, a "Dividend Payment Date"),
commencing on March 31, 1997; PROVIDED, HOWEVER, that if any such day is a
non-business day, the Dividend Payment Date will be the next business day. Each
declared dividend shall be payable to holders of record as they appear at the
close of business on the stock books of the Company on such record dates, not
more than 30 calendar days and not less than 10 calendar days preceding the
Dividend Payment Date therefor, as determined by the Board of Directors (each of
such dates, a "Record Date"). Quarterly dividend periods (each a "Dividend
Period") shall commence on and include the first day of January, April, July and
October of each year and shall end on and include the day next preceding the
next following Dividend Payment Date.
(b) No full dividends shall be declared or paid or set apart for
payment on any series of preferred stock or other capital stock of any series
ranking, as to dividends or
PREPARED BY:
Nina S. Gordon, Esquire
Fla Bar No. 0435309
Broad and Cassel
201 S. Biscayne Blvd., Ste. 3000
Miami, FL 33131
<PAGE>
liquidation preference, junior to ("Junior Stock") the Series C Preferred Stock
during any calendar quarter unless full dividends on the Series C Preferred
Stock for the Dividend Period ending during such calendar quarter have been or
contemporaneously are declared and paid. If full dividends on the Series C
Preferred Stock have not been declared and paid for the then-current Dividend
Period, then, with respect to such then-current Dividend Period, the following
restrictions shall be applicable: (1) no dividend or distribution, other than in
Junior Stock, may be declared, set aside or paid on any shares of Junior Stock,
(2) the Company may not repurchase, redeem or otherwise acquire any shares of
its Junior Stock (except by conversion into or exchange for Junior Stock) and
(3) the Company may not, directly or indirectly, repurchase, redeem or otherwise
acquire (except by conversion into or exchange for Junior Stock) any shares of
any class or series of Junior Stock or warrants, calls, options or other rights
to acquire capital stock of the Company or other security exercisable or
exchangeable into capital stock of the Company, without the consent of the
holders of a majority of the then-outstanding shares of Series C Preferred
Stock. Holders of the Series C Preferred Stock shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of the
dividends as herein provided on the Series C Preferred Stock. No interest or sum
of money in lieu of interest shall be payable in respect of any declared
dividend payment or payments on the Series C Preferred Stock which may be in
arrears.
15. CONVERSION.
(a) Subject to and upon compliance with the provisions of this Section
3, the holders of the Series C Preferred Shares shall have the right, at his or
her option, at any time commencing on June 20, 1997, to convert the shares into
a number of fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100th of a share) of the Company's common stock,
$.01 par value (the "Common Stock"), equal to $100.00 for each Series C
Preferred Share surrendered for conversion divided by the Conversion Price (as
defined in Section 3(f) below); PROVIDED, HOWEVER, that if the Company shall
have called the Series C Preferred Stock for redemption, such right shall
terminate on the close of business on the third business day preceding the
Redemption Date (as defined below) unless the Company has defaulted in making
the payment due on the Redemption Date.
(b) In order to exercise this conversion option, the holder of any
Series C Preferred Shares to be converted shall surrender and deliver to the
Company the certificate(s) representing such shares, together with the Notice of
Election to Convert on the reverse side of said certificate(s), or otherwise in
such form as the Company may reasonably require, duly completed and signed by
the holder. Unless the shares issuable upon conversion are to be issued in the
same name as the name in which the shares of the Series C Preferred Stock are
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Company, duly executed by
the holder or his or her duly authorized attorney and by funds in an amount
sufficient to pay any transfer or similar tax. The holders of shares of the
Series C Preferred Stock at the close of business on a Record Date shall be
entitled to receive any dividend declared payable on those shares for the
corresponding Dividend Period on the applicable Dividend Payment Date,
notwithstanding the conversion of the shares after the
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Record Date. Upon the proper delivery of such documents, the conversion to be
effected thereby shall be effective as of the date of such delivery.
(c) Promptly after the effective date of a holder's conversion of
Series C Preferred Shares in accordance with this Section 3, the Company shall
issue and deliver to such holder a certificate or certificates for the number of
full shares of Common Stock issuable to the holder pursuant to the holder's
conversion of Series C Preferred Shares in accordance with the provisions of
this Section 3. The fractional interest in one share of Common Stock arising
upon the conversion, if any, shall be settled as provided in paragraph (e)
below.
(d) All shares of Common Stock delivered upon conversion of the Series
C Preferred Stock shall be duly and validly issued and fully paid and
nonassessable. Upon the effective date of a holder's conversion of Series C
Preferred Shares, such converted Series C Preferred Shares shall no longer be
deemed to be outstanding and all rights of the holder with respect to such
shares shall immediately terminate except the right to receive the shares of
Common Stock issuable upon such conversion.
(e) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon conversion of the Series C Preferred Stock.
Any fractional interest in one share of Common Stock resulting from a holder's
conversion of Series C Preferred Shares shall be paid in cash (computed to the
nearest cent) based on the Current Market Price (as defined in Section (f)(vi)
below) of a Common Share on the effective date of the conversion. If more than
one share shall be surrendered for conversion at one time by the same holder,
the number of whole shares of Common Stock issuable upon the conversion shall be
computed on the basis of the aggregate Liquidation Preference (as such term is
defined in Section 8 below) of the Series C Preferred Shares so surrendered.
(f) The "Conversion Price" per share of the Series C Preferred Stock
shall be $6.325, subject to adjustment from time to time as follows:
a. For purposes of this Section 3, the following definitions shall
apply:
(1) "Convertible Securities" shall mean any evidences of
indebtedness, shares or securities convertible into or exchangeable for shares
of Common Stock.
(2) "Common Stock Outstanding" shall include all Common Stock
issued and outstanding and issuable upon exercise of all outstanding options and
conversion of all outstanding Convertible Securities.
(3) "Effective Price" of additional shares of Common Stock
shall mean the quotient determined by dividing the total number of additional
shares of Common Stock issued or sold, or deemed to have been issued or sold by
the Company under Section 3(f)(ii), into the aggregate consideration received or
deemed to have been received by the Company for such issue.
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(4) "Issuance Date" shall mean the actual initial date of
issuance of the Series C Preferred Stock.
(5) "Private Placement" shall mean the issuance of securities
by the Company pursuant to an exemption from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act").
b.
(1) In case at any time or from time to time after the Issuance
Date, the Company issues or sells, or is deemed by the express provisions of
this Section 3(f)(ii) to have issued or sold additional shares of Common Stock,
for an Effective Price less than the Conversion Price in effect on the date of
and immediately prior to such issue or, in the case of the issuance of
additional shares of Common Stock in a Private Placement at less than 90% of
such Conversion Price, or the Company issues or sells, or is deemed by the
express provisions of this Section 3(f)(ii) to have issued or sold Additional
Shares of Common Stock for an Effective Price less than the Current Market Price
in effect on the date of and immediately prior to such issue, then and in each
such case the then-existing Conversion Price for the Series C Preferred Stock
shall be reduced, as of the opening of business on the date of such issue or
sale, to the lower of the prices determined as follows:
(a) by multiplying the Conversion Price for the Series C
Preferred Stock in effect immediately prior to the time of such issue or sale by
a fraction (a) the numerator of which shall be the sum of (i) the number of
shares of Common Stock Outstanding immediately prior to such issue or sale plus
(ii) the number of shares of Common Stock which the aggregate consideration
received (or by express provision hereof deemed to have been received) by the
Company for the total number of additional shares of Common Stock so issued
would purchase at such Conversion Price for the Series C Preferred Stock and (b)
the denominator of which shall be the number of shares of Common Stock
Outstanding at the close of business on the date of such issue after giving
effect to such issue of additional shares of Common Stock; and
(b) by multiplying the Conversion Price for the Series C
Preferred Stock in effect immediately prior to the time of such issue or sale by
a fraction (a) the numerator or which shall be the sum of (i) the number of
shares of Common Stock Outstanding immediately prior to such issue or sale
multiplied by the Current Market Price immediately prior to such issue or sale
plus (ii) the aggregate consideration received (or by express provision hereof
deemed to have been received) by the Company for the total number of additional
shares of Common Stock so issued, and (b) the denominator of which shall be the
product of (iii) the number of shares of Common Stock Outstanding at the close
of business on the date of such issue after giving effect to such issue of
additional shares of Common Stock, multiplied by (iv) the Current Market Price
immediately prior to such issue or sale.
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(2) For the purpose of making any adjustment required under
Section 3(f)(ii), the consideration received by the Company for any issue or
sale of securities shall (1) to the extent it consists of cash, be computed at
the net amount of cash received by the Company prior to deduction of any
expenses payable by the Company and any underwriting or similar commissions,
compensation or concessions paid or allowed by the Company in connection with
such issue or sale, (2) to the extent it consists of property other than cash,
be computed at the fair market value of that property as determined in good
faith by the Board of Directors, and (3) if additional shares of Common Stock,
Convertible Securities or options to purchase either additional shares or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration that covers both,
be computed (as provided in clauses (1) and (2) above) as the portion of the
consideration so received that may be reasonably determined in good faith by the
Board of Directors to be allocable to such additional shares of Common Stock,
Convertible Securities or options.
