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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission File No. 0-22908
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 organization) 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: $10,491,447
The aggregate market value of the issuer's Common Stock, $.01 par value, held by
non-affiliates on March 19, 1998, based on the last sale price of the Common
Stock as reported by Nasdaq, was: $23,507,774.
As of March 19, 1998, there were 6,932,519 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, 1997
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS................................................3
PART I
Item 1. Description of Business...........................................3
Item 2. Description of Property..........................................14
Item 3. Legal Proceedings................................................14
Item 4. Submission of Matters to a Vote of Securityholders...............15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.........16
Item 6. Management's Discussion and Analysis or Plan of Operation........17
Item 7. Financial Statements.............................................28
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................53
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................54
Item 10. Executive Compensation..........................................58
Item 11. Security Ownership of Certain Beneficial Owners and Management..62
Item 12. Certain Relationships and Related Transactions..................63
Item 13. Exhibits and Reports on Form 8-K................................68
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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, prior operating losses and accumulated
deficit, its dependence on its relationship with its authors, its reliance on
licenses, its ability to manage and finance growth, its dependence on key
management personnel, and its ability to compete in the entertainment, licensing
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 engaged in the
development and licensing of intellectual properties, the developing and
licensing of books, and the operation of entertainment-related retail stores.
Big Entertainment conducts these activities through the Company and its wholly
and majority-owned subsidiaries, as well as through a joint venture known as
NetCo Partners ("NetCo Partners"), in which the Company has a 50% ownership
interest.
The Company has two operating divisions: the intellectual properties
division and the entertainment retail division.
The intellectual properties division owns the exclusive rights to
certain original characters and concepts, created by best-selling authors and
media celebrities, which it licenses across all media, including books, films
and television, multi-media software, toys and other products. The Company and
NetCo Partners acquire the rights to these intellectual properties pursuant to
agreements that generally grant them the exclusive rights to the intellectual
properties and the right to use the creator's name in the titles of the
intellectual properties (i.e., TOM CLANCY'S NETFORCE, MICKEY SPILLANE'S MIKE
DANGER, LEONARD NIMOY'S PRIMORTALS). The intellectual properties division also
includes a book licensing and packaging operation which focuses on developing
and executing book projects, typically with best-selling authors, which books
are then licensed for publication to book publishers such as HarperCollins,
Bantam Doubleday Dell, Random House, Simon & Schuster, Viking Press and Warner
Books. In addition, the intellectual properties division previously published
works based on these properties itself, rather than licensing them to others;
however, the Company has opted to exclusively pursue licensing of its
intellectual properties since early 1997.
The entertainment retail division operates a chain of retail studio
stores and "Entertainment
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Super/bullet/Kiosks" that sell entertainment-related merchandise. Although all
of the retail outlets are currently Company-operated, Big Entertainment has
entered into two separate franchise agreements that provide in certain limited
territorial areas for the future development of franchised Big Entertainment
studio stores and Super/bullet/Kiosks in those areas. In addition, the Company
has an agreement with The ABC Television Network ("ABC"), a division of The Walt
Disney Company, pursuant to which the entertainment retail division runs ABC
video clips on the television monitors in the Entertainment Super/bullet/Kiosks
in exchange for promotional and advertising spots on ABC affiliate television
stations.
INTELLECTUAL PROPERTIES DIVISION
INTELLECTUAL PROPERTIES & LICENSING ACTIVITIES. The Company's
intellectual properties have been acquired and developed pursuant to agreements
with best-selling authors and media celebrities, which agreements generally
grant the Company all rights (including the rights to all media including print,
television, film, video, on-line, merchandise, etc.) to the original
intellectual property. The Company actively seeks to license the intellectual
properties to third parties including book publishers, film studios, television
networks, etc. for use in various media. The Company is generally obligated to
pay the authors or celebrities 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 or eliminate the
Company's additional development costs going forward.
The Company's current intellectual properties, and the licensing
activities related thereto, are discussed below. Those properties which are
owned through NetCo Partners (in which the Company has a 50% interest) are so
indicated. It is important to note that the Company (or NetCo Partners, if
applicable) has the right to include the author's or celebrity's name as part of
the title of the intellectual property for all licensed products, including
books, television series and films based on such intellectual properties.
/bullet/ TOM CLANCY'S NETFORCE (a NetCo Partners property): 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 was developed for NetCo Partners by Tom Clancy (the
author of 14 New York Times best-selling novels) in collaboration
with Steve Pieczenik, who previously collaborated with Tom Clancy
in the creation of the best-selling TOM CLANCY'S OP-CENTER series
of novels.
TOM CLANCY'S NETFORCE has been licensed for production as a
four-hour television mini-series with ABC, for publication of up
to six adult and 18 young adult novels to be published in North
America by Berkley Publishing Group (a division of Pearson, plc.),
for publication of the first two adult books as audio books by
Random House Audio Publishing, as a line of action-figure toys to
be manufactured by Playmates Toys, Inc., and for book publication
and distribution rights in the United Kingdom by Headline Book
Publishing Ltd. NetCo Partners has also entered into a product
placement agreement with Dodge, a division of Chrysler
Corporation, pursuant to which NetCo Partners has agreed to
feature Dodge vehicles in the first four TOM CLANCY'S NETFORCE
novels. These agreements are discussed in more detail under
"Management's Discussion and Analysis or Plan of
Operation...Equity in Earnings of NetCo Partners" Item 6 of Part
II of this Form 10-KSB.
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/bullet/ LEONARD NIMOY'S PRIMORTALS: Inspired by his research at the SETI
(Search for Extraterrestrial Intelligence) Program, this
intellectual property created by Leonard Nimoy, actor, director
and author (best known for his role as "Spock" on STAR
TREK/Trademark/), is about primordial creatures, some benign and
some deadly, abducted from Earth eons ago by space aliens, who are
now coming home to Earth.
LEONARD NIMOY'S PRIMORTALS was published as a hardcover novel in
North America under a licensing agreement with Warner Books during
1997. A paperback version was released in March 1998 under the
same licensing agreement. It was also published as an interactive
CD-ROM in 1997 under a licensing agreement with Sierra On-Line,
Inc. The Company has also entered into an agreement for
publication and distribution of this book in certain countries
outside the United States and Canada.
/bullet/ GENE RODDENBERRY'S XANDER IN LOST UNIVERSE: A space adventure,
based on a concept created by the late creator of STAR
TREK/Trademark/, 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). The
I/bullet/BOTS are a fusion of man and androids, representing both
the best characteristics of mankind and of machine.
The Company licensed ISAAC ASIMOV'S I/bullet/BOTS to HarperCollins
for publication of an illustrated novel published in 1997 and as a
hardcover novel, which is expected to be released in 1998.
/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.
During 1998, the Company entered into an agreement with Pressman
Films, granting Pressman Films the option to produce a feature
film or television series based on MICKEY SPILLANE'S MIKE DANGER.
There is no guarantee that Pressman Films will exercise its
option. Pressman Films produced OLIVER STONE'S WALL STREET, THE
CROW, REVERSAL OF FORTUNE, AND DAS BOOT. The rights to this
property had previously been optioned to another studio, but such
rights reverted back to the Company during 1997. Pursuant to an
agreement with the Company, a novel based on this property is
expected to be published in the next 12 months jointly by Hyperion
Books and Miramax Books, both divisions of the Walt Disney Co.
/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 (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.
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/bullet/ TAD WILLIAMS' MIRRORWORLD (a Netco Partners property): An epic
battle between the forces of good and evil about giant predatory
creatures that exist behind a series of 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 DRAGONBONE CHAIR and TAILCHASER'S SONG.
TAD WILLIAMS' MIRRORWORLD is expected to be published as an
illustrated novel in 1998 under a licensing agreement with
HarperCollins (a division of News Corp.).
/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. She has written more than 30 novels and numerous shorter
works. Ms. McCaffrey received both the Hugo and the Nebula awards
in the same year, recognizing her achievements in this field.
The Company has entered into a licensing agreement with
HarperCollins for the publication and distribution in North
America of two prose novels and one illustrated novel based on
ANNE MCCAFFREY'S ACORNA: UNICORN GIRL. The first prose novel and
the illustrated novel were published in 1997. The first prose
novel is in its third reprinting and it is currently listed as the
number two best selling young adult fantasy book on Amazon.com,
the online bookstore. The second prose novel is scheduled to be
released by HarperCollins during 1998. HarperCollins has offered
to continue this book series and extend the licensing agreement.
This intellectual property has also been licensed to Books on
Tape, Inc. for production of unabridged audio recordings of the
two prose novels and to various other parties for licensing rights
in certain countries outside the United States and Canada.
/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.
The Company licensed MARGARET WEIS' TESTAMENT OF THE DRAGON to
HarperCollins for publication of an illustrated novel, which was
published in 1997, and for publication of a prose novel, which is
scheduled to be released by HarperCollins in 1998.
/bullet/ ARTHUR C. CLARKE'S WORLDS OF ALEXANDER (a NetCo Partners
property): 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 an
award-winning comic book writer who has been voted the number one
comic writer for four years in a row in COMIC BUYERS GUIDE reader
polls.
/bullet/ NEIL GAIMAN'S TEKNOPHAGE: Exploring the world and character of the
sinister TeknoPhage, a
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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: Interweaves the stories of several
of Gaiman's characters.
/bullet/ CATHY CASH SPELLMAN'S MILLENNIUM (working title) (a NetCo
Partners property): 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. Spellman is a NEW YORK TIMES best-selling
author.
In addition to the properties detailed above, other intellectual
properties owned by the Company include MAGIC JOHNSON'S TEAM MAGIC and L. RON
HUBBARD'S CROSSROADS. Other intellectual properties owned by NetCo Partners
include ANNE MCCAFFREY'S SARABAND and NEIL GAIMAN'S LIFERS.
The Company is continually in negotiations with best-selling authors to
create additional intellectual properties and with publishers, television
networks, movie studios and other licensees to contract for additional licensing
opportunities based on the Company's library of intellectual properties. The
Company believes that successful feature films and/or television series will
significantly enhance the value of the intellectual property upon which such
feature film and/or television series is based, resulting in increased
opportunities for additional licensing and merchandising revenues. The Company
is represented in its efforts to secure book licenses with publishers by the
William Morris Agency.
NETCO PARTNERS. In June 1995, the Company and C.P. Group Inc. ("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 CLANCY'S NETFORCE, and has entered
into various licensing agreements described above.