(3) For purpose of the adjustment required under Section
3(f)(ii), if at any time or from time to time after the Issuance Date for the
Series C Preferred Stock, the Company issues or sells any options or Convertible
Securities, then in each case the Company shall be deemed to have issued at the
time of the issuance of such options or Convertible Securities the maximum
number of additional shares of Common Stock (as set forth in the instruments
relating thereto, giving effect to any provision contained therein for a
subsequent upward adjustment of such number) issuable upon exercise or
conversion thereof and to have received as consideration for the issuance of
such shares an amount equal to the total amount of the consideration, if any,
received by the Company for the issuance of such options or Convertible
Securities plus, in the case of such options, the minimum amounts of
consideration, if any (as set forth in the instruments relating thereto, giving
effect to any provision contained therein for a subsequent downward adjustment
of such consideration), payable to the Company upon the exercise of such options
and, in the case of Convertible Securities, the minimum amounts of
consideration, if any, payable to the Company (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities). No further
adjustment of the Conversion Price for the Series C Preferred Stock, adjusted
upon the issuance of such options or Convertible Securities, shall be made as a
result of the actual issuance of additional shares of Common Stock on the
exercise of any such options or the conversion of any such Convertible
Securities. If any such options or the conversion privilege represented by any
such Convertible Securities shall expire without having been exercised and fewer
than the maximum number of additional shares of Common Stock deemed issued
thereunder upon issuance thereof shall have actually been issued thereunder, or
more than the minimum consideration deemed to have been received by the Company
upon issuance thereof shall have been actually received by the Company, then the
Conversion Price for the Series C Preferred Stock adjusted upon the issuance of
such options or Convertible Securities shall be readjusted to the Conversion
Price for the Series C Preferred Stock that would have been in effect had an
adjustment been made on the basis that the only additional shares of Common
Stock so issued were the additional shares of Common Stock, if any, actually
issued or sold on the exercise of such options or rights of conversion of such
Convertible Securities, and such additional shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company upon such
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<PAGE>
exercise, plus the consideration received by the Company for the granting of all
such options plus the consideration received for issuing or selling the
Convertible Securities actually converted plus the consideration, if any,
actually received by the Company (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) on the conversion of such
Convertible Securities.
(4) Except as expressly provided herein, no adjustment in the
Conversion Price of any share of Series C Preferred Stock shall be made in
respect of the issue of additional shares of Common Stock unless the
consideration per share for such additional shares of Common Stock issued or
deemed to be issued by the Company is less than the Conversion Price or 90% of
the Conversion Price in the case of additional shares of Common Stock issued in
a Private Placement, or Current Market Price, as the case may be, in each case
in effect on the date of, and immediately prior to, such issue.
c.
(1) In case the Company shall (1) pay a dividend or make a
distribution on its Common Stock in shares of its Common Stock, (2) subdivide
its outstanding Common Stock into a greater number of shares, or (3) combine its
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect immediately prior to such event shall be proportionately adjusted so
that the holder of any share of the Series C Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the number and kind of
shares of Common Stock of the Company that he would have been entitled to
receive had the share been converted immediately prior to the happening of such
event. An adjustment made pursuant to this Section 3(f)(i) shall become
effective immediately after the Record Date in the case of a dividend or
distribution except as provided in Section 3(f)(ix) below, and shall become
effective immediately after the effective date in the case of a subdivision or
combination. If any dividend or distribution is not paid or made, the Conversion
Price then in effect shall be appropriately readjusted.
(2) If at any time or from time to time there is a capital
reorganization of the Common Stock (other than a recapitalization provided for
in Section 3(f)(iii)(A)) or a merger or consolidation of the Company with or
into another corporation, or the sale of all of the Company's properties and
assets to any other person, then, as a part of such reorganization, merger,
consolidation or sale, provision shall be made so that the holders of Series C
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series C Preferred Stock the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from such
merger or consolidation or sale, to which a holder of Common Stock deliverable
upon conversion would have been entitled upon such capital reorganization,
merger, consolidation or sale. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Section 3 with respect to the
rights of holders of the Series C Preferred Stock after the reorganization,
merger, consolidation or sale to the end that the provisions of this Section 3
(including adjustment of the Conversion Price for the Series C Preferred Stock
then in effect and number of shares of Common Stock purchasable
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upon conversion of the Series C Preferred Stock) shall be applicable after that
event and be as nearly equivalent to the provisions hereof as may be
practicable.
(3) In the event that the Company at any time or from time to
time after the Issuance Date makes, or fixes a record date for the determination
of holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Company other than shares of Common Stock, then in
each such event provision shall be made so that the holders of Series C
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Company that they would have received had their Series C Preferred Stock been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the date of
conversion, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this Section 3 with respect to the rights of the holders of the Series C
Preferred Stock.
d. In case the Company shall issue rights or warrants to all
holders of its Common Stock entitling them (for a period expiring within 45 days
after the record date mentioned below) to subscribe for or purchase Common Stock
at a price per share less than the Current Market Price of the Common Stock at
the record date for the determination of shareholders entitled to receive the
rights or warrants, the Conversion Price in effect immediately prior to the
issuance of such rights or warrants shall be adjusted so that it shall equal the
price determined by multiplying the Conversion Price in effect immediately prior
to the date of issuance of the rights or warrants by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding on the date
of the issuance of the rights or warrants plus the number of shares of Common
Stock that the aggregate offering price of the total number of shares of Common
Stock so offered for subscription or purchase would purchase at the Current
Market Price at that record date, and of which the denominator shall be the
number of shares of Common Stock outstanding on the date of issuance of the
rights or warrants plus the number of additional shares of Common Stock for
subscription or purchase. The adjustment provided for in this Section 3(f)(iv)
shall be made successively whenever any such rights or warrants are issued, and
shall become effective immediately, except as provided in Section 3(f)(ix)
below, after such record date. In determining whether any rights or warrants
entitle the holder of the Common Stock to subscribe for or purchase shares of
Common Stock at less than the Current Market Price, and in determining the
aggregate offering price of the shares of Common Stock so offered, there shall
be taken into account any consideration received by the Company for such rights
or warrants, the value of such consideration, if other than cash, to be
determined by the Board of Directors of the Company (whose determination, if
made in good faith, shall be conclusive). If any or all of such rights or
warrants are not so issued or expire or terminate without having been exercised,
the Conversion Price then in effect shall be appropriately readjusted.
e. In case the Company shall distribute to all holders of its
Common Stock any shares of capital stock of the Company (other than Common
Stock) or evidences of
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indebtedness or assets (excluding cash dividends or distributions paid from
retained earnings of the Company) or rights or warrants to subscribe for or
purchase any of its securities (excluding those referred to in Section 3(f)(iv)
above), then, in each such case, the Conversion Price shall be adjusted so that
it shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of the distribution by a fraction, the
numerator of which shall be the Current Market Price of the Common Stock on the
record date mentioned below less the then fair market value (as determined by
the Board of Directors of the Company, whose determination, if made in good
faith, shall be conclusive) of that portion of the capital stock or assets or
evidences of indebtedness so distributed, or of the rights or warrants so
distributed, applicable to one share of Common Stock, and the denominator of
which shall be the Current Market Price of the Common Stock on the record date.
Such adjustment shall become effective immediately, except as provided in
Section 3(f)(ix) below, after the record date for the determination of
shareholders entitled to receive such distribution. If any such distribution is
not made or if any or all of such rights or warrants expire or terminate without
having been exercised, the Conversion Price then in effect shall be
appropriately readjusted. Notwithstanding the foregoing, in the event that the
Company shall distribute rights or warrants, other than those referred to in
Section 3(f)(iv) above ("Rights") pro rata to holders of Common Stock, the
Company may, in lieu of making any adjustment pursuant to this Section 3(f)(v),
make proper provision so that each holder of the Series C Preferred Stock who
converts such Series C Preferred Stock (or any portion thereof) after the record
date for such distribution and prior to the expiration or redemption of the
Rights shall be entitled to receive upon such conversion, in addition to the
shares of Common Stock issuable upon such conversion (the "Conversion Shares"),
a number of Rights to be determined as follows: (1) if such conversion occurs on
or prior to the date for the distribution to the holders of Rights of separate
certificates evidencing such Rights (the "Distribution Date"), the same number
of Rights to which a holder of a number of shares of Common Stock equal to the
number of Conversion Shares is entitled at the time of such conversion in
accordance with the terms and provisions of and applicable to the Rights; and
(2) if such conversion occurs after the Distribution Date, the same number of
shares of Common Stock into which the number of Series C Preferred Shares so
converted was convertible immediately prior to the Distribution Date would have
been entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights.
f. For the purpose of any computation under this Section 3, the
"Current Market Price" of the Common Stock at any date shall be the average of
the last reported sale prices per share for the 10 consecutive Trading Days (as
defined below) preceding the date of such computation. The last reported sale
price for each day shall be (1) the last reported sale price of the Common Stock
on the Nasdaq National Market or SmallCap Market, as the case may be, or any
similar system of automated dissemination of quotations of securities prices
then in common use, if so quoted, or (2) if not quoted as described in clause
(1), the mean between the high bid and low asked quotations for the Common Stock
as reported by the National Quotation Bureau Incorporated if at least two
securities dealers have inserted both bid and asked quotations for the Common
Stock on at least five of the 10 preceding days, or (3) if the Common Stock is
listed or admitted for trading on any national securities exchange, the last
sale price, or the closing bid price if no sale occurred, of the Common Stock on
the principal
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securities exchange on which the Common Stock is listed. If the Common Stock is
quoted on a national securities or central market system, in lieu of a market or
quotation system described above, the last reported sale price shall be
determined in the manner set forth in clause (2) of the preceding sentence if
bid and asked quotations are reported but actual transactions are not, and in
the manner set forth in clause (3) of the preceding sentence if actual
transactions are reported. If none of the conditions set forth above is met, the
last reported sale price of the Common Stock on any day or the average of such
last reported sale prices for any period shall be the fair market value of such
class of stock as determined by a member firm of the New York Stock Exchange,
Inc. selected by the Company. As used herein, the term "Trading Days" means (A)
if the Common Stock is quoted on the Nasdaq National Market, Nasdaq SmallCap
Market or any similar system of automated dissemination of quotations of
securities prices, days on which trades may be made on such system, or (B) if
not quoted as described in clause (A), days on which quotations are reported by
the National Quotation Bureau Incorporated, or (C) if the Common Stock is listed
or admitted for trading on any national securities exchange, days on which such
national securities exchange is open for business. Notwithstanding the
foregoing, if Common Stock is issued by the Company in a Private Placement, then
"Current Market Price" shall be 90% of the price computed pursuant to this
Section 3(f)(vi).