The Company and C.P. Group are each 50% partners in NetCo Partners. Tom
Clancy owns 50% of C.P. Group. 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, ARTHUR C. CLARKE'S WORLDS OF ALEXANDER
(formerly called 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 the 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
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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 which remains owned 50% by the Company and 50% owned by C.P.
Group even after dissolution of NetCo Partners) 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. Big Entertainment conducts its book
licensing and packaging activities through its 51%-owned subsidiary, Tekno
Books. Tekno Books is a leading book packager of fiction and non-fiction, with
approximately 960 books published to date and in its history (approximately 240
published since the fourth quarter of 1994, when the Company acquired its
interest in Tekno Books) and approximately another 180 under contract that are
forthcoming. In addition to providing the Company with access to 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, Dean Koontz,
Tony Hillerman, Robert Ludlum and Scott Turow, and numerous media celebrities,
including David Copperfield, Louis Rukeyser and Willard Scott. These books have
been published with more than 60 publishers (including HarperCollins, Doubleday,
Random House, Simon & Schuster, Viking Penguin and Warner Books), translated
into 30 languages, and selected by 18 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 1997, some of the books worked on by
Tekno Books include TOM CLANCY'S POWER PLAYS: POLITIKA; LOUIS RUKEYSER'S BOOK OF
LISTS; MURDER SHE WROTE PRESENTED BY JESSICA FLETCHER; PSYCHOS, an anthology
compiled by the Horror Writers Association; and LEGENDS OF THE BATMAN, edited by
Dr. Martin H. Greenberg for D.C. Comics.
In September 1997, the Company entered into an agreement with a company
owned by Magic Johnson, June Bug Enterprises, Inc., which provides for pro
basketball star Magic Johnson to develop textbooks, children's books, novels,
and action figure cartoon characters with special appeal to children. Current
plans are for Magic Johnson to work with Tekno Books to develop a series of
educational textbooks with material presented by Magic Johnson as well as a
series of children's books and novels. The textbooks are expected to use
examples from sports to illustrate important concepts and enliven student
interest and enthusiasm. The Company is currently in discussions with various
publishing houses to license these works. To the extent not borne by the
publishers, Tekno Books will advance all costs associated with the development
of these books and projects while the net proceeds (after agent's fees and
reimbursement of costs advanced by Tekno Books) will be divided equally between
Tekno Books and June Bug Enterprises, Inc.
In November 1997, Tekno Books entered into an agreement with MGM
Consumer Products granting Tekno Books the exclusive right to publish books
based on the past, present and future properties from the film and television
show libraries of Metro-Goldwyn-Mayer Studios, United Artists Corporation, Orion
Pictures Corporation, and Goldwyn Entertainment, Inc. As part of this contract,
Tekno Books acquired the right to use the MGM name and trademark in connection
with the books published. The initial contract is for 15 months with an
automatic renewal provided Tekno Books is in compliance with the terms
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of the contract. Tekno Books will pay MGM a royalty based on the net profits
generated from the books. Several books are currently being developed based on
the rights granted to Tekno Books under the MGM contract, although no publishing
agreements have been executed for these books yet.
Also during 1997, Tekno Books, through its wholly-owned subsidiary,
Tekno Books International, LLC., entered into an agreement with The Classica
Foundation, a Russian charitable organization. The Classica Foundation holds the
only catalogue of archived documents contained in the Russian archives
consisting of millions of documents that were captured by the Soviets from the
German archives at the end of World War II. This includes a substantial portion
of the German archives up to 1945 as well as voluminous documents from archives
of countries occupied by Germany during World War II. Until this time, these
files have not been seen outside of Russia. This agreement with The Classica
Foundation grants Tekno Books International, LLC the exclusive use of this
catalogue to the Russian archives, and the right to copy the materials contained
therein for use in licensing to publishers rights to publication of books and
for licensing rights for CD-ROMs, on-line, documentaries, television specials
and feature films based on these materials. Tekno Books has developed an
extensive list of major book projects that can be developed from these archives
including books about various topics such as the German military, German
intelligence activities before and during World War II, the attempt to kill
Hitler in 1944, the Nazi party, Hitler's personal papers and correspondence,
Germany's plan for the occupation of England and German-Vatican relations. Many
of these topics also have the potential to be developed as CD-ROMs, television
specials and feature films. Work has already begun on several book projects
based on the archived materials. The Company and Tekno Books intend to donate
copies of any documents related to the Holocaust or any profit derived therefrom
to appropriate Holocaust-related charitable organizations. Tekno Books paid
$100,000 in 1997 as a deposit to secure this contract and another $100,000 was
paid during the first quarter of 1998.
Since the acquisition of Tekno Books by the Company, the book licensing
and packaging subsidiary 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 1998. See "Management's Discussion and Analysis or Plan of
Operation -- Results of Operations" under Item 6 of Part II of this Form 10-KSB.
The Chief Executive Officer of Tekno Books, Dr. Martin H. Greenberg, is
also a director of the Company and owner of the remaining 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 700 books in various genre, including science fiction, fantasy,
mystery and adventure, and is widely regarded as the leading anthologist in
trade publishing. Dr. Greenberg was the 1995 recipient of the Ellery Queen
Award, presented by the Mystery Writers of America for Lifetime Achievement and
was Dean of the Graduate School of Political Science at the University of
Wisconsin - Green Bay.
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.
RECENT DEVELOPMENTS - FORMATION OF HUGE ENTERTAINMENT LLC. In March
1998, the Company, C.P. Group, and Dr. Martin H. Greenberg, CEO of Tekno Books
and a director of the Company, agreed to contribute certain assets to a newly
formed entity, Huge Entertainment LLC ("Huge Entertainment"), in exchange for
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equity ownership in Huge Entertainment and an aggregate of $8 million in
promissory notes from Huge Entertainment. Huge Entertainment is a pure-play
content company that will focus on obtaining additional intellectual properties
and the development and licensing of intellectual properties in multiple media
formats. In exchange for 51.75% of the equity of Huge Entertainment and a
promissory note in the amount of $4,140,000 from Huge Entertainment, the Company
is contributing to Huge Entertainment (i) 100% of the intellectual properties
presently owned by the Company, (ii) the Company's 50% ownership interest in
NetCo Partners, and (iii) the Company's 51% interest in Tekno Books. In exchange
for 46.05% of the equity of Huge Entertainment and a promissory note in the
amount of $3,684,000, C.P. Group is contributing to Huge Entertainment (i) its
50% ownership interest in NetCo Partners and (ii) two additional intellectual
properties created by Tom Clancy - TOM CLANCY'S CYBERNATION and TOM CLANCY'S TOP
SECRET. In exchange for 2.20% of the equity in Huge Entertainment and a
promissory note in the amount of $176,000, Dr. Martin H. Greenberg is
contributing a 24.5% ownership interest in Tekno Books.
The $8 million amount was mutually agreed to by the Company, C.P.
Group, and Dr. Greenberg, and represents an estimate of the portion of the
anticipated net proceeds from an initial public offering ("IPO") of Huge
Entertainment that will be distributed to the Company, C.P. Group, and Dr.
Greenberg (subject to underwriters' consent if paid from any such IPO proceeds),
and still leave adequate liquidity and capital resources in Huge Entertainment
for its growth strategy, and such $8 million is not indicative of the total
valuation of Huge Entertainment. There can be no assurance or guarantee that any
such IPO will occur. The promissory notes bear interest at the Citibank, N.A.
prime rate and mature in seven years. Any payments on the notes will be made pro
rata to all note holders. The notes provide for optional prepayment without
penalty and mandatory prepayment (except in certain limited circumstances) in
the event of an IPO or other issuance of equity by Huge Entertainment.
The formation of Huge Entertainment has been approved by the Company's
Board of Directors. It is anticipated that the transaction will close during the
second quarter of 1998. Plans are for Huge Entertainment to go public via an
IPO of Huge Entertainment securities and/or to add investors who are
strategic to Huge Entertainment's growth plans such as international media
companies, although there can be no assurances that Huge Entertainment will
successfully implement these plans.
ENTERTAINMENT RETAIL DIVISION
GENERAL. The Company operates retail stores which sell
entertainment-related merchandise including apparel, jewelry, art, collectibles,
novelty items, and books. The merchandise is based on movies and television
shows such as Star Wars/Trademark/, Star Trek/Trademark/, X-Files/Trademark/,
South Park/Trademark/ and Batman/Trademark/. The Company operates two different
retail concepts - Entertainment Super/bullet/Kiosks and in-line studio stores.
The 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 ABC and other
promotional spots. See "ABC Programming Agreement," below. The Entertainment
Super/bullet/Kiosks average 166 square feet in size. During October and November
1997, the Company opened three prototype in-line studio stores. The new format
in-line studio store prototype at approximately 3,000 square feet is
significantly larger than the Entertainment Super/bullet/Kiosks and enables the
Company to offer a broader array of merchandise targeted at a wider segment of
the market. The Company expects to primarily open in-line studio stores in the
future.
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ENTERTAINMENT SUPER/bullet/KIOSK LOCATIONS AND SITE SELECTION. The
Company currently operates 28 mall-based retail stores consisting of 24
Entertainment Super/bullet/Kiosks and four in-line stores. The following table
sets forth information with respect to the Company's existing retail outlets:
<TABLE>
<CAPTION>
LOCATION DATE OPENED STORE TYPE
- -------- ----------- ----------
<S> <C> <C>
The Mall of The Americas, Bloomington, Minnesota September 1994 Mini In-Line
The Florida Mall, Orlando, Florida October 1994 Super/bullet/Kiosk
Altamonte Mall, Altamonte Springs (Orlando), Florida October 1994 Super/bullet/Kiosk
Sawgrass Mills, Sunrise, Florida November 1994 Super/bullet/Kiosk
North Point Mall, Alpharetta (Atlanta), Georgia October 1995 Super/bullet/Kiosk
St. Charles Towne Center, Waldorf, Maryland October 1995 Super/bullet/Kiosk
Windsor Park Mall, San Antonio, Texas November 1995 Super/bullet/Kiosk
North East Mall, Hurst, Texas November 1995 Super/bullet/Kiosk
Newport Centre Mall, Jersey City, New Jersey November 1995 Super/bullet/Kiosk
Pembroke Lakes Mall, Pembroke Pines, Florida November 1995 Super/bullet/Kiosk
Charleston Town Center, Charleston, West Virginia May 1996 Super/bullet/Kiosk
Tower Shops at Stratosphere, Las Vegas, Nevada May 1996 Super/bullet/Kiosk
Crossgates Mall, Albany, New York June 1996 Super/bullet/Kiosk
Holyoke Mall at Ingleside, Holyoke (Springfield), Massachusetts June 1996 Super/bullet/Kiosk
Greenwood Park Mall, Greenwood Park (Indianapolis), Indiana August 1996 Super/bullet/Kiosk
Tippecanoe Mall, Lafayette, Indiana August 1996 Super/bullet/Kiosk
Orange Park Mall, Orange Park, Florida August 1996 Super/bullet/Kiosk
West Oaks Mall, Ocoee, Florida October 1996 Super/bullet/Kiosk
Ontario Mills Mall, Ontario, California November 1996 Super/bullet/Kiosk
Volusia Mall, Daytona Beach, Florida November 1996 Super/bullet/Kiosk
Coral Square Mall, Coral Springs, Florida November 1996 Super/bullet/Kiosk
Castleton Square, Indianapolis, Indiana May 1997 Super/bullet/Kiosk
North Star Mall, San Antonio, Texas July 1997 Super/bullet/Kiosk
Kings Plaza, Brooklyn, New York July 1997 Super/bullet/Kiosk
Great Mall of Great Plains, Olathe, Kansas August 1997 Super/bullet/Kiosk
Willowbrook Mall, Wayne, New Jersey October 1997 In-Line Studio Store
Woodbridge Mall, Woodbridge, New Jersey November 1997 In-Line Studio Store
Garden State Plaza, Paramus, New Jersey November 1997 In-Line Studio Store
</TABLE>
Big Entertainment's strategy for opening its retail stores is to seek
prime locations in regional and major shopping malls in geographic areas
determined by management as having desirable demographic characteristics. The
Company's new in-line studio store concept is expected to be its primary retail
concept going forward. The Company currently plans to open between six and eight
additional in-line studio stores during 1998. The Company will continue to
utilize the Entertainment Super/bullet/Kiosks to fill in markets, to gain
entrance to malls where the Company is unable to secure a desirable in-line
space (possibly due to a mall being 100% occupied), and to test new locations.
The kiosks can be easily relocated and the Company has historically moved kiosks
both from one mall to another and also from one location to another location
within the same mall. The Company intends to continue to relocate kiosks,
closing down locations that are unprofitable and redeploying the units to more
desirable 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, the largest U.S.
mall developer. See
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"Financing Transactions," below.
ABC PROGRAMMING AGREEMENT. During March 1997, the Company entered into
a one-year exclusive programming agreement with ABC, a division of The Walt
Disney Company. Under this agreement, the Company runs ABC video clips on the
television monitors in the kiosks in exchange for advertising air time on the
local ABC affiliate television stations. Effective May 1997, the Company began
running a 12-minute programming segment provided by ABC and its local affiliate
television stations twice each hour on the video monitors at each of its
Entertainment Super/bullet/Kiosks. The programming is devoted to upcoming
television programs to appear on ABC (including ABC Entertainment, ABC News, ABC
Daytime and ABC Sports) and its affiliate stations. New, non-repetitive
programming is provided to the Company by ABC each month. The Company also
agreed to display ABC's logo and other promotional materials complementing the
then-current video monitor campaigns and 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). In exchange for its agreement to run the ABC
programming exclusively, ABC affiliate stations in markets where the Company's
retail stores are located run promotional and advertising spots on the ABC
affiliate stations featuring the Company's Entertainment Super/bullet/Kiosks and
in-line studio stores. The Company believes that this arrangement with ABC
provides its Entertainment Super/bullet/Kiosks with a steady source of current
programming for the Entertainment Super/bullet/Kiosks that appeals 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 provide the Company with
substantial television advertising in the markets where the retail units are
located at no cash expense to the Company. The ad spots began to run on the ABC
affiliate stations during the third quarter of 1997. Management recently met
with ABC and ABC has indicated its desire to renew and expand the relationship
to also include promotion of feature films and videos distributed by Walt Disney
Co. and its affiliates; therefore the Company anticipates that it will be able
to renew the contract with ABC.
FRANCHISING. All of the Big Entertainment retail stores are currently
operated by the Company. As part of its expansion strategy, the Company has
entered into two franchise agreements. The first such agreement dated December
1995 is between the Company and a private investor. In December 1997, this
franchise agreement was amended. The original agreement provided the franchisee
with the exclusive rights to open Entertainment Super/bullet/Kiosks in certain
parts of Canada. The franchisee never opened any stores in Canada. Under the
revised agreement, this private investor has the exclusive rights to open Big
Entertainment in-line studio stores in the Phoenix, Arizona market area in
exchange for a $350,000 territorial exclusivity fee. The amended agreement
requires the franchisee to open the first store by December 1999 and to open one
store each year thereafter in order to preserve the exclusivity. The Company has
the option to reacquire rights to the Phoenix, Arizona territory prior to
December 31, 1998, provided no such franchised units have already opened, by
issuing the franchisee 100,000 unregistered shares of the Company's Common
Stock. The territorial exclusivity fee of $350,000 was received during the first
quarter of 1998.
The Company signed its second franchise agreement on May 1, 1997, under
which at least one Big Entertainment retail unit is expected to be built by the
franchisee in the Philadelphia area. The agreement, with a private investor,
also provides for up to three more franchise stores in the Philadelphia region.
Both franchise agreements provide for a continuing royalty payable to
the Company based upon sales.
12
<PAGE>
FINANCING TRANSACTIONS
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. During 1997, the Company sold
93,079 shares of Series B Preferred Stock to Tekno Simon, LLC ("Tekno Simon")
(an entity controlled by Melvin Simon, Co-Chairman of the Simon-DeBartolo Group)
for $480,000, bringing Tekno Simon's aggregate investment in the Company to
$3,000,000. Other financing transactions during 1997 included the issuance of
1,000,002 shares of common stock through a private placement and issuance of a
$650,000 convertible debenture. In addition, the Company entered into long-term
equipment leases with two leasing companies to partially finance the
construction and fixture costs for its three prototype in-line studio stores and
the Company's retail subsidiary obtained a $5 million line of credit from
BankBoston Retail Finance, of which $535,000 was drawn at December 31, 1997, to
partially finance its merchandise inventories. These financial instruments are
discussed in more detail in "Management's Discussion and Analysis or Plan of
Operation -- Liquidity and Capital Resources" under Item 6 of Part II of this
Form 10-KSB.
COMPETITION
GENERAL. Competition is generally intense in the 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 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, media celebrities, and
sports greats. 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 and the large media
companies that actively market and distribute the Company's products.
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.
BOOK LICENSING AND PACKAGING. 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.
ENTERTAINMENT RETAIL. The Company's entertainment retail division
competes for sales with specialty stores and other retail outlets which offer
entertainment merchandise. Competition for the Entertainment Super/bullet/Kiosk
sales is highly fragmented and varies substantially from one location to another
as competing comic book retailers and science fiction collectible stores
typically serve individual or local markets. Frequently, the Big Entertainment
Super/bullet/Kiosk is the only retailer in its mall selling the majority of its
product line. There is more direct competition for the Big Entertainment studio
stores in the malls where they are located. The Company's studio stores compete
with other entertainment retailers including Warner Bros. and Disney stores;
however, the Company believes that the Big Entertainment studio stores have an
advantage of being able to sell licensed product from all studios and networks,
rather than being limited to their own studio products. For example, the Company
can sell licensed products from StarWars/Trademark/ (George Lucas/Fox), Star
Trek /Trademark/ (Viacom), X-Files /Trademark/ (Fox), Dilbert /Trademark/,
Godzilla /Trademark/, etc. None of the above
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<PAGE>
merchandise is a Disney or Warner product, and thus is not offered for sale in a
Disney or Warner Bros. store. On the other hand, Big Entertainment does sell
both Disney and Warner licensed products in its stores along with merchandise
from other studios. The Company also competes with other retailers for retail
space in the malls and for qualified employees and management personnel.
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 30 U.S. registered trademarks and
approximately 110 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 19, 1998, the Company employed approximately 97 full-time and
99 part-time employees. Of the Company's 196 employees, 15 were corporate and
administrative employees, 5 were engaged in intellectual property related
activities, and 176 were engaged in retail administration and store operations
(including all part-time employees). 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 2008. The Company also leases 6,000
square feet of warehouse space in Broward County, Florida, which serves as a
distribution center for the merchandise for its retail stores, pursuant to a
lease expiring May 31, 2000, at a current monthly rental of approximately
$2,600.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently has no material legal proceedings pending or
threatened.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
The Company held its annual meeting of shareholders on November 13,
1997. There were two matters submitted to a vote of shareholders at this
meeting. The first matter voted upon was election of eight directors of the
Company to serve for the ensuing year. The second matter voted upon was
ratification of the selection of Arthur Andersen, LLP as the Company's
independent public accountants for the year ending December 31, 1997. Both
matters were approved based on the following tabulation of votes cast in person
at the meeting or by proxy solicitation:
FOR WITHHELD
--- --------
Election of Directors:
Mitchell Rubenstein 5,401,646 3,550
Laurie S. Silvers 5,402,146 3,050
Dr. Lawrence Gould 5,401,846 3,350
Dr. Martin H. Greenberg 5,402,146 3,050
Harry T. Hoffman 5,402,146 3,050
E. Donald Lass 5,402,146 3,050
Jules L. Plangere 5,402,146 3,050
Deborah J. Simon 5,402,146 3,050
Ratification of Selection of
Arthur Andersen, LLP as the
Company's Independent Public FOR AGAINST WITHHELD
Accountants for the Year Ending --- ------- --------
December 31, 1997 5,398,326 4,050 2,820
15
<PAGE>
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
---- ---
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
1997
First Quarter......................... $6 3/4 $5 1/4
Second Quarter........................ $5 3/16 $4 1/2
Third Quarter......................... $6 5/32 $4 1/2
Fourth Quarter........................ $7 13/32 $5 5/8
HOLDERS OF COMMON STOCK
As of March 19, 1998, there were approximately 175 record holders of
the Company's Common Stock, not including security position listings. The
Company believes that there are more than 1000 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 1997. All of such sales were made pursuant to the exemption from
registration afforded by Section 4(2) of the Securities Act.