g. In the event that the Company shall fail to declare and timely
pay a dividend on the Series C Preferred Stock for a Dividend Period (a
"Dividend Default"), then the Conversion Price shall be reduced by $0.25 for
each such Dividend Default. Notwithstanding the foregoing, if at any time
subsequent to an adjustment in the Conversion Price pursuant to this Section
3(f)(vii), the Company declares and pays all cumulated dividends on the Series C
Preferred Stock through the then-current Dividend Period, then no further
adjustment in the Conversion Price pursuant to this Section 3(f)(vii) shall be
made until a new Dividend Default shall have occurred.
h. In the event the Company shall have failed to file and have
declared effective a registration statement on Form S-3 filed with the
Securities and Exchange Commission pursuant to the Securities Act for the shares
of Common Stock into which the Series C Preferred Stock is convertible by
September 1, 1997, then the existing Conversion Price for the Series C Preferred
Stock shall be reduced, as of the close of business on September 1, 1997, to a
price that is 75% of the Conversion Price for the Series C Preferred Stock in
effect immediately prior to the close of business on September 1, 1997, and if
such registration shall not have been filed and declared effective by March 31,
1998, the Conversion Price for the Series C Preferred Stock shall be reduced, as
of the close of business on March 31, 1998, to a price that is 50% of the
Conversion Price for the Series C Preferred Stock in effect immediately prior to
the close of business on September 1, 1997.
i. No adjustment in the Conversion Price shall be required unless
such adjustment would require a change of at least 1% in the Conversion Price;
PROVIDED, HOWEVER, that any adjustments which by reason of this Section 3(f)(ix)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment; and PROVIDED, FURTHER, that adjustment shall be
required and made in accordance with the provisions of this Section 3(f)
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(other than this Section 3(f)(ix)) not later than three years of the date of the
event requiring the adjustment. All calculations under this Section 3(f) shall
be made to the nearest cent or the nearest one hundredth of a share, as the case
may be. Notwithstanding anything in this Section 3(f) to the contrary, the
Company shall be entitled to make such reductions in the Conversion Price, in
addition to those required by this Section 3(f), as it, in its discretion, shall
determine to be advisable in order that any stock dividend, subdivision or
combination of shares, distribution of capital stock or rights or warrants to
purchase stock or securities, or distribution of evidence of indebtedness or
assets (other than cash dividends or distributions paid from retained earnings)
hereinafter made by the Company to its shareholders shall be a tax-free
distribution for federal income tax purposes.
j. In each case of an adjustment or readjustment of the Conversion
Price for the Series C Preferred Stock or the number of shares of Common Stock
or other securities issuable upon conversion of the Series C Preferred Stock,
the Company, at its expense, shall cause the Chief Financial Officer of the
Company to compute such adjustment or readjustment in accordance with the
provisions hereof (and cause its regularly retained independent public
accountants to verify such computation) and prepare a certificate showing such
adjustment or readjustment and shall mail such certificate, by first class mail,
postage prepaid, to each registered holder of the Series C Preferred Stock at
the holder's address as shown in the Company's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (1) the
consideration received or deemed to have been received by the Company for any
additional shares of Common Stock issued or sold or deemed to have been issued
or sold, (2) the Conversion Price for the Series C Preferred Stock at the time
in effect, (3) the number of additional shares of Common Stock, and (4) the type
and amount, if any, of other property that at the time would be received upon
conversion of the Series C Preferred Stock.
k. The provision of this Section 3(f) shall not apply to or as
result of any shares, rights, options, warrants or Convertible Securities
outstanding on the date hereof or issuable as a result of any transaction
occurring, plan adopted, or agreement entered into prior to the date hereof.
(g) a. The Company covenants that it will at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued shares of Common Stock or its issued shares of Common
Stock held by its treasury, or both, for the purpose of effective conversions of
the Series C Preferred Stock, the full number of shares of Common Stock
deliverable upon the conversion of all outstanding shares of the Series C
Preferred Stock not theretofore converted. For purposes of this Section 3(g),
the number of shares of Common Stock that shall be deliverable upon the
conversion of all outstanding shares of the Series C Preferred Stock shall be
computed as if at the time of computation all the outstanding shares were held
by a single holder.
b. Before taking any action that would cause an adjustment
reducing the Conversion Price below the then par value (if any) of the shares of
Common Stock
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deliverable upon conversion of the Series C Preferred Stock, the Company will
take any corporate action that may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock at the adjusted Conversion Price.
(h) The Company will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock or other securities on conversion of the Series C Preferred Stock
pursuant hereto; PROVIDED, HOWEVER, that the Company shall not be required to
pay any tax or fee that may be payable in respect of any transfer involved in
the issue or delivery of shares of Common Stock or other securities in a name
other than that of the holder of the Series C Preferred Stock to be converted
and no such issue or delivery shall be made unless and until the person
requesting the issue or delivery has paid to the Company the amount of any such
tax or fee or has established, to the satisfaction of the Company, that the tax
or fee has been paid.
(i) The Company shall list the shares of Common Stock required to be
delivered upon conversion of the Series C Preferred Shares, prior to the
delivery thereof, for trading upon each national securities exchange or Nasdaq,
if any, upon which the outstanding Common Stock is listed at the time of
delivery.
16. REDEMPTION.
(a) The shares of Series C Preferred Stock shall be redeemable by the
Company, in whole or in part, at any time and from time to time, from and after
the later of (i) December 20, 1999 or (ii) the date on which the Company's
Common Stock shall have an average closing bid price that is at least 200% of
the Conversion Price for any 10 consecutive trading days, at a price of $100.00
per share, plus, in each case, an amount equal to all accrued but unpaid
dividends for the then-current Dividend Period immediately preceding the date
fixed for redemption (the "Redemption Date").
(b) In the event that fewer than all the outstanding shares of the
Series C Preferred Stock are to be redeemed as permitted by this Section 4, the
number of shares to be redeemed shall be determined by the Board of Directors
and the shares to be redeemed shall be determined by lot or pro rata as may be
determined by the Board of Directors or by such other method as may be approved
by the Board of Directors that is required to conform to any rule or regulation
of any stock exchange or automated quotation system upon which the shares of the
Series C Preferred Stock may at the time be listed.
(c) Notice of redemption of the Series C Preferred Stock, specifying
the Redemption Date and place of redemption, shall be given by certified mail to
each holder of record of the shares to be redeemed, at his or her address of
record, not less than 60 calendar days prior to the Redemption Date. Each such
notice shall also specify the redemption price applicable to the shares to be
redeemed. If less than all the shares owned by such holder are then to be
redeemed, the notice shall also specify the number of shares thereof that are to
be
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redeemed and the fact that a new certificate or certificates representing any
unredeemed shares shall be issued without cost to such holder.
(d) Notice of redemption of shares of the Series C Preferred Stock
having been given as provided in Section 4(c), then unless the Company shall
have defaulted in providing for the payment of the redemption price and all
accrued and unpaid dividends for the then-current Dividend Period immediately
preceding the Redemption Date, all rights of the holders thereof (except the
right to receive the redemption price and all accrued and unpaid dividends for
the then-current Dividend Period immediately preceding the Redemption Date)
shall cease with respect to such shares and such shares shall not, after the
Redemption Date, be deemed to be outstanding and shall not have the status of
Series C Preferred Stock.
(e) Any shares of Series C Preferred Stock which shall at any time
have been redeemed or converted shall, after such redemption or conversion, have
the status of authorized but unissued shares of Preferred Stock, without
designation as to series until such shares are once more designated as part of a
particular series by the Board of Directors.
(f) The Company, directly or indirectly, shall not purchase or
otherwise acquire any shares of the Series C Preferred Stock; PROVIDED, HOWEVER,
that the foregoing shall not prevent the purchase or acquisition of shares of
the Series C Preferred Stock pursuant to a purchase or exchange offer made on
the same terms to all holders of all outstanding shares of the Series C
Preferred Stock or pursuant to the exercise of the conversion right provided in
Section 3 hereof.
(g) Shares of the Series C Preferred Stock are not subject or
entitled to the benefit of a sinking fund.
(h) Notwithstanding the foregoing, if notice of redemption shall have
been given pursuant to this Section 4 and any holder of the Series C Preferred
Stock shall, prior to the close of business on the date three business days next
preceding the Redemption Date, give written notice to the Corporation pursuant
to Section 3 hereof of the conversion of any or all of the shares held by the
holder (accompanied by a certificate or certificates for such shares, duly
endorsed or assigned to the Company), then the redemption shall not become
effective as to such shares and the conversion shall become effective as
provided in Section 3 hereof.
17. REDEMPTION FOLLOWING DEFAULT.
(a) In the event of a default under the terms of the Series C
Preferred Stock as set forth herein (excluding a Dividend Default resulting in
an adjustment to the Conversion Price pursuant to Section 3(f)(vii) hereof), or
under the Preferred Stock Purchase Agreement, each holder of Series C Preferred
Stock shall have the right, at such holder's sole option, to require the Company
to repurchase all or a portion of such holder's shares at the price of $100 per
share plus accrued but unpaid dividends for the then-current Dividend Period.
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(b) In order to exercise this option to require redemption of Series
C Preferred Shares by the Company, the holder of any such Series C Preferred
Shares shall surrender and deliver to the Company the certificate(s)
representing such shares, together with a notice of election to require
redemption, duly completed and signed by the holder. Holders of shares of the
Series C Preferred Stock at the close of business on a Record Date shall be
entitled to receive any dividend declared payable on those shares for the
corresponding Dividend Period on the applicable Dividend Payment Date,
notwithstanding the redemption of the shares after the Record Date pursuant to
this Section 5.
18. PREEMPTIVE RIGHTS. Shares of the Series C Preferred Stock are not
entitled to any preemptive rights to acquire any unissued shares of any capital
stock of the Company, now or hereafter authorized, or any other securities of
the Company, whether or not convertible into shares of capital stock of the
Company or carrying a right to subscribe to or acquire any such shares of
capital stock.
19. VOTING. The holders of shares of the Series C Preferred Stock will be
entitled to vote such shares (with each share having one vote) together with the
holders of shares of the Company's Common Stock, Series A Variable Rate
Convertible Preferred Stock and Series B Variable Rate Preferred Stock as a
single class on all matters, including the election of directors, except as
otherwise expressly required by law. Except as set forth in the foregoing
sentence or as required by law, the shares of Series C Preferred Stock shall not
have any voting powers, either general or special.
20. LIQUIDATION PREFERENCE.
(a) Upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the shares of the Series C Preferred
Stock shall be entitled to receive out of the assets of the Company available
for distribution to shareholders under applicable law, before and in priority to
any payment or distribution of assets by any means whatsoever that is made on
the Common Stock or on any other class or series of capital stock of the Company
ranking junior to the Series C Preferred Stock upon liquidation, the amount of
$100 per Series C Preferred Share, in the event of an involuntary or voluntary
liquidation (the "Liquidation Preference"), plus a sum equal to all dividends
accrued on such shares for and unpaid for the then-current Dividend Period. The
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all the property and assets of the
Company shall not be deemed a dissolution, liquidation or winding up of the
Company for the purposes of this Section 8, nor shall the merger or
consolidation of the Company into or with any other corporation or association
or the merger or consolidation of any other corporation or association into or
with the Company, be deemed to be a dissolution, liquidation or winding up of
the Company for the purposes of this Section 8.
(b) After the payment in full in cash of the Liquidation Preference
plus accrued dividends to the holders of the Series C Preferred Shares, as
provided in the foregoing paragraph (a), the holders of the Series C Preferred
Shares shall have no further right or claim
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to any of the remaining assets of the Company, except as otherwise provided
herein or as otherwise required by law.
(c) In the event the assets of the Company available for distribution
to the holders of the Series C Preferred Shares upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company shall be
insufficient to pay in full all amounts to which such holders are entitled
pursuant to Section 8(a) above, no distribution shall be made on account of any
shares of any other series of Preferred Stock or any other class of capital
stock of the Company ranking on a parity with the Series C Preferred Stock upon
such liquidation, dissolution or winding up unless proportionate amounts shall
be paid on account of the Series C Preferred Stock, ratably, in proportion to
the full amounts to which holders of all such shares which are on a parity with
the Series C Preferred Stock are respectively entitled upon such dissolution,
liquidation or winding up.
21. RANK. The Series C Preferred Stock shall rank junior as to payment of
dividends and rights upon voluntary or involuntary liquidation, dissolution or
winding up of the Company with the Company's Series A Variable Rate Convertible
Preferred Stock and Series B Variable Rate Convertible Preferred Stock. The
Series C Preferred Stock shall rank senior as to payment of dividends and rights
upon voluntary or involuntary liquidation, dissolution or winding up of the
Company as to all other classes and series of capital stock of the Company
outstanding as of the date of these Articles of Amendment or issued subsequent
hereto, unless consented to by the holders of at least a majority of the
then-outstanding shares of Series C Preferred Stock. The Company shall not
hereafter issue any shares of Preferred Stock or other capital stock ranking
senior to the Series C Preferred Stock as to the payment of dividends or rights
upon voluntary or involuntary liquidation, dissolution or winding up of the
Company, without the prior consent of the holders of at least a majority of the
then-outstanding shares of Series C Preferred Stock. Any shares of Series C
Preferred Stock that shall at any time have been converted or redeemed or
otherwise reacquired by the Company shall, after such conversion, redemption or
reacquisition, have the status of authorized but unissued shares of Preferred
Stock, without designation as to class or series until such shares are once more
designated as part of a particular class or series of Preferred Stock by the
Board of Directors.
22. REPORTS AND NOTICES. So long as any shares of the Series C Preferred
Stock shall be outstanding, the Company shall provide to the holder or holders
of such shares copies of all annual, quarterly and other reports of the Company
and copies of all shareholder notices of the Company promptly after filing with
the Securities and Exchange Commission.
23. WAIVER BY SERIES C PREFERRED SHAREHOLDERS. Except as expressly
provided for herein or as otherwise required by law, any rights or benefits for
the Series C Preferred Shares and the holders thereof provided herein may be
waived as to all outstanding Series C Preferred Shares and the holders thereof
by the consent of the holders of a majority of the then-outstanding Series C
Preferred Shares.
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24. HOLDER. The term "holder" as used in this Designation of Preferences,
Rights and Limitations of 4% $100 Series C Convertible Preferred Stock means a
record holder of any shares of Series C Preferred Stock.
25. ADDITIONAL ISSUANCES OF SERIES C PREFERRED SHARES. If after the
initial issuance of Series C Preferred Shares as provided herein, the Company
desires to issue additional Series C Preferred Shares with a different
Conversion Price, the Company shall file such amendments to its Articles of
Incorporation as may be necessary to effect such change in the Conversion Price
and, thereafter, the Series C Preferred Shares as initially issued shall be
designated "Series C-1" and such subsequently issued Series C Preferred Shares
shall bear similar consecutively numbered designations.
SECOND: ADOPTION OF AMENDMENTS TO ARTICLES OF INCORPORATION
These Articles of Amendment to Articles of Incorporation and the
amendments to the Company's Articles of Incorporation set forth herein were
adopted and approved by the Company's Board of Directors without shareholder
action on December 9, 1996, pursuant to Section 607.0602 of the Florida Business
Corporation Act, and shareholder action was not required.
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IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the ____ day of December, 1996.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
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EXHIBIT 10.20
Dated as of October 15, 1996
Tekno Simon LLC
115 West Washington Street
Indianapolis, Indiana 46204
RE: AMENDMENT TO PREFERRED STOCK PURCHASE AGREEMENT
Ladies and Gentlemen:
Reference is made to that certain Preferred Stock Purchase Agreement
dated as of November 8, 1995 (the "Purchase Agreement") between Tekno Simon LLC
(the "Purchaser") and Big Entertainment, Inc. (the "Company"). The parties wish
to amend certain terms and conditions of the Purchase Agreement as follows:
1. As of the date of this letter, the parties acknowledge that pursuant
to the Purchase Agreement, the Purchaser has purchased an aggregate of 217,600
shares of the Company's Series A Variable Rate Convertible Preferred Stock, par
value $.01 per Share (the "Series A Preferred Stock") for aggregate
consideration of $1,360,000. The parties further acknowledge that an aggregate
of $640,000 in stock purchases for the funding of eight Entertainment Kiosks is
presently available pursuant to the terms of the Purchase Agreement.
2. (a) Commencing with the date hereof, in lieu of purchasing Series A
Preferred Stock pursuant to the Purchase Agreement, the Purchaser shall purchase
shares of the Company's Series B Variable Rate Convertible Preferred Stock, par
value $.01 per share (the "Series B Preferred Stock"). The terms of the Series B
Preferred Stock shall be identical to that of the Series A Preferred Stock
except that the Initial Stated Value of the Series B Preferred Stock shall be
$5.375 per share (the "Initial Stated Value"). In addition, each Installment of
Series B Preferred Stock for which a Closing is held following an Installment
Event shall consist of 14,884 shares of Series B Preferred Stock. The purchase
price for each share of Series B Preferred Stock shall be $5.375 per share. The
Initial Stated Value, number of shares issuable to the Purchaser and the
purchase price for each share shall be subject to adjustment as provided in
section (b) below.
(b) On the earlier to occur of March 31, 1997 or the Closing of the
25th Installment under the Purchase Agreement, the Stated Value of the Series B
Preferred Stock shall be adjusted (the "Final Stated Value") so that it shall
equal the average of the Subsequent Stated Values determined at the time of each
Closing, but in no event greater than $6.25 per share or less than $4.50 per
share. As used herein, the "Subsequent Stated Value" for a Closing shall equal
the average of closing bid price for the Company's Common Stock during the 20
trading days prior to the date of each Closing. In addition to the foregoing,
once the Final Stated Value has been determined, within ten business days
thereof, the Company shall issue to the Purchaser such additional number of
shares of Series B Preferred Stock as shall equal (i) the total purchase price
paid by the Purchaser for the Series B Preferred Stock dividend by the Final
Stated Value, minus (ii) the number of shares of Series B Preferred Stock
previously issued to the Purchaser. The Purchaser shall have the same
registration rights under the Securities Act with respect to the shares of
Series B Preferred Stock and shares of Common Stock issurable upon conversion
<PAGE>
Tekno Simon LLC
October 15, 1996
Page 2
of and as dividends on the Series B Preferred Stock as the Purchaser has with
respect to the shares of Series A Preferred Stock and shares of Common Stock
issuable or issued upon conversion of and as dividends on the Series A Preferred
Stock. The existing Registration Rights Agreement between the parties shall be
applicable to all the foregoing registration rights.
(c) The Purchaser hereby consents to the filing of an amendment or
amendments to the Company's Articles of Incorporation (i) reducing the number of
shares of Series A Preferred Stock authorized to 217,600 shares and (ii)
effecting the adjustments to the Series B Preferred Stock described in
subsection (b) below.
(d) All references to Preferred Stock in the Purchase Agreement
shall mean Series A Preferred Stock and/or Series B Preferred Stock, as
applicable.
3. Section 3 of the Purchase Agreement is hereby amended to extend the
latest date on which an Installment Event can occur from December 31, 1996 to
March 31, 1997.
4. Except as amended hereby, the Purchase Agreement is ratified,
approved and confirmed in all respects.
5. All terms not specifically defined herein shall have the meanings
set forth in the Purchase Agreement.