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<PAGE>
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, 1997 ("FISCAL 1997") AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996 ("FISCAL 1996")
The following table summarizes the revenues, cost of sales, gross
profit and equity in earnings of NetCo Partners by division for fiscal 1997 and
fiscal 1996, respectively:
INTELLECTUAL ENTERTAINMENT
PROPERTIES RETAIL TOTAL
------------ ------------- -----------
FISCAL 1997
Net Revenues $2,519,678 $7,971,769 $10,491,447
Cost of Sales 1,496,888 4,151,101 5,647,989
---------- ---------- -----------
Gross Profit 1,022,790 3,820,668 4,843,458
Equity in Earnings
of NetCo Partners 2,702,049 - 2,702,049
---------- ---------- -----------
Combined Income $3,724,839 $3,820,668 $ 7,545,507
========== ========== ===========
FISCAL 1996
Net Revenues $3,481,171 $4,129,942 $ 7,611,113
Cost of Sales 2,666,978 2,255,783 4,922,761
---------- ---------- -----------
Gross Profit 814,193 1,874,159 2,688,352
Equity in Earnings
of NetCo Partners (3,050) - (3,050)
---------- ---------- -----------
Combined Income $ 811,143 $1,874,159 $ 2,685,302
========== ========== ===========
NET REVENUES
Net revenues (not including revenues attributable to the Company's
50% interest in NetCo Partners) for fiscal 1997 increased by 38%, or $2,880,334,
to $10,491,447 from $7,611,113 for fiscal 1996. The increase in net revenues is
attributable to the continued growth in the Company's entertainment retail
division offset by a decrease in net revenues in the intellectual properties
division due to the Company's decision to phase out of the comic book publishing
business beginning in 1996. For 1997, revenues generated by the entertainment
retail division comprised 76% of the Company's total revenues while revenues
from the intellectual properties division amounted to 24% of the total. By
comparison for 1996, entertainment retail revenues amounted to 54% of the total
and intellectual properties revenues were 46% of the total.
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GROSS PROFIT
Overall Company gross profit increased by 80%, or $2,155,106, to
$4,843,458 for fiscal 1997 from $2,688,352 in fiscal 1996. As a percentage of
net revenues, gross profit increased to 46% in fiscal 1997 from 35% in
fiscal 1996. The increase in gross profit is primarily due to increases in gross
profit in the Company's entertainment retail division resulting from the
increased sales and also in part due to the impact of the ABC barter transaction
discussed below.
COMBINED INCOME
Combined income (gross profit plus the equity in earnings of NetCo
Partners) increased by $4,860,205, or 181%, to $7,545,507 in 1997 as compared to
$2,685,302 for 1996. This increase reflects the above mentioned growth in the
entertainment retail division coupled with $2,702,049 of income from NetCo
Partners during 1997 in comparison to a $3,050 loss from NetCo Partners during
1996. The equity in earnings of NetCo Partners of $2,702,049 for 1997 represents
the Company's 50% share of the earnings generated by NetCo Partners largely from
TOM CLANCY'S NETFORCE which is discussed in more detail under "Equity in
Earnings of NetCo Partners" on page 21. The breakdown of combined income for
1997 was fairly evenly split with 49% being generated by the intellectual
properties division (including the Company's 50% interest in the earnings of
NetCo Partners) and 51% being generated by the entertainment retail division.
INTELLECTUAL PROPERTIES DIVISION
The intellectual properties division generates revenues from several
different activities including book licensing and packaging, licensing, and
publishing MYSTERY SCENE MAGAZINE. In 1996, publishing also included publication
of comic books; as noted above, the Company has discontinued comic book
publishing. The revenue breakdown from these activities for 1997 and 1996 is as
follows:
1997 1996
------------------ -------------------
$ % $ %
---------- ------ ---------- ------
Book Licensing & Packaging $2,228,911 89% $2,200,664 63%
Licensing 205,761 8 357,909 10
Publishing 85,006 3 922,598 27
---------- ----- ---------- -----
Total $2,519,678 100% $3,481,171 100%
========== ===== =========== =====
Book licensing and packaging represents 89 % of the revenues
generated by the intellectual properties division in 1997. The Company's book
licensing and packaging activities are conducted through Tekno Books, its 51%
owned subsidiary. Tekno Books focuses on developing and executing book projects,
typically with best-selling authors, and then licensing the books for
publication with various publishers.
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Book licensing and packaging revenues increased by 1%, or $28,247, to $2,228,911
for 1997 from $2,200,664 for 1996. While revenues from Tekno Books remained
fairly constant from 1996 to 1997, the Company anticipates significant increases
in the revenues generated by Tekno Books in future years due to several new
contracts which were entered into during 1997. These contracts include an
agreement with June Bug Enterprises (the "Magic Johnson Agreement"), an
agreement with MGM Consumer Products (the "MGM Agreement"), and an agreement
with The Classica Foundation (the "Tekno Classica Agreement"). Under the Magic
Johnson Agreement, Tekno Books will work with pro basketball star Magic Johnson
to develop a series of educational textbooks with material presented by Magic
Johnson as well as a series of children's books and novels. Under the MGM
Agreement, Tekno Books has the exclusive rights to publish books based on the
past, present and future properties from the film and television show libraries
of Metro-Goldwyn-Mayer studios, United Artists Corporation, Orion Pictures
Corporation, and Goldwyn Entertainment, Inc. Several books are currently being
developed pursuant to the MGM Agreement. Under the Tekno Classica Agreement,
Tekno Books, through its wholly-owned subsidiary, may develop books for
licensing to publishers worldwide and license rights to produce CD-ROMs,
documentaries, television specials, and feature films based on archived
documents contained in the Russian archives that were captured from the German
archives at the end of World War II. Tekno Books currently has a lengthy list of
book projects that it plans to develop under the Tekno Classica Agreement. Each
of these agreements were entered into during 1997, requiring significant time
and effort during the acquisition, negotiation and due diligence process, while
any financial benefit to be derived from these agreements will be generated
during 1998 and thereafter.
Licensing revenues decreased by 43%, or $152,148, from $357,909 in
1996 to $205,761 in 1997. Licensing revenues include advances and royalties
received under the Company's various licensing agreements with HarperCollins,
Warner Books, Sierra On-Line, Alliance Entertainment, and various licensees for
foreign publication of comic books. The decrease in revenues during 1997
pertains primarily to up-front contractual advances and option payments received
in 1996 on projects that have yet to be developed; therefore, no additional
revenues were generated on these projects in 1997. It is important to note that
licensing revenues generated by NetCo Partners (in which the Company has a 50%
interest) are not included in the above licensing figures, but rather are
included in equity in earnings of NetCo Partners discussed in more detail on
page 21.
Publishing revenues decreased by 91% or $837,592 from $922,598 in
1996 to $85,006 in 1997. The decrease in publishing revenues is entirely related
to the Company's decision to discontinue its comic book publishing operation due
to the sustained losses incurred in the publication of comic books. The Company
began to reduce the number of comic book titles it published during 1996 and
completely ceased publication of all titles during the first quarter of 1997.
Publishing revenues during 1997 primarily reflect revenues from publication of
MYSTERY SCENE MAGAZINE, a mystery-genre trade journal published by the Company's
51%-owned subsidiary, Fedora, Inc., and minor residual revenues from the comic
book business.
Gross profit for the intellectual properties division increased by
26%, or $208,597, to $1,022,790 in 1997 from $814,193 in 1996. This increase in
gross profit is directly attributable to the Company's elimination of the comic
book publishing operation in 1997, which had historically generated a negative
gross margin for the Company. As a percent of revenues, gross profit increased
to 41% from 23% in the prior year, reflecting the more profitable continuing
operations of book licensing and packaging and licensing. While the Company was
engaged in comic book publishing, it advanced 100% of all costs associated with
the development of its comic book titles including character and storyline
development, design, writing, and illustration, plus the Company paid for the
printing and distribution of all books, and
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<PAGE>
was responsible for returns, which are a normal part of the book publishing
business. By now developing its intellectual properties through licensing
arrangements, the Company has essentially limited the costs incurred to writers'
payments for books and teleplays or scripts, and typically funds these costs
from advance payments received from publishers pursuant to licensing agreements.
The same holds true for the book licensing and packaging operation.
Production expenses to publish the books are borne by the publishers. The book
licensing and packaging operation typically secures the publishing agreements in
advance of determining amounts to be paid to authors and for permissions,
thereby ensuring a profit on the projects based on the up-front advances
received, plus obtaining an ongoing royalty stream for future sales once the
advances have been earned. Tekno Books has a library of approximately 960 book
titles which it has produced.
ENTERTAINMENT RETAIL
Net revenues for the Company's entertainment retail division
increased by 93%, or $3,841,827, to $7,971,769 for fiscal 1997 from $4,129,942
for fiscal 1996. Net revenues are derived from sales of entertainment products
and merchandise, including T-shirts (such as STAR WARS/Trademark/ T-shirts),
hats (such as X-FILES/Trademark/ hats ), action figures (such as
BATMAN/Trademark/ action figures) and related items, videos, comic books,
collectible art, and other entertainment merchandise, at the Company's retail
units located in major malls in various parts of the United States. The Company
had 34 retail units in operation at December 31, 1997 as compared to 28 retail
units at December 31, 1996. It should be noted that the Company closed six
Entertainment Super/bullet/Kiosks shortly after the end of fiscal 1997 and
placed the kiosk units in storage. The Company intends to redeploy these units
either for its own use in locations which it believes will be more profitable or
for use by its franchisees. Net revenues also include imputed income from
running ABC video clips on the in-store television monitors in exchange for
advertising air time on local ABC affiliate television stations (see "ABC
Programming Agreement" in Item 1. Description of Business). The Company records
the estimated fair value of the air time received from the ABC affiliates as the
value of the revenues earned by playing the ABC video clips in its retail units.
The increase in revenues was due to four factors: (1) the opening of three new
in-line studio stores during the fourth quarter of 1997, (2) an increase in the
number of Entertainment Super/bullet/Kiosks in operation, (3) an increase in
same store sales of 5.8% for fiscal 1997 over fiscal 1996 same store sales, and
(4) imputed income from the ABC programming agreement of $1,150,000 in 1997,
which is the first year the contract was in effect. For 1996, the increase in
same store sales was 8.4% over the prior year amount, in large part reflecting
the change in the Company's merchandise mix to higher ticket merchandise during
1996.