If the foregoing correctly sets forth our understanding, please so
indicate by signing and returning a copy of this letter.
Very truly yours,
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
----------------------------
Mitchell Rubenstein,
Chairman of the Board
ACCEPTED and AGREED to, this
21st day of October, 1996.
TEKNO SIMON LLC
By: /s/ MELVIN SIMON
Name: Melvin Simon
Title: Member
EXHIBIT 10.21
PREFERRED STOCK PURCHASE AGREEMENT
Preferred Stock Purchase Agreement (the "Agreement") dated as of
December 20, 1996 between Big Entertainment, Inc., a Florida corporation (the
"Company") and Auric Partners Limited (the "Purchaser").
R E C I T A L S:
A. The Company desires to sell shares of the Company's 4% $100
Convertible Series C Preferred Stock, par value $.01 per share (the "Preferred
Stock"), to the Purchaser pursuant to this Agreement in part to finance the
expansion of its retail operations and for general corporate purposes.
B. The Purchaser desires to purchase shares of Preferred Stock pursuant
to this Agreement on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Purchasers hereby agree as follows:
1. PURCHASE OF PREFERRED STOCK. The Company hereby sells, conveys and
transfers to the Purchaser and the Purchaser hereby purchases from the Company
the number of shares of the Preferred Stock set forth on Schedule I hereto. The
terms of the Preferred Stock are as set forth in an Amendment to the Company's
Articles of Incorporation (the "Articles of Amendment") filed with the Florida
Secretary of State pursuant to Sections 607.0602 and 602.1006 of the Florida
Business Corporation Act, the form of which Articles of Amendment is attached as
Exhibit A hereto. The purchase price for the Preferred Stock (the "Purchase
Price") is $100 per share.
2. DELIVERIES BY THE PARTIES. On the date hereof:
(a) The Company will deliver to the Purchaser (i) a certificate
evidencing its shares of the Preferred Stock; (ii) a Good Standing Certificate
for the Company issued by the Secretary of State of Florida; (iii) a certified
copy of resolutions of the Board of Directors authorizing the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby; (iv) the legal opinion of Broad and Cassel, counsel to the Company, in
form and substance reasonably satisfactory to the Purchaser; and (v) appropriate
evidence of the filing and recordation of the Articles of Amendment pursuant to
Florida law.
(b) The Purchaser will deliver to the Company payment, by wire
transfer, of the Purchase Price for its shares of the Preferred Stock.
3. USE OF PROCEEDS. The Company agrees that not less than 50% of the
proceeds from the sale of the Preferred Stock hereunder, net of commissions and
expenses of Keane Securities, Co., Inc., the placement agent for the sale of the
Preferred Stock (the "Placement
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Agent"), will be used by the Company for the development, construction and
operation of Entertainment Super/bulletKiosks or in-line retail facilities and
the balance of such net proceeds will be used for general working capital
purposes.
4. REPRESENTATIONS OF THE PURCHASERS. The Purchaser acknowledges,
represents and warrants as follows:
(a) RECEIPT OF CORPORATE INFORMATION. All requested
publicly-available documents, records and books pertaining to the Company and
the offer and sale hereby of the Preferred Stock and the shares of the Company's
Common Stock, par value $.01 per share (the "Common Stock"), into which the
Preferred Stock is convertible (the "Conversion Shares" and, together with the
Preferred Stock, the "Securities"), including, without limitation, the Company's
Annual Report on Form 10-KSB for the Year Ended December 31, 1995 (the "Form
10-KSB") and Quarterly Report on Form 10-QSB for the Quarter Ended September 30,
1996 (the "Form 10-QSB"; the Form 10-KSB and the Form 10-QSB are collectively
referred to herein as the "SEC Documents"), have been delivered to the Purchaser
and/or its advisors, and all of the Purchaser's questions and requests for
information have been answered to the Purchaser's satisfaction.
(b) RISKS. The Purchaser acknowledges and understands that the
purchase of the Securities involves a high degree of risk and is suitable only
for persons of adequate financial means who have no need for liquidity in this
investment in that (i) the Purchaser may not be able to liquidate the investment
in the event of an emergency; (ii) transferability is extremely limited; and
(iii) in the event of a disposition, the Purchaser could sustain a complete loss
of its entire investment. The Purchaser is sufficiently experienced in financial
and business matters to be capable of evaluating the merits and risks of an
investment in the Company; has evaluated such merits and risks, including risks
particular to the Purchaser's situation; and the Purchaser has determined that
this investment is suitable for the Purchaser. The Purchaser has adequate
financial resources and can bear a complete loss of the Purchaser's investment.
(c) ACCREDITED INVESTOR STATUS. The Purchaser is an "accredited
investor" as defined in Rule 501(a) of Regulation D promulgated by the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act").
(d) INVESTMENT INTENT. The Purchaser hereby represents that the
Securities being purchased hereunder are being acquired for the Purchaser's own
account with no intention of distributing such securities to others. The
Purchaser has no contact, undertaking, agreement or arrangement with any person
to sell, transfer or otherwise distribute to any person or to have any person
sell, transfer or otherwise distribute for the Purchaser the Securities being
purchased hereunder or any interest therein. The Purchaser is presently not
engaged, nor does the Purchaser plan to engage within the presently foreseeable
future, in any discussion with any person regarding such a sale, transfer or
other distribution of the securities being purchased hereunder or any interest
therein.
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(e) COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. The
Purchaser understands that the Securities being offered and sold hereunder have
not been registered under the Securities Act. The Purchaser understands that the
Securities being offered and sold hereunder must be held indefinitely unless the
sale or other transfer thereof is subsequently registered under the Securities
Act or an exemption from such registration is available. Moreover, the Purchaser
understands that its right to transfer the Securities being purchased hereunder
will be subject to certain restrictions, which include restrictions against
transfer under the Securities Act and applicable state securities laws. In
addition to such restrictions, the Purchaser realizes that it may not be able to
sell or dispose of the Securities being purchased hereunder as there may be no
public or other market for them. The Purchaser understands that certificates
evidencing the Securities being purchased hereunder shall bear a legend
substantially as follows:
The shares represented by this certificate have not been
registered under the Securities Act of 1933 or any applicable
state law. They may not be offered for sale, sold, transferred or
pledged without (1) registration under the Securities Act of 1933
and any applicable state law, or (2) an opinion (reasonably
satisfactory to the Company) of counsel that registration is not
required.
(f) AUTHORITY; ENFORCEABILITY. The Purchaser has the full right,
power, and authority to execute and deliver this Agreement and perform its
obligations hereunder.
(g) NONCONTRAVENTION. This Agreement constitutes a valid and
legally binding obligation of the Purchaser and neither the execution of this
Agreement, nor the consummation of the transactions contemplated hereby, will
constitute a violation of or default under, or conflict with, any judgment,
decree, statute or regulation of any governmental authority applicable to the
Purchaser or any contract, commitment, agreement or restriction of any kind to
which the Purchaser is a party or by which its assets are bound. The execution
and delivery of this Agreement does not, and the consummation of the
transactions described herein will not, violate applicable law, or any mortgage,
lien, agreement, indenture, lease or understanding (whether oral or written) of
any kind outstanding relative to the Purchaser.
(h) APPROVALS. No approval, authorization, consent, order or other
action of, or filing with, any person, firm or corporation or any court,
administrative agency or other governmental authority is required in connection
with the execution and delivery of this Agreement by the Purchaser or the
consummation of the transactions described herein.
(i) PLACEMENT AGENT'S COMPENSATION. The Purchaser acknowledges
that the Placement Agent, as compensation for its having assisted the Company in
the placement of the Preferred Stock hereunder, will receive (i) a fee equal to
8% of the Purchase Price of the shares of the Preferred Stock offered and sold
hereunder; (ii) reimbursement of the Placement Agent's accountable expenses up
to a maximum of $50,000; and (iii) five-year warrants to purchase 47,430 shares
of the Company's Common Stock at a price of $6.325 per share.
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<PAGE>
(j) SUBSEQUENT SALES. The Purchaser acknowledges that the Company
may from time to time raise additional capital, which may include, but not be
limited to, subsequent offers and sales by the Company ("Subsequent Sales") of
additional shares of Preferred Stock (with the same or different terms), which
shares shall have in the aggregate a total purchase price of not more than
$10,000,000. Nothing herein shall prohibit the Company from offering or selling
additional shares of preferred stock in addition to the Preferred Stock,
provided, however, that such shares shall rank junior to the Preferred Stock
with respect to payment of dividends and liquidation rights, unless otherwise
consented to by the holders of the Preferred Stock as provided in the Articles
of Amendment.
(k) OUTSTANDING SERIES A AND SERIES B PREFERRED STOCK. The
Purchaser acknowledges that the Preferred Stock offered and sold hereby shall be
junior to the Company's Series A Variable Rate Convertible Preferred Stock (the
"Series A Preferred Stock") and Series B Variable Rate Convertible Preferred
Stock (the "Series B Preferred Stock") as to payment of dividends and rights
upon liquidation.
(l) CONSENTS TO AMENDMENTS TO ARTICLES OF INCORPORATION. The
Purchaser hereby consents to the filing of an amendment or amendments to the
Company's Articles of Incorporation to effect any adjustments to the Preferred
Stock contemplated by Section 7 hereof.
5. REPRESENTATIONS OF THE COMPANY. The Company acknowledges, represents
and agrees as follows:
(a) CORPORATE ORGANIZATION. The Company is duly organized, validly
existing and in good standing under the laws of the State of Florida and has
full corporate power, authority and legal right to own its properties and to
conduct the businesses in which it is now engaged. The Company is duly licensed
or qualified to transact business as a foreign corporation and is in good
standing in each jurisdiction where the ownership or lease of its assets or the
operation of its business requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on the business,
operations, property or financial or other condition of the Company (a "Material
Adverse Effect").