Gross profit for the entertainment retail division increased by
104%, or $1,946,509, to $3,820,668 for fiscal 1997 from $1,874,159 for fiscal
1996. As a percentage of entertainment retail division revenues, gross profit
increased to 48% for fiscal 1997, from 45% for fiscal 1996. The increase in
gross profit was due to the impact of the ABC barter agreement discussed above
plus the impact of the additional revenues. Without the ABC barter income of
$1,150,000, the gross margin for the retail division actually dropped from 45%
in 1996 to 39% in 1997. This decline in gross margin is attributable to
increased promotional activity, increased sales in lower margin product
categories such as videos and trading card games, and higher inventory
shrinkage during 1997. The Company has taken measures to reduce the shrinkage.
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EQUITY IN EARNINGS OF NETCO PARTNERS
The Company's 50% share in the earnings of NetCo Partners
amounted to $2,702,049 for 1997 as compared to a loss of $3,050 for 1996. NetCo
Partners began to recognize income from its contracts related to TOM CLANCY'S
NETFORCE beginning in 1997 as discussed below. NetCo Partners recognizes
revenues when the earnings process has been completed based on the terms of the
various agreements. When advances are received prior to completion of the
earnings process, NetCo Partners defers recognition of revenue until the
earnings process has been completed. Costs related to acquisition, development
and sales of the intellectual properties and their licensed products are
expensed in proportion to the revenues that have been recognized.
NetCo Partners 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 to be paid to
NetCo Partners of $8 million 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, each
of which is a 50% partner of NetCo Partners. In the event that ABC does not meet
the "progress to production" and broadcast requirements for the mini-series as
set forth in the agreement, the agreement provides for the payment of a $1.6
million penalty to NetCo Partners. NetCo Partners recognized $1.6 million as
income during 1997 as this is the minimum amount due to NetCo Partners under the
agreement and NetCo Partners has fulfilled all of its obligations to ABC under
the agreement. ABC has hired the executive producers, the director, and the
screenwriter for the mini-series and the Company has been advised that ABC has
"greenlit" the mini-series, meaning that ABC has authorized the mini-series
based on TOM CLANCY'S NETFORCE to proceed to production. 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 November 1998.
In April 1997, NetCo Partners entered into an agreement with
The Berkley Publishing Group ("Berkley"), a division of Penguin Putnam Inc.,
which is part of the international media group Pearson plc, to publish a series
of up to six original novels based on TOM CLANCY'S NETFORCE. The contract, with
total maximum advances of $22 million, calls for initial publication of the
first book to coincide with the airing of the ABC mini-series referred to above.
NetCo Partners received gross advances totaling $3 million on this contract
during 1997, which have been distributed as part of NetCo Partners' normal
distributions to the Company and C.P. Group, its partners. Additional advances
become payable based on specific milestones such as commencement of writing,
delivery and acceptance of the manuscripts, and actual publication of each of
the six books. As of December 31, 1997, an additional advance related to
delivery and acceptance of the second manuscript is currently due under this
contract. This contract calls for royalties on paperback sales to be earned by
NetCo Partners at 15% of the publisher's suggested retail price.
In April 1997, NetCo Partners also entered into a second
agreement with Berkley to publish up to 18 young adult novels based on TOM
CLANCY'S NETFORCE. The contract, with total maximum advances of $900,000, calls
for initial publication of the first book to coincide with the airing of the ABC
mini-series referred to above. An initial advance payment of $450,000 was
received by NetCo Partners and distributed during 1997, as part of NetCo
Partners' normal distributions to the Company and C.P. Group, its partners. This
contract calls for royalties on paperback sales of the young adult novels to be
earned at 10% of the publisher's suggested retail price.
21
<PAGE>
Both of the Berkley contracts grant to Berkley only the North
American publishing rights to TOM CLANCY'S NETFORCE. NetCo Partners also plans
to license the rights to TOM CLANCY'S NETFORCE in numerous countries throughout
the world in all major languages. It is currently anticipated that the aggregate
of such foreign licenses will generate approximately 20% to 40% of the revenue
being generated by the North American book licenses referenced above. As of
December 31, 1997, NetCo Partners had entered into an agreement with Headline
Book Publishing Ltd. ("Headline") for the rights to publish the first four TOM
CLANCY'S NETFORCE novels in the United Kingdom for a fee of 1.2 million pounds
(approximately $2 million at December 31, 1997). Acceptance of the manuscripts
by Berkley, the North American publisher, is deemed acceptance of the
manuscripts by Headline under this contract. Accordingly, NetCo Partners
recorded revenues related to the first two novels during 1997 as the manuscripts
for these two books were delivered and accepted by Berkley during 1997. NetCo
Partners is currently negotiating license agreements for TOM CLANCY'S NETFORCE
in other foreign markets.
NetCo Partners also entered into an agreement with Random
House Audio Publishing to license the audio book rights for the first two TOM
CLANCY'S NETFORCE novels for an aggregate consideration of $600,000. NetCo
Partners recorded these revenues during 1997. NetCo Partners anticipates
licensing additional audio books in the series.
In April 1997, NetCo Partners entered into an agreement with
the Dodge division of Chrysler Corporation regarding placement of Chrysler and
Dodge products in TOM CLANCY'S NETFORCE novels. An initial advance payment of
$100,000 was received by NetCo Partners and distributed during 1997 as part of
NetCo Partners' normal distributions to the Company and C.P. Group, its
partners.
NetCo Partners previously entered into an agreement with
Playmates Toys, Inc. ("Playmates Toys") to develop, manufacture and market a
line of toys based on TOM CLANCY'S NETFORCE. Playmates Toys, which specializes
in boys' action figures, is currently the master toy licensee of STAR
TREK/Trademark/ and TEENAGE MUTANT NINJA TURTLES/Trademark/. The agreement with
Playmates Toys provides for payment to NetCo Partners of a maximum advance of $1
million. Of this advance, $250,000 was received prior to December 31, 1997, and
has been recognized as income, $250,000 is contingent upon the broadcast of TOM
CLANCY'S NETFORCE mini-series and $500,000 is contingent upon the broadcast of
TOM CLANCY'S NETFORCE as a prime time television series or a kids' television
series scheduled for after school, or Saturday or Sunday morning. While an
agreement has been reached with ABC for a four-hour mini-series for TOM CLANCY'S
NETFORCE, there is currently no contractual agreement licensing production of a
TOM CLANCY'S NETFORCE prime time or kids' television series nor are there any
assurances that such a series will be produced. Royalties, which will be offset
by any advances so paid, are based on a percentage of Playmates Toys' receipts
on worldwide sales.
NetCo Partners has also entered into an agreement to license
TAD WILLIAMS' MIRRORWORLD to HarperCollins for publication as an illustrated
novel.
OPERATING EXPENSES
Operating expenses consist of selling, general and administrative
expenses, salaries and benefits and amortization of goodwill and intangibles.
Operating expenses increased by 28%, or $2,479,441, to $11,272,047 for fiscal
1997 from $8,792,606 for fiscal 1996. (Note that $1,150,000 of the increase
represents non-cash advertising expense imputed under the ABC barter agreement
discussed below.) As a percentage of net revenues, total operating expenses
decreased to 107% in fiscal 1997 from 116% in fiscal
22
<PAGE>
1996. The new kiosks and in-line studio stores have necessitated that the
Company incur additional operating and administrative expenses in conjunction
with its retail operations. The increase in total operating expenses in fiscal
1997 as compared to total operating expenses in fiscal 1996 reflects increases
in selling, general and administrative expenses and salaries and benefits of
$2,064,177, or 42%, and $510,836, or 15%, respectively, which were slightly
offset by a $95,572, or 21%, reduction in amortization of goodwill and
intangibles. Of the $2,064,177 increase in selling, general and administrative
expenses, $910,489 or 44%, is attributable to incremental occupancy,
depreciation and other store-level expenses for the new stores opened during
1997 and 1996, and $1,150,000, or 56% of the increase, consists of imputed
advertising expense under the ABC barter arrangement (see "ABC Programming
Agreement" in Item 1. Description of Business). The Company estimates the value
of the advertising air spots that it receives from the ABC affiliate television
stations and records this amount as advertising expense. The $510,836, or 15%,
increase in salaries and benefits is attributable to additional expenses in the
entertainment retail division as a result of adding new employees to staff new
stores opened and the minimum wage rate increases which were effective October
1, 1996 and September 1, 1997. The increase in salaries and benefits for the
entertainment retail division was partially offset by a decrease in salaries and
benefits for the intellectual properties division due to the phase out of the
comic book publishing operations during late 1996 and 1997.
INTEREST EXPENSE, NET
Net interest expense for fiscal 1997 was $297,692 as compared to
$182,700 for fiscal 1996, representing increased interest expense pertaining to
the $650,000 convertible debenture. Although the coupon rate on the debenture is
only 4%, the discount attributable to the conversion feature of the debenture is
being amortized as interest expense and this non-cash amortization totaled
$107,750 for 1997.
DEFERRED TAX BENEFIT
During 1997, the Company recognized $1,407,600 of deferred tax
benefit as the Company believes that realization of a portion of its net
operating loss carryforward is likely to occur based on the Company's
projections of taxable income particularly in light of the transaction discussed
in "Recent Developments - Formation of Huge Entertainment LLC" included in Item
1. Description of Business.
NET LOSS
Net loss decreased by 55%, or $3,660,262, to $2,995,347 for fiscal
1997 as compared to a net loss of $6,655,609 for fiscal 1996. The decreased net
loss resulted primarily from the Company's equity in the earnings of Netco
Partners as one of NetCo Partners' intellectual properties, TOM CLANCY'S
NETFORCE, began to generate substantial revenues and cash flow during 1997, and
to a lesser extent, due to the recognition of the deferred tax benefit discussed
above. Net loss per share for fiscal 1997 was $0.51 compared to $1.23 per share
in fiscal 1996, for a decrease in net loss per share of $0.72, or 59%. The
decrease in net loss per share in fiscal 1997 from fiscal 1996 is attributable
to both a decrease in net loss and an increase in the number of shares
outstanding.
The Company has made several modifications to its initial business
plan in an effort to reverse the losses that have been sustained since its
inception. During 1997, the Company stopped publishing comic books, an activity
that required a substantial amount of resources and had not proven to be
profitable. Essentially all of the overhead associated with comic book
publishing was eliminated effective with the second quarter of 1997. At the
same time, the Company decided to expand its retail operations
23
<PAGE>
with the development of three prototype in-line retail stores. Substantial
resources were devoted to the development of the three prototype in-line stores
which opened in the fourth quarter of 1997, including professional fees and
expenses incurred to design the new stores, the hiring of additional field and
administrative personnel, the selection and acquisition of new hardware and
software for a new retail accounting and merchandising system to be implemented,
and the capital expenditures for the new stores. The Company believes that the
in-line studio store concept will allow it to more quickly achieve economies of
scale in its entertainment retail division. In addition, the Company continues
to acquire and develop its base of intellectual properties, and to negotiate
additional licensing agreements thereon, which while not capital intensive,
requires a substantial amount of time from its senior executives. While the
Company believes that these measures will ultimately reverse its operating
losses, there can be no assurances that the revenues generated by the
intellectual properties and entertainment retail divisions will be sufficient to
offset the associated expenses incurred.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of
$887,153 and a working capital deficit of $491,513 compared to cash and cash
equivalents of $1,675,852 and working capital of $1,285,093 at December 31,
1996. Net cash used in operating activities during fiscal 1997 was $4,012,481
primarily representing cash used to fund the Company's pre-tax loss. Significant
increases in merchandise inventories, largely attributable to the opening of
three new in-line studio stores during late 1997, were more than offset by
similar increases in accounts payables, reflecting amounts due to vendors for
this merchandise. Net cash used in investing activities was $1,004,937
representing capital expenditures and distributions to minority interests. Net
cash provided by financing activities amounted to $4,228,719 during 1997,
primarily representing proceeds from issuance of common stock, preferred stock
and a convertible debenture, plus the initial draw on the Company's bank line of
credit. The combined effect of the above was a net decrease in cash and cash
equivalents of $788,699 during 1997. Net cash used in operating activities and
investing activities during fiscal 1996 was $6,294,765 and $1,123,495,
respectively, and net cash provided by financing activities was $8,487,736. Cash
provided from financing activities during 1996 consisted primarily of proceeds
from the issuance of common and preferred stock.
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, has invested a total of
$3,000,000 in the Company. Initially Tekno Simon invested $1,000,000 in shares
of the Company's common stock in the Company's 1995 private placement. Pursuant
to the Simon Stock Purchase Agreement entered into in November 1995, Tekno Simon
also invested an additional $1,360,000 in shares of the Company's Series A
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 Preferred Stock (the "Series A Preferred Stock"). The Company's
agreement with Tekno Simon was amended in October 1996. This amendment extended
the funding period and provided for a purchase price adjustment on the
additional shares to be issued based on the market value of the Company's common
stock at the time of funding. The Company funded the development of eight
additional Entertainment Super/bullet/Kiosks with the amended facility. This
amendment also provided that the subsequent stock purchases would 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.
Tekno Simon acquired a total of 122,846 shares of Series B preferred stock for
$640,000, of which $160,000 was funded in 1996 and $480,000 was funded in 1997.
See Note 9 to the
24
<PAGE>
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 July 1997, the Company sold 1,000,002 shares of its common stock
through a private placement for $3,500,000. The proceeds to the Company from the
issuance of these shares amounted to $3,069,996, net of expenses. The shares
issued through this private placement were restricted from resale for six months
from the date of issuance; accordingly the shares were sold at a 20% discount to
the then current market price of the common stock reflecting the restrictions on
resale. In conjunction with this offering, the placement agent received warrants
to purchase 100,000 shares of common stock. The warrants expire five years from
the date of issuance and have an exercise price of $5.00 per share.
In August 1997, the Company issued a $650,000 convertible debenture
to a single institutional investor. The debenture accrues interest at 4% per
annum, which is payable in arrears on August 31, 1999, the maturity date of the
debenture. The debenture is convertible by the holder, subject to certain
restrictions, and is redeemable at the option of the Company at 125% of the
principal amount plus accrued interest. The Company can require the holder of
the debenture to convert any portion of the debenture still outstanding on the
maturity date. As of December 31, 1997, no portion of the debenture had been
converted or redeemed. In conjunction with the issuance of the debenture, the
buyer received warrants to buy 32,499 shares of common stock at exercise prices
ranging from $6.00 to $6.53 per share. The warrants expire March 2, 2003.
In November and December 1997, the Company entered into long-term
equipment leases with two different leasing companies in order to finance the
construction build-out and fixtures and equipment for its three, new prototype
in-line studio stores. The total principal financed through these leasing
transactions amounted to $1,439,319. The lease terms range from 36 months to 60
months with a combined monthly rental payment of approximately $39,833. In
conjunction with the lease financing, the Company issued 5-year warrants to one
of the leasing companies to acquire 7,231 shares of Common Stock for $6.56 per
share. The Company also entered into several smaller equipment leasing
transactions during 1997 to finance some of its other equipment needs including
one such lease to finance an upgrade to certain computer hardware and new
software to be used in the Company's retail entertainment division. This
hardware and software, and the related implementation costs associated
therewith, represent the only significant expenditures which the Company
anticipates it will require in order to be ready for the year 2000.
In December 1997, the Company established a $5 million credit
facility with BankBoston Retail Finance, Inc., ("BankBoston") which the Company
is using to partially finance the cost of inventories for its entertainment
retail division. The primary obligor on the credit facility is the Company's
wholly-owned subsidiary that constitutes the Company's entertainment retail
division, and the Company is the guarantor. Availability under this credit
facility is limited to 50%-55% of the cost of retail inventories and certain
other factors. The term of the facility is 48 months. Interest is payable
monthly at the prime rate plus 1% for the first two years and the prime rate
plus 1/2% for the third and fourth years. In conjunction with the inventory line
of credit, the Company issued 5-year warrants to BankBoston to acquire 30,000
shares of the Company's common stock at $9.68 per share. As of December 31,
1997, the Company's outstanding balance on the line of credit was $535,000 and
the available borrowing base was approximately $1 million. The facility is
secured by cash, inventory and accounts receivable of the entertainment retail
division. The loan agreement provides for various financial performance
covenants, including maintaining specified levels of working capital, inventory,
gross margin, and earnings before interest, taxes, depreciation and
25
<PAGE>
amortization, all measured by comparison to the entertainment retail division's
business plan, which is subject to modification from time to time as may be
approved by the lender. The loan agreement also sets forth certain covenants
requiring a minimum level of vendor trade support, limitations on cash dividends
paid by the entertainment retail subsidiary to the Company (other than for
overhead allocations), and limitations on capital expenditures. The first
measurement date for compliance with the financial performance covenants was
January 30, 1998. The Company anticipates that it will need to modify the
business plan originally submitted to BankBoston and have such plan approved by
BankBoston in order to be in compliance with all such covenants throughout 1998.
The Company does not anticipate that such covenants and limitations will
materially adversely affect the Company.
The success of the Company's operations in future years is
dependent on its ability to generate adequate revenue to offset operating
expenses. Unless otherwise noted, the proceeds from the financing transactions
described above were used for general corporate purposes. The Company's
management expects to require additional financing for the expansion of its
business, and in particular the growth of the Company's in-line studio stores,
and to support working capital requirements of its retail division in future
years. As of March 19, 1998, the Company has entered into two additional leases
for in-line studio stores to be opened in the future. The Company currently is
exploring financing alternatives to allow the Company to finance such expansion,
although 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 represented that they would provide the Company, if required,
with an amount not to exceed $2.5 million in order to enable the Company to meet
its working capital requirements for the balance of 1998; provided, however,
that the commitment will terminate in the event the Company raises no less than
$2.5 million from other sources. In the event that the Company raises less than
$2.5 million, 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. This
commitment is in addition to the existing $1.1 million credit facility extended
by these executives pursuant to a $1.1 million promissory note executed by the
Company. Borrowings under this credit facility are unsecured and bear interest
at the JP Morgan Bank prime rate of interest (8.5% at December 31, 1997). At
December 31, 1997, the Company had borrowed $85,000 from the Company's Chairman
and Chief Executive Officer and the Company's Vice Chairman and President
pursuant to this facility. The terms of the Promissory Note were previously
approved by the Company's Board of Directors. Any such working capital financing
provided to the Company by the Company's Chairman and Chief Executive Officer
and the Company's Vice Chairman and President will be upon terms negotiated and
agreed to between them and the Company's Board of Directors.
The Company does not anticipate that the formation of Huge
Entertainment (see Item 1. Description of Business under "Recent Developments -
Formation of Huge Entertainment LLC") will negatively impact in any material way
the Company's liquidity and capital resources. Conversely, the Company believes
that through the formation of Huge Entertainment, the Company's acquisition of a
51.75% interest in two additional intellectual properties created by Tom Clancy
- - TOM CLANCY'S CYBERNATION and TOM CLANCY'S TOP SECRET - significantly improves
the Company's liquidity and capital resources assuming that these Tom Clancy
properties have the same earnings potential as TOM CLANCY'S NETFORCE.
26
<PAGE>
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 operation as a result of the general publishing industry practice of
paying royalties semi-annually. The Company's entertainment retail business is
seasonal with the holiday season accounting for the largest percentage of annual
net sales. Accordingly, as the Company expands its entertainment retail
division, it anticipates that its results of operations will be increasingly
affected by seasonality. In addition, although not seasonal, the Company's
intellectual properties division and NetCo Partners both experience significant
fluctuations in their respective revenue streams, earnings and cash flow as a
result of the significant amount of time that is expended in the creation and
development of the intellectual properties and their respective licensing
agreements. While certain of the development costs are incurred as normal
recurring operating expenses, the recognition of licensing revenue is typically
triggered by specific contractual events which occur at different points in time
rather than on a regular periodic basis.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants.......................29
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1996..................................................................30
Consolidated Statements of Operations for the Years Ended December 31,
1997 and 1996.........................................................31
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997 and 1996......................................32
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1996.........................................................33
Notes to Consolidated Financial Statements...............................34
28
<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,
1997 and 1996, 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, 1997 and 1996, 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,
March 20, 1998.