(b) AUTHORITY. The Company has full corporate power and authority
to execute and deliver this Agreement and to perform all of its covenants and
agreements hereunder. The execution and delivery of this Agreement by the
Company, the performance by the Company of its covenants and agreements
hereunder and the consummation by the Company of the transactions contemplated
hereby have been duly authorized by all necessary corporate action.
(c) ENFORCEABILITY. This Agreement has been duly executed and
delivered and constitutes the valid and legally binding obligation of the
Company, enforceable against the Company in accordance with its terms except as
such enforceability may be limited by (i) bankruptcy, insolvency, moratorium or
similar laws affecting the enforcement of creditors' rights generally or by the
principles governing the availability of specific performance, injunctive
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<PAGE>
relief and other equitable remedies (regardless of whether such enforceability
is considered in equity or at law), including requirements of reasonableness and
good faith in the exercise of rights and remedies thereunder; (ii) applicable
laws and court decisions which may limit or render unenforceable certain terms
and provisions contained therein, but which in our opinion do not substantially
interfere with the practical realization of the benefits thereof, except for the
economic consequences of any procedural delay which may be imposed by, relate to
or result from such laws and court decisions; and (iii) the limitations on the
enforceability of the securities indemnification provisions set forth herein by
reason of matters of public policy.
(d) NONCONTRAVENTION. Neither the execution and delivery of this
Agreement by the Company, nor the consummation of the transactions contemplated
hereby, nor the performance by the Company of its covenants and agreements
hereunder (i) violates any provision of the Articles of Incorporation or By-Laws
of the Company; (ii) violates any existing law, statute, ordinance, regulation,
or any order, judgment or decree of any court or governmental agency to which
the Company is a party or by which the Company or any of its assets is bound; or
(iii) conflicts with or will result in any breach of any of the terms of or
constitute a default under or result in the termination of or the creation of
any lien pursuant to the terms of any indenture, mortgage, real property lease,
securities purchase agreement, credit or loan agreement or other material
agreement to which the Company is a party or by which the Company or any of its
assets is bound, to the extent such violation thereof, conflict therewith,
breach thereof, default thereunder or termination thereof would have a Material
Adverse Effect.
(e) CAPITALIZATION. The authorized capital stock of the Company
consists of (i) 1,000,000 shares of Preferred Stock, $.01 par value, of which
217,600 shares are designated Series A Preferred Stock, all of which are issued
and outstanding, and 142,223 shares are designated Series B Preferred Stock,
none of which are issued and outstanding; and (ii) 11,000,000 shares of Common
Stock, $.01 par value, of which 6,095,601 shares are issued and outstanding. The
holders of outstanding capital stock of the Company have no preemptive rights.
The Articles of Amendment have been approved by all requisite corporate action
of the Company.
(f) THE PREFERRED STOCK. The Preferred Stock being offered and
sold pursuant to this Agreement has been duly and validly authorized and, when
issued for the consideration herein provided, will be duly and validly issued,
fully paid and nonassessable.
(g) CONVERSION SHARES. The Conversion Shares have been duly
authorized and reserved for issuance and, when issued upon conversion of the
Preferred Stock in accordance with the terms thereof, will be duly and validly
authorized and issued, fully paid and nonassessable.
(h) APPROVALS. Except as may be required under federal and state
securities laws (which have been or, in the case of compliance required on a
post-sale basis, will be complied with), the execution, delivery and performance
of this Agreement by the Company does not require (i) the consent, waiver,
approval, license or authorization of or any filing with
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<PAGE>
any person or any governmental authority; or (ii) the approval or authorization
of the shareholders of the Company. The issuance of the Preferred Stock pursuant
to this Agreement is not subject to the registration or prospectus delivery
requirements of Section 5 of the Securities Act.
(i) LEGAL PROCEEDINGS. There are no (i) actions, suits, claims,
investigations or legal or administrative or arbitration proceedings pending or,
to the best knowledge of the Company, threatened against or affecting the
Company, whether at law or in equity, or before or by any governmental
authority; (ii) judgments, decrees, injunctions or orders of any governmental
authority or arbitrator against the Company, which, in either case, could have a
Material Adverse Effect.
(j) SEC FILINGS, ETC. The Company has heretofore delivered to each
Purchaser correct and complete copies of the SEC Documents. The SEC Documents
were true and correct in all material respects at the time filed with respect to
the periods covered thereby; and such reports, as amended, supplemented, or
updated by subsequent filings, are true and correct as of the date so amended,
supplemented or updated in all material respects, do not contain any
misstatement of a material fact and do not omit to state a material fact or any
fact required to be stated therein or necessary to make the statements contained
therein not materially misleading with respect to the periods covered thereby;
and all amendments or supplements thereto required to be filed under the federal
securities laws have been so filed. The consolidated financial statements of the
Company included in the SEC Documents complied, when filed, with the
then-applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may have been indicated in the notes thereto or, in the case
of the unaudited statements, as permitted by Form 10-QSB promulgated by the SEC)
and fairly presented (subject in the case of the unaudited statements, to normal
audit adjustments) the financial position of the Company at the dates thereof
and the consolidated results of the operations and statement of changes in
financial position for the periods then ended. The Company has filed all
documents and agreements that were required to be filed as exhibits to the SEC
Documents and all such documents and agreements when filed were correct and
complete in all material respects.
(k) ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in the
financial statements (the "Financial Statements") included in the SEC Documents,
or as incurred in the ordinary course of business subsequent to September 30,
1996, as of the date hereof (i) the Company has no material liability of any
nature (matured or unmatured, fixed or contingent) that was not provided for or
disclosed in the Financial Statements, and (ii) to the best knowledge of the
Company, all liability reserves established by the Company and set forth in the
Financial Statements were adequate in all material respects for the purposes
indicated therein.
(l) NO CHANGE. Except as disclosed in or contemplated by the SEC
Documents, since September 30, 1996 there has not been (i) any material change
in the condition (financial or otherwise), operations, results of operations,
assets, liabilities, business
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<PAGE>
or prospects of the Company taken as a whole; (ii) any material liability or
obligation (contingent or otherwise) incurred by the Company, other than current
liabilities (or obligations) or capital leases incurred in the ordinary of
business; (iii) any asset or property of the Company made subject to a lien of
any kind, except (a) liens for taxes not yet due or which are being contested in
good faith and by appropriate proceedings provided adequate reserves with
respect thereto are maintained on the Company's books in accordance with
generally accepted principles; (b) landlords', carriers', warehousemen's,
mechanics', materialmen's, repairmen's or other like liens arising in the
ordinary course of business which are not overdue for a period of more than 60
days or which are being contested in good faith and by appropriate proceedings;
(c) pledges or deposits in connection with worker's compensation, unemployment
insurance and other social security legislation; (d) deposits to secure the
performance of contracts, bids, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature; (e) easements,
rights-of-way, restrictions and other similar encumbrances incurred in the
ordinary course of business; and (f) liens which, in the aggregate, are not
material in amount, and which do not in any case materially detract from the
value of the property subject thereto or interfere with the ordinary conduct of
the Company's business; (iv) any waiver of any material valuable right of the
Company, or the cancellation of any material debt or claim held by the Company;
(v) any payment of dividends on, or other distributions with respect to, or any
direct or indirect redemption or acquisition of, any shares of the Common Stock
of the Company, or any agreement or commitment therefor; (vi) any mortgage,
pledge, sale, assignment or transfer of any tangible or intangible assets of the
Company, except, with respect to tangible assets, in the ordinary course of
business; (vii) any loan by the Company to any officer, director, employee or
shareholder of the Company, or any agreement or commitment therefor; (viii) any
material damage, destruction or loss (whether or not covered by insurance) which
does or may adversely affect the condition (financial or otherwise), operations,
results of assets, property, business or prospects of the Company; or (ix) any
change in the accounting methods or practices followed by the Company.
(m) TAXES. The Company has accurately prepared and timely filed or
has had accurately prepared and timely filed on its behalf all tax returns
which, to the knowledge of the Company, are required to be filed by it, and has
paid all taxes shown to be due and payable on said returns or on any assessments
made against it or any of its property and all other taxes, fees or other
charges imposed on it or any of its property by any nation or government, any
state or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government (other than those the amount or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with generally accepted accounting
principles have been provided on the books of the Company); and except as set
forth on a Schedule hereto, no tax liens have been filed and, to the knowledge
of the Company, no claims are being asserted with respect to any such taxes,
fees or other charges.
(n) RELATED PARTY TRANSACTIONS. Except to the extent described in
the SEC Documents, no current principal shareholder or current or former
director, officer or employee of the Company nor any "affiliate" (as defined in
the rules and regulations promulgated under
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<PAGE>
the Securities Exchange Act of 1934, as amended (the "Exchange Act")), of any
such person, is currently, or since September 30, 1996 has been, directly or
indirectly through his affiliation with any other person or entity, a party to
any transaction (other than as an employee, consultant or shareholder) with the
Company providing for the furnishing of services by, or rental of real or
personal property from, or otherwise requiring cash payments from or to any such
person.
(o) DISCLOSURE. The representations or warranties made by the
Company in this Agreement or, except to the extent modified or amended by
subsequent written disclosure to each of the Purchasers through the date hereof,
in any other document or certificate furnished in connection herewith did not
contain at the time made or, if set forth herein, does not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements herein or therein, in light of the circumstances under which
they are made, not misleading in any material respect. There is no fact known to
the Company that materially adversely affects or, other than general economic
conditions in the industry in which the Company operates, that the Company
reasonably believes will in the future materially adversely affect the business,
operations, affairs or condition, financial or otherwise, of the Company, which
has not been set forth in this Agreement or in the SEC Documents.
6. REGISTRATION RIGHTS.
(a) FILING OF REGISTRATION STATEMENT. The Company shall file with
the SEC and use its best efforts to cause to be declared effective on or before
May 1, 1997 a registration statement on Form S-3 (the "Registration Statement")
covering the Conversion Shares.