29
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 887,153 $ 1,675,852
Trade receivables, net 243,168 95,547
Merchandise inventories 2,417,224 1,410,603
Prepaid expenses 548,206 654,255
Franchise fee receivable 350,000 700,000
Other current assets 163,099 64,167
------------ ------------
Total current assets 4,608,850 4,600,424
PROPERTY AND EQUIPMENT, net 4,069,171 2,349,108
INVESTMENT IN NETCO PARTNERS 1,533,567 201,311
INTANGIBLE ASSETS, net 163,393 491,265
GOODWILL, net 325,817 345,257
OTHER ASSETS 531,523 256,054
DEFERRED TAX ASSET 1,407,600 -
------------ ------------
TOTAL ASSETS $ 12,639,921 $ 8,243,419
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,108,202 $ 1,021,264
Revolving line of credit 535,000 -
Accrued professional fees 205,313 98,520
Other accrued expenses 559,050 479,225
Deferred revenue 839,084 1,268,455
Loan from shareholder/officer 85,000 -
Current portion of capital lease obligations 768,714 447,867
------------ ------------
Total current liabilities 5,100,363 3,315,331
------------ ------------
CAPITAL LEASE OBLIGATIONS, less current portion 1,803,344 731,807
------------ ------------
CONVERTIBLE DEBENTURE, net 542,250 -
------------ ------------
MINORITY INTEREST 90,111 4,414
------------ ------------
COMMITMENTS AND CONTINGENCIES
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. Liquidation preference of $1,592,050 at
December 31, 1997. 1,360,000 1,360,000
Series B variable rate convertible preferred stock, $5.21
stated and liquidation value, 142,223 shares authorized;
122,846 and 29,767 issued and outstanding at December 31,
1997 and at December 31, 1996, respectively. 640,000 160,000
Series C, 4% convertible preferred stock, $100 stated value,
100,000 shares authorized; 20,000 issued and outstanding
at December 31, 1997 and 1996. Liquidation preference of
$2,000,000 at December 31, 1997. 2,000,000 2,000,000
Common stock, $.01 par value, 25,000,000 shares authorized;
6,896,340 and 5,870,601 shares issued and outstanding at
December 31, 1997 and December 31, 1996, respectively. 68,963 58,706
Additional paid-in capital 25,671,900 22,029,194
Warrants outstanding 586,600 576,600
Accumulated deficit (25,223,610) (21,992,633)
------------ ------------
Total shareholders' equity 5,103,853 4,191,867
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,639,921 $ 8,243,419
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
30
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
NET REVENUES $10,491,447 $ 7,611,113
COST OF SALES 5,647,989 4,922,761
----------- -----------
Gross profit 4,843,458 2,688,352
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 7,031,010 4,966,833
Salaries and benefits 3,884,926 3,374,090
Amortization of goodwill and intangibles 356,111 451,683
----------- -----------
Total operating expenses 11,272,047 8,792,606
----------- -----------
Operating loss (6,428,589) (6,104,254)
EQUITY IN EARNINGS OF NETCO PARTNERS 2,702,049 (3,050)
OTHER:
Interest, net (297,692) (182,700)
Other, net 73,894 55,470
----------- -----------
Loss before minority interest and deferred tax benefit (3,950,338) (6,234,534)
MINORITY INTEREST (452,609) (421,075)
----------- -----------
Loss before deferred tax benefit (4,402,947) (6,655,609)
DEFERRED TAX BENEFIT 1,407,600 -
----------- -----------
Net loss $(2,995,347) $(6,655,609)
=========== ===========
Basic and diluted loss per common share $ (0.51) $ (1.23)
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
31
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
PREFERRED PREFERRED PREFERRED ADDITIONAL
COMMON STOCK STOCK STOCK PAID-IN WARRANTS ACCUMULATED
STOCK SERIES A SERIES B SERIES C CAPITAL OUTSTANDING DEFICIT TOTAL
------- ---------- --------- ---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 $47,239 $ 800,000 $ - $ - $16,149,046 $302,000 $(15,229,808) $ 2,068,477
Issuance of preferred stock
Series A to Tekno Simon, LLC - 560,000 - - - - - 560,000
Issuance of stock options in
lieu of cash under consulting
agreements - - - - 100,000 - - 100,000
Issuance of warrants - - - - - 274,600 - 274,600
Conversion of 8.5% Note 829 - - - 517,590 - - 518,419
Public issuance of stock 10,000 - - - 4,853,465 - - 4,863,465
Expiration of stock redemption 500 - - - 299,500 - - 300,000
Non-cash dividend - preferred
stock 138 - - - 78,149 - (107,216) (28,929)
Issuance of preferred stock
Series B to Tekno Simon, LLC - - 160,000 - - - - 160,000
Issuance of preferred stock
Series C in private placement - - - 2,000,000 (276,156) - - 1,723,844
Issuance of compensatory options - - - - 307,600 - - 307,600
Net loss for the year - - - - - - (6,655,609) (6,655,609)
------- ---------- -------- ---------- ----------- -------- ------------ -----------
Balance - December 31, 1996 58,706 1,360,000 160,000 2,000,000 22,029,194 576,600 (21,992,633) 4,191,867
Issuance of common stock in
private placement 10,000 - - - 3,059,996 - - 3,069,996
Issuance of preferred stock
Series B to Tekno Simon, LLC - - 480,000 - - - - 480,000
Non-cash dividend - preferred
stock 257 - - - 141,452 - (155,630) (13,921)
Cash dividend on preferred stock
Series C - - - - - - (80,000) (80,000)
Issuance of compensatory stock
options and warrants - - - - 225,758 - - 225,758
Value of conversion feature of
convertible debentures - - - - 215,500 - - 215,500
Issuance of warrants for
services rendered - - - - - 10,000 - 10,000
Net loss for the year - - - - - - (2,995,347) (2,995,347)
------- ---------- -------- ---------- ----------- -------- ------------ -----------
Balance - December 31, 1997 $68,963 $1,360,000 $640,000 $2,000,000 $25,671,900 $586,600 $(25,223,610) $ 5,103,853
======= ========== ======== ========== =========== ======== ============ ===========
</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,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,995,347) $(6,655,609)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,178,935 1,050,992
Equity in earnings of Netco Partners, net of
(invested)/return of capital (1,332,256) (161,311)
Issuance of compensatory stock options and warrants 225,758 220,495
Recognition of deferred gain (40,389) (30,291)
Amortization of deferred financing costs 25,426 16,627
Amortization of discount on convertible debentures 107,750 -
Minority interest 452,609 421,075
Changes in assets and liabilities:
Trade receivables (147,621) 149,051
Prepaid expenses 106,049 (200,235)
Merchandise inventories (1,006,621) (831,385)
Other current assets (104,140) 24,105
Other assets (295,687) 12,514
Deferred tax asset (1,407,600) -
Accounts payable 1,086,938 (611,799)
Accrued professional fees 106,793 (36,201)
Deferred revenue (38,982) 207,643
Other accrued expenses 65,904 129,564
----------- -----------
Net cash used in operating activities (4,012,481) (6,294,765)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (638,025) (633,607)
Investment in patents and trademarks - (49,670)
Return of capital from Tekno Books to minority partner (366,912) (440,218)
----------- -----------
Net cash used in investing activities (1,004,937) (1,123,495)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred stock 480,000 2,443,844
Proceeds from issuance of convertible debenture 650,000 -
Net proceeds from issuance of common stock in private
placement 3,069,996 4,873,465
Proceeds from revolving line of credit 535,000 -
Net proceeds from shareholder/officer loan 85,000 -
Proceeds from the issuance of warrants 10,000 264,600
Proceeds from sale of 8.5% convertible promissory note - 500,000
Proceeds from sale of assets - 803,372
Dividends on preferred stock (80,000) (438)
Repayments under capital lease obligations (521,277) (397,107)
----------- -----------
Net cash provided by financing activities 4,228,719 8,487,736
----------- -----------
Net (decrease) increase in cash and cash equivalents (788,699) 1,069,476
CASH AND CASH EQUIVALENTS, beginning of year 1,675,852 606,376
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 887,153 $ 1,675,852
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 180,447 $ 237,108
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
33
<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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, engaged
in the development and licensing of intellectual properties, the development and
licensing of books, and the operation of entertainment-related retail stores.
The Company has two operating divisions: the intellectual properties division
and the entertainment retail division.
The intellectual properties division owns or controls the exclusive rights to
certain original characters and concepts created by best-selling authors and
media celebrities, which it licenses across all media, including books, films
and television, multimedia software, toys, and other products. 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 intellectual properties division also includes a 51%-owned book
licensing and packaging operation which focuses on developing and executing book
projects, typically with best-selling authors, which books are then licensed for
publication to book publishers. In addition, the intellectual properties
division may directly publish works based on these properties, rather than
licensing them to others; however the Company has chosen to exclusively pursue
licensing of its intellectual properties since early 1997.
The Company owns 51% of Tekno Books, the Company's book licensing and packaging
operation. Tekno Books generates revenue from new book projects in the form of
non-refundable advances paid by publishers, and from royalties from the
expanding library of book titles.
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 best-selling author Tom Clancy is a 50%
shareholder. NetCo Partners is engaged in the development and licensing of
entertainment properties.
The entertainment retail division operates a chain of retail studio stores and
retail kiosks known as "Entertainment Super/bullet/Kiosks" that sell
entertainment-related merchandise. The Company operates as of December 31, 1997,
34 retail stores consisting of 30 "Entertainment Super/bullet/Kiosks" at various
shopping malls throughout the country, three in-line studio stores located in
New Jersey and one mini in-line store in the Mall of America in Minnesota. The
Company has entered into two separate agreements to begin franchising its retail
concept.
The Company has expended significant funds developing its intellectual property,
entertainment retail and other businesses. Operating losses since inception,
including the development stage, have resulted in an accumulated deficit of
$25,223,610 at December 31, 1997. The success of the Company's operations in
future years is dependent on its ability to generate adequate revenue to offset
operating expenses. There
34
<PAGE>
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's management expects to require additional financing for the
expansion of its business, and in particular the growth of the Company's in-line
studio stores, and to support working capital requirements in future years. The
Company is currently 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 1998;
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. This commitment is in
addition to the existing $1,100,000 credit facility extended by these
executives.
(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.
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 $103,839 and $278,431, at December
31, 1997 and 1996, 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 at
35
<PAGE>
December 31, 1997 and 1996.
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 allocate 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. Entertainment
Super/bullet/Kiosks that are not in use are maintained in a storage facility
pending redeployment. At December 31, 1997, a total of six Entertainment
Super/bullet/Kiosks were held in storage and an additional six units were taken
out of service subsequent to December 31, 1997. The Company intends to redeploy
these units in other locations or to use them in conjunction with its
franchisees. Depreciation continues to be recorded on these units.