(b) OBLIGATIONS OF THE COMPANY. In connection with the filing of
the Registration Statement, the Company shall
(i) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and
the prospectus used in connection with the Registration Statement and take such
other reasonable action as may be necessary to keep the Registration Statement
effective until the earlier of the (A) public sale of the Conversion Shares or
(B) the Conversion Shares becoming capable of full and complete public sale
without registration under the Securities Act and to comply with the provisions
of the Securities Act and the Exchange Act, and the rules and regulations
thereunder, with respect to the disposition of the Conversion Shares;
(ii) Notify the Purchaser, after becoming aware thereof, (A)
when the Registration Statement or the prospectus included therein or any
prospectus amendment or supplement or post-effective amendment has been filed
and, with respect to the Registration Statement or any post-effective amendment,
when the same has become effective or (B) of any request by the SEC for
amendment of or supplement to the Registration Statement or related prospectus
or for additional information;
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(iii) Furnish promptly to the Purchaser such reasonable number
of copies of a prospectus, and all amendments and supplements thereto, in
conformity with the requirements of the Securities Act, and such other documents
as the Purchaser may reasonably request in order to facilitate their disposition
of any Conversion Shares;
(iv) Use its best efforts to register and qualify the
Conversion Shares under the securities or Blue Sky laws of such states as shall
be reasonably requested by the Purchaser, and prepare and file in those states
such amendments (including post-effective amendments) and supplements and to
take such other actions as may be necessary to maintain such registration and
qualification in effect at all times during the period the Company is required
to maintain the Registration Statement effective, and to take all other actions
necessary or advisable to enable the disposition of such securities in such
states, provided that the Company shall not be required in connection therewith
or as a condition thereto to subject itself to taxation, to qualify to do
business or to file a general consent to service of process in any such states;
and
(v) Notify the Purchaser, at any time when a prospectus
relating to the Conversion Shares is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
Company shall promptly amend or supplement the Registration Statement to correct
any such untrue statement or omission, and provide the Purchaser with an amended
or supplemented prospectus with respect to the Conversion Shares that corrects
such untrue statement or omission.
(c) THE PURCHASER'S OBLIGATIONS. It shall be a condition precedent
to the obligations of the Company to the Purchaser to take any action pursuant
to this Section that the Purchaser shall furnish to the Company such information
regarding the Purchaser, the Conversion Shares and other shares of the Company's
Common Stock held by the Purchaser and the intended method of disposition of
such securities as shall be reasonably required to effect the registration of
the Conversion Shares and shall execute such documents in connection with such
registration as the Company may reasonably request.
(d) EXPENSES OF REGISTRATION. All expenses incurred by the Company
in complying with this section, including, without limitation, registration and
filing fees, fees and expenses of complying with state securities and Blue Sky
laws, printing expenses, and fees and disbursements of the Company's counsel and
accountants, shall be paid by the Company; provided, however, that all fees and
expenses of counsel to the Purchaser and all selling commissions applicable to
the disposition of the Conversion Shares shall not be borne by the Company but
shall be borne by the Purchaser.
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(e) INDEMNIFICATION.
(i) the Company will indemnify and hold harmless the
Purchaser, the directors and officers of the Purchaser, if any, and each person,
if any, who controls the Purchaser within the meaning of the Securities Act or
the Exchange Act (each a "Purchaser Indemnified Party" and collectively, the
"Purchaser Indemnified Parties"), against any losses, claims, damages, expenses
or liabilities (joint or several) to which any of them may become subject under
the Securities Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages, expenses or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively, a
"Violation"): (A) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (B) the omission or alleged omission to state therein
information required to be stated therein, or necessary to make the statements
therein, in light of the circumstances under which they are made, not misleading
or (C) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act or any state securities or Blue Sky law; and the Company will
reimburse each Purchaser Indemnified Party, promptly as such expenses are
incurred, for any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that the indemnity agreement
contained in this section shall not apply to amounts paid in settlement of any
such loss, claim, damage, expense, liability, action or proceeding if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, expense, liability, action or proceeding to
the extend that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in the Registration Statement by the Purchaser.
(ii) The Purchaser will indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act (collectively, the
"Company Indemnified Parties") against any losses, claims, damages, expenses or
liabilities (joint or several) to which any of them may become subject, under
the Securities Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages, expenses or liabilities (or actions in respect
thereof) arise out of or are based upon: (A) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto and (B) the omission or alleged omission
to state therein information required to be stated therein, or necessary to make
the statements therein not misleading, in each case to the extent (and only to
the extent) that such losses, claims, damages, expenses or liabilities are
caused by statements made in the Registration Statement in reliance upon and in
strict conformity with written information furnished by such Purchaser expressly
for use therein; and the Purchaser will reimburse any legal or other expenses
reasonably incurred by any of them in connection with investigating or defending
any such loss, claim, damage,
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liability, action or proceeding; provided, however, that the indemnity agreement
contained in this section shall not apply to amounts paid in settlement or any
such loss, claim, damage, expense, liability, action or proceeding if such
settlement is effected without the consent of the Purchaser, which consent shall
not be unreasonably withheld.
(iii) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this section, deliver
to the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and, to the extend the
indemnifying party so desires to assume control of the defense thereof with
counsel mutually satisfactory to the indemnifying and indemnified parties;
provided, however, that an indemnified party shall have the right to retain its
own counsel, with the fees and expenses to be paid by the indemnifying party,
if, in the reasonable opinion of counsel for the indemnified party,
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall relieve such indemnifying party of any liability to the indemnified
party under this section only to the extent prejudicial to its ability to defend
such action, but the omission so to deliver written notice to the indemnifying
party shall not relieve it of any liability that is may have to any indemnified
party otherwise than under this section. The indemnification required by this
section shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, promptly as such expense, loss, damage
or liability is incurred.
(iv) To the extent any indemnification by an indemnifying
party is prohibited or limited by law, or is otherwise unavailable to or
insufficient to hold harmless an indemnified party, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under this section, provided that no parson guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(f) REPORTS UNDER THE EXCHANGE ACT. With a view to making
available to the Purchaser the benefits of Rule 144 ("Rule 144") under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Purchaser to sell securities of the Company to the public without
registration, the Company agrees to use its best efforts to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144;
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the Exchange Act; and
-11-
<PAGE>
(iii) furnish to the Purchaser, so long as the Purchaser owns
any Conversion Shares, forthwith upon request (A) a written statement by the
Company that it has complied with the reporting requirements of Rule 144; (B) a
copy of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company; and (C) such other publicly
available information as may be reasonably requested in availing the Purchaser
of any rule or regulation of the SEC which permits the selling of any such
securities without registration.
(g) ASSIGNMENT OF REGISTRATION RIGHTS. Rights under this Agreement
may be assigned by the Purchaser to transferees or assignees of the Purchaser's
Conversion Shares; provided, however, that the Company is, within a reasonable
time after such transfer or assignment, furnished with notice of the name and
address of such transferee or assignee and the Conversion Shares with respect to
which such registration rights are being assigned; provided, further, that such
assignment effectively only if, immediately following such transfer or
assignment, the further disposition of the Conversion Shares by the transferee
or assignee is restricted under the Securities Act. The term "Purchaser" used in
this Agreement includes permitted assignees of rights under this Agreement in
accordance with this Section.
7. COVENANTS OF THE COMPANY. So long as at least 25% of the shares of
Preferred Stock sold hereunder or in Subsequent Sales are outstanding, the
Company shall:
(a) REPORTS AND INFORMATION.
(i) Furnish to the Purchaser, promptly after filing with the
SEC, copies of each Quarterly Report on Form 10-QSB or Form 10-Q, Annual Report
on Form 10-KSB or Form 10-K and Current Report on Form 8-K filed by the Company
with the SEC; and
(ii) Furnish to the Purchaser, promptly after mailing to
shareholders, copies of each Annual or Quarterly Report to the Company's
shareholders and proxy or information statement relating to a meeting of the
Company's shareholders.
(b) USE OF PROCEEDS COMPLIANCE. On or before each April 15, July
15, October 30 and January 15, commencing April 15, 1997, the Company shall
deliver to the Purchaser a certificate executed by the Company's Chief Executive
and Chief Operating Officers, certifying as to the Company's compliance during
the immediately proceeding calendar quarter with use of proceeds provisions set
forth in Section 2 hereof. Such obligation shall cease upon the delivery to the
Purchaser of a certificate executed by the Company's Chief Executive and Chief
Operating Officers certifying that the entire net proceeds from the sale of the
shares of Preferred Stock hereby has been applied in accordance with the
provisions set forth in Section 2 hereof.
(c) CORPORATE EXISTENCE. Preserve and keep in full force and
effect its corporate existence, its qualification to do business and its good
standing in every state where it is or is required to be qualified to do
business, except where the failure to be so qualified
-12-
<PAGE>
would not have a Material Adverse Effect; provided that nothing herein shall
prevent the Company or any subsidiary of the Company from changing their state
of incorporation.
(d) LICENSES, PERMITS AND FRANCHISES. Maintain, preserve and
protect at all times all of its corporate and operational licenses, permits and
franchises, and comply with each and all of the terms, conditions and
requirements of such licenses, permits and franchises, except to the extent
management of the Company determines it is not in the best interest of the
Company to do so.
(e) PROPERTIES. Preserve all of its assets and properties that are
used in the conduct of its business and maintain and keep these assets and
properties in good repair, working order and condition, and from time to time
make or cause to be made all needed and proper repairs, renewals, replacements,
betterments and improvements to these assets and properties to preserve and
maintain their value, normal wear and tear excepted, so that the business
carried on in connection with these assets and properties may be properly
conducted at all times, except to the extent management of the Company
determines it is not in the best interest of the Company to do so.
(f) INSURANCE. Maintain (i) "all-risk" insurance at all times on
all properties (real and personal) in such amounts as are usually carried by
companies engaged in similar businesses; and (ii) insurance against liability to
persons for such risks and hazards and in such amounts as are usually carried by
companies engaged in similar businesses.
(g) BOOKS AND RECORDS. Keep at all times complete books of record
and accounts, in conformity with generally accepted accounting principles as
revised from time to time, with full, true and correct entries of all dealings
and transactions in relation to the Company's business and affairs, and
reasonably protect such books and accounts against loss or damage.
(h) PAYMENT OF TAXES. Timely file or cause to be filed any and all
federal, state and local tax returns and reports and timely pay and discharge
any and all taxes and assessments, and any and all federal, state and local
governmental impositions, fees, charges and/or levies, including but not limited
to, any income taxes, municipal taxes, real estate and personal property taxes,
social security, unemployment, excise and withholding taxes, and the like
imposed upon the Company, its operations, or upon its income and profits, or
upon all or any part of its properties, real, personal or mixed, or upon its
payroll, in each case before the same becomes delinquent and before penalties
accrue thereon.
(i) STATUTORY COMPLIANCE. At all times, conduct its business in
accordance with, and comply in all material respects with, all applicable
statutes, regulations, judgments, decrees, resolutions and orders of, and all
applicable restrictions imposed by, any and all governmental entities and/or
authorities, federal, state, local and non-U.S., judicial or administrative,
applicable to the conduct of the Company's businesses and activities (including
environmental and other regulatory requirements) or the ownership or operation
of its properties,
-13-
<PAGE>
licenses, permits and/or franchises, particularly those pertaining to the
business it currently operates.
(j) CONTRACTUAL COMPLIANCE. Pay and discharge all of the Company's
indebtedness and obligations promptly and in accordance with their terms and
substantially comply with the terms and conditions of any indentures,
agreements, contracts or other instruments to which it is party or which may
affect its assets or properties or enter into mutually satisfactory agreements
with the other parties to such documents and instruments; provider, however,
that nothing herein shall prevent the Company from withholding payment or
otherwise failing to comply with any agreement, if its management determines it
to be in the best interest of the Company to do so and if such action will not
result in any Material Adverse Effect.
(k) CONDUCT OF BUSINESS. Carry on its business and activities
diligently and consistent with prudent business practice for a company of the
size and character of the Company and will use its best efforts to preserve its
present relationship with suppliers, customers and others having business
relationships with it, except to the extent that management of the Company
determines it is not in the best interest of the Company to do so.
(l) DIVIDENDS. Without the consent of holders of a majority of the
outstanding Preferred Stock sold hereunder or in Subsequent Sales, the Company
shall not:
(i) Declare or pay any dividend (except for dividends paid in
respect of the Company's preferred stock) or make any other distributions on
shares of capital stock, other than (A) regular quarterly cash dividends on
Common Stock, provided that at the times such cash dividends are declared and
paid, Company is not in default with respect to payment of cash dividends on the
Preferred Stock or (B) dividends payable solely in shares of Common Stock; or
(ii) Repurchase any shares of Common Stock.
(m) ADJUSTMENTS BASED ON SUBSEQUENT SALES. In the event that the
Company subsequent to the date of this Agreement sells any or all of the
authorized but unissued Preferred Stock, the Company shall give the Purchaser
written notice of the closing of each such sale, together with a summary of the
material sale terms, not later than two business days following such closing
(such notice and summary of terms is referred to herein as a "Notice of
Subsequent Sale"). The Purchaser each shall have the right, by written notice to
the Company given not less than five calendar days following receipt of the
Notice of Subsequent Sale, to compel the Company to amend this Agreement and/or
the Articles of Amendment to incorporate those covenants, terms and/or
conditions described in the Notice of Subsequent Sale reasonably deemed more
favorable by the Purchaser than those contained in this Agreement and/or the
Articles of Amendment.
-14-
<PAGE>
8. NOTICES. All notices, reports and other communications to the
Purchaser of the Company hereunder shall be in writing, shall refer specifically
to this Agreement and shall be hand delivered or sent by facsimile transmission
or by registered mail or certified mail, return receipt requested, postage
prepaid, in each case to the respective persons and addresses specified below
(or to such other persons or addresses as may be specified in writing to the
other party):
If to the Purchaser, to: The address as set forth on
Schedule I hereto
With a copy to: Keane Securities Co., Inc.
50 Broadway
New York, New York 10004
Attn: Mr. Walter O'Hearn
Fax No: (212) 509-6613
If to the Company, to: Big Entertainment, Inc.
2255 Glades Road
Suite 237W
Boca Raton, Florida 33431
Attn: Mr. Mitchell Rubenstein
Chief Executive Officer
Fax No.: (561) 998-8006
With a copy to: Broad and Cassel
Miami Center, Suite 3000
201 South Biscayne Boulevard
Miami, Florida 33131
Attn: Dale S. Bergman, P.A.
Fax No.: (305) 373-9443
Any notice or communication given in conformity with this Section shall
be deemed to be effective when received by the addressee if delivered by hand or
overnight courier or by facsimile (with confirmed receipt), and three days after
mailing, if mailed.
9. NO IMPLIED WAIVERS; RIGHTS CUMULATIVE. No failure on the part of the
Purchaser or the Company to exercise and no delay in exercising any right,
power, remedy or privilege under this Agreement or provided by statute or at law
or in equity or otherwise, including, without limitation, the right or power to
terminate this Agreement, shall impair, prejudice or constitute a waiver of any
such right, power, remedy or privilege or be construed as a waiver of any breach
of this Agreement or as an acquiescence therein, nor shall any single or partial
exercise of any such right, power, remedy or privilege preclude any other or
further exercise thereof or the exercise of any other right, power, remedy or
privilege.
10. AMENDMENTS. No amendment, modification, waiver, termination or
discharge of any provision of this Agreement, nor consent to any departure
therefrom, shall in any event be effective unless the same shall be in writing
specifically identifying this Agreement and the provision(s) intended to be
amended, modified, waived, terminated or discharged and signed by
-15-
<PAGE>
the Purchaser and the Company, and each amendment, modification, waiver,
termination or discharge shall be effective only in the specific instance and
for the specific purpose for which given. No provision of this Agreement shall
be varied, contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by the Purchasers and the Company.
11. INDEMNIFICATION BY THE COMPANY. The Company hereby agrees to
indemnify and hold the Purchaser and its affiliates, directors, officers,
employees and agents (collectively, the "Purchaser Indemnitees") harmless from,
and to reimburse each of the Purchaser Indemnitees for, on an after-tax basis,
any loss, damage, deficiency, claim, liability, obligation, suit, action, fee,
cost or expense of any nature whatsoever (including, but not limited to,
reasonable attorney's fees and costs) arising out of, based upon or resulting
from (a) any inaccuracy in or any breach of any representation or warranty of
the Company contained in this Agreement, certificate or other written instrument
or document delivered by the Company pursuant hereto or (b) any breach of any of
the covenants, agreements or undertakings of the Company contained in or made
pursuant to this Agreement.
12. INDEMNIFICATION BY THE PURCHASER. The Purchaser hereby agrees to
indemnify and hold the Company and its subsidiaries, affiliates, directors,
officers, employees and agents (collectively, "the Company Indemnitees")
harmless from, and to reimburse each of the Company Indemnitees for, on an
after-tax basis, any loss, damage, deficiency, claim, liability, obligation,
suit, action, fee, cost or expense of any nature whatsoever (including, but not
limited to, reasonable attorney's fees and costs) arising out of, based upon or
resulting from (i) any inaccuracy in or any breach of any representation or
warranty of the Purchaser contained in this Agreement, certificate or other
written instrument or document delivered by the Purchaser pursuant hereto or
(ii) any breach of any of the covenants, agreements or undertakings of the
Purchaser contained in or made pursuant to this Agreement.
13. INTEGRATION. This Agreement, including the Schedule hereto,
represents the entire understanding and agreement of the parties with respect to
the subject matter hereof. No other representations, statements or warranties
have been made, other than what is written herein.
14. ATTORNEYS' FEES. Except as otherwise set forth herein, all costs
and expenses, including reasonable attorneys' fees, incurred in the enforcement
of this Agreement, shall be paid to the prevailing party by the non-prevailing
party, upon demand.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which may be considered one and the same agreement and each
of which shall be deemed an original.
16. GOVERNING LAW. This Agreement shall be enforced, governed and
construed in all respects in accordance with the internal laws, and not the laws
pertaining to conflicts or choice of laws, of the State of Florida.
-16-
<PAGE>
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
officers, have executed this Agreement as of the date first written above.
THE COMPANY:
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
------------------------------
Name: Mitchell Rubenstein
Title: Chief Executive Officer
PURCHASER:
AURIC PARTNERS LIMITED
By:
-------------------
Name:
Title:
-17-
<PAGE>
SCHEDULE I
THE PURCHASER
NAME AND ADDRESS NUMBER OF SHARES PURCHASED
- ------------------------- --------------------------
Auric Partners Limited 20,000
7575 East Fulton Road
Ada, MI 49355
EIN ###-##-####
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,675,852
<SECURITIES> 0
<RECEIVABLES> 95,547
<ALLOWANCES> 0
<INVENTORY> 1,410,603
<CURRENT-ASSETS> 4,600,424
<PP&E> 3,181,883
<DEPRECIATION> 832,775
<TOTAL-ASSETS> 8,243,419
<CURRENT-LIABILITIES> 3,315,331
<BONDS> 0
0
3,520,000
<COMMON> 58,706
<OTHER-SE> 613,161
<TOTAL-LIABILITY-AND-EQUITY> 8,243,419
<SALES> 7,611,113
<TOTAL-REVENUES> 7,611,113
<CGS> 4,922,761
<TOTAL-COSTS> 8,795,656
<OTHER-EXPENSES> 55,470
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 182,700
<INCOME-PRETAX> 6,655,609
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,655,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,655,609
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