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,
-----------------------------------
1997 1996
------------- -------------
Book contracts acquired with Tekno Books $ 1,263,542 $ 1,263,542
Patents and trademarks 203,368 202,822
------------- -------------
1,466,910 1,466,364
Less accumulated amortization (1,303,517) (975,099)
------------- -------------
$ 163,393 $ 491,265
============= =============
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 $62,966 and $43,526 as of December
31, 1997 and 1996, 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.
36
<PAGE>
REVENUE RECOGNITION
Licensing revenues in the form of non-refundable advances and other guaranteed
royalty payments are recognized when the earnings process has been completed,
which is generally upon the achievement of milestones in the
development/publishing of the property. Non-guaranteed royalties based on sales
of licensed products and on sales of books published directly by the Company are
recognized as revenues when earned based on royalty statements or other
notification of such amounts from the publishers.
Revenue relating to the Company's book packaging and licensing operation 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.
Revenue relating to sales at the Company's retail outlets is recognized at the
time of sale.
Franchise fee revenue is recognized when all material services or conditions
relating to a franchise agreement have been substantially performed or
satisfied.
Revenue on sales of the Company's comic books to distributors was recognized at
the time of shipment, net of estimated returns. The Company exited the comic
book publishing business during 1997. The costs associated with the exit of the
comic book publishing business were not material.
PRE-OPENING EXPENSES
Pre-opening expenses related to new store openings are expensed as incurred.
BARTER TRANSACTIONS
The Company records the exchange of air time given on the television monitors in
its retail stores for advertising air time received on local ABC affiliate
television stations at the estimated fair value of the air time received from
the ABC affiliates. The income and expense are recorded in equal amounts at the
time when the advertising air time is received from ABC. In 1997, the Company
imputed revenues and selling, general and administrative expenses of $1,150,000
relating to the ABC Programming Agreement.
LOSS PER COMMON SHARE
The Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per
Share", in February of 1997, which requires companies to present basic and
diluted earnings per share ("EPS") instead of the primary and fully diluted EPS
that was previously required. The Company adopted SFAS No. 128 in 1997. Loss per
common 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. For the years ended December 31, 1997 and
1996 the weighted average number of common and common equivalent shares
outstanding were 6,316,013 and 5,477,595, respectively. Basic and diluted loss
per share
37
<PAGE>
are the same.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("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 ("SFAS
123") 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, is presented in Note 10. The adoption of SFAS No.
123 did not have a material impact on the Company's results of operations,
financial position or cash flows.
POST-RETIREMENT BENEFITS
The Company does not currently provide post-retirement benefits for its
employees.
RECLASSIFICATIONS
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, trade receivables, and
accounts payable, approximate fair value due to the short maturity of the
instruments. The fair value of capital lease obligations is estimated using an
appropriate valuation method and approximates the carrying amount of capital
lease obligations in the accompanying consolidated balance sheets. The carrying
value of debt, including bank debt, the convertible debenture, and the loan from
shareholders/officers, approximates fair value either because the interest rate
reprices with changes in market rates or because the debt was recently
negotiated.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS:
SFAS No. 130 ("SFAS 130"), "Reporting Comprehensive Income", was issued by the
Financial Accounting Standards Board in June 1997. This Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
will adopt SFAS 130 beginning January 1, 1998. Adoption of this standard will
not have a material impact on the consolidated financial statements.
SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information", was issued by the Financial Accounting Standards Board in
June 1997. This Statement establishes standards for reporting of selected
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company will adopt SFAS 131 beginning January 1, 1998. The Company is
currently evaluating the impact of SFAS 131.
38
<PAGE>
(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 franchisee did not open any stores in Canada and in
December 1997, under an amended franchise agreement, the franchisee gave up its
rights to Canada and obtained the exclusive rights to open Big Entertainment
in-line studio stores in the Phoenix, Arizona market area in exchange for a
$350,000 territorial exclusivity fee, which was paid during the first quarter of
1998. In order for the franchisee to maintain its territorial rights, the
agreement requires the franchisee to open one store by December 31, 1999 and one
store each year thereafter. The agreement does not require any further
performance by the Company. The Company has the option, exercisable at any time
prior to December 31, 1998, to reacquire the rights to the Phoenix, Arizona
market, provided no such franchised units have already opened, by issuing the
franchisee 100,000 unregistered shares of the Company's common stock. The
Company will recognize the $350,000 territorial exclusivity fee as income or
equity on the date the Company determines that it will or will not exercise its
option to reacquire the rights to the Phoenix, Arizona market. Accordingly, as
of December 31, 1997 and December 31, 1996, the Company has reflected $350,000
and $700,000, respectively, in the accompanying consolidated balance sheets as
franchise fee receivable and deferred revenue.
(6) PROPERTY AND EQUIPMENT:
Property and equipment (excluding equipment under capital leases) consists of:
DECEMBER 31,
------------------------------------
1997 1996
------------ ------------
Furniture and fixtures $ 180,863 $ 179,690
Entertainment Super/bullet/Kiosks 1,003,678 753,125
Equipment 212,853 186,345
Leasehold improvements 545,865 289,311
------------ ------------
1,943,259 1,408,471
Less: accumulated depreciation and
amortization (800,408) (333,969)
------------ ------------
$ 1,142,851 $ 1,074,502
============ ============
Equipment under capital leases consists of:
DECEMBER 31,
------------------------------------
1997 1996
------------ ------------
Equipment $ 2,554,846 $ 609,032
Entertainment Super/bullet/Kiosks 1,164,380 1,164,380
------------ ------------
3,719,226 1,773,412
Less: accumulated amortization (792,906) (498,806)
------------ ------------
$ 2,926,320 $ 1,274,606
============ ============
39
<PAGE>
Depreciation and amortization expense on property and equipment was $831,623 and
$599,309 for the years ended December 31, 1997 and 1996, 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, 1997 are as follows:
For the years ending December 31,
1998 $1,130,210
1999 902,624
2000 603,315
2001 398,519
2002 329,395
----------
Minimum lease payments 3,364,063
Less amount representing interest (792,005)
----------
Present value of net minimum lease payments 2,572,058
Less current portion (768,714)
----------
Noncurrent portion $1,803,344
==========
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 Super/bullet/Kiosks to the lessor for $1,080,000 (excluding
transaction costs of approximately $50,000, and fair value of warrants granted
of $84,380) 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 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. As collateral security for the lease, the
Company issued 225,000 shares of its common stock which were placed in escrow
(the "Escrow Shares"). The escrow agent continues to hold 186,405 of the Escrow
Shares and the remaining 38,595 Escrow Shares have been returned to Company. In
the event that the Company defaults under the agreements for the Sale-Leaseback,
the Escrow Shares held by the escrow agent 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) DEBT:
The Company's Chairman and Chief Executive Officer and the Company's Vice
Chairman and President have extended a $1.1 million unsecured line of credit
facility to the Company. The line of credit bears interest at the JP Morgan Bank
prime rate of interest, is prepayable at any time without penalty by the
40
<PAGE>
Company, and is payable on demand of the holders. The outstanding balance under
this line of credit was $85,000 at December 31, 1997.
In August 1997, the Company issued a $650,000 convertible debenture to a single
institutional investor. The debenture accrues interest at 4% per annum, which is
payable in arrears on August 31, 1999, the maturity date of the debenture. The
debenture is convertible by the holder into shares of the Company's common stock
at a conversion price equal to 80% of the average closing bid price for the ten
trading days immediately preceding the date of conversion. The conversion
features restrict the maximum principal amount of the debenture which can be
converted for a 120-day period following the effective date of registration for
resale of the underlying shares. The debenture is redeemable at the option of
the Company at 125% of the principal amount plus accrued interest. The Company
can require the holder of the debenture to convert any portion of the debenture
still outstanding on the maturity date. As of December 31, 1997, no portion of
the debenture had been converted or redeemed. In conjunction with issuance of
the debenture, the buyer received warrants to buy 32,499 shares of common stock
at exercise prices ranging from $6.00 to $6.53 per share. The warrants expire
March 2, 2003. The Company recorded the convertible debenture net of a discount
of $215,500 attributable to the intrinsic value of the nondetachable conversion
feature. The discount is being amortized as interest expense from the date of
issuance through April 1998, the earliest date the investor can convert the
entire debenture. The discount balance at December 31, 1997 is $107,750.
In December 1997, the Company established a $5 million credit facility with
BankBoston, which the Company is using to finance the cost of inventories for
its entertainment retail division. The primary obligor on the credit facility is
the Company's wholly owned subsidiary that constitutes the Company's
entertainment retail division, and the Company is guarantor. Availability under
this credit facility is limited to 50%-55% of the cost of retail inventories and
certain other factors. The term of the facility is 48 months. Interest is
payable monthly at the prime rate plus 1% for the first two years (9.5% at
December 31, 1997) and the prime rate plus 1/2% for the third and fourth years.
The credit facility includes an annual commitment fee of 1% and a monthly
facility fee of $2,500. BankBoston received five-year warrants to buy 30,000
shares of the Company's common stock at an exercise price of $9.68 per share
(see Note 10). As of December 31, 1997, the Company's outstanding balance on the
line of credit was $535,000 as compared to an available borrowing base of
approximately $1 million. The facility is secured by cash, inventory and
accounts receivable of the Company's entertainment retail division. The loan
agreement provides for capital, inventory, gross margin, and earnings before
interest, taxes, depreciation and amortization, all measured by comparison to
the entertainment retail division's business plan, which is subject to
modification from time to time as may be approved by the lender. The loan
agreement also sets forth certain covenants requiring a minimum level of vendor
trade support, limitations on cash dividends paid by the entertainment retail
subsidiary to the Company (other than for overhead allocations), and limitations
on capital expenditures. The first measurement date for compliance with the
financial performance covenants was January 30, 1998. The Company anticipates
that it will need to modify the business plan originally submitted to BankBoston
and have such plan approved by BankBoston in order to be in compliance with all
such covenants throughout 1998. The Company does not anticipate that such
covenants and limitations will materially adversely affect the Company.
41
<PAGE>
(9) OFFERINGS OF SECURITIES:
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
provided 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 closed 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.
Pursuant to the agreement, Tekno Simon acquired 217,600 shares of the Company's
Series A Preferred Stock during 1995 and 1996.
The Series A Preferred Stock has a stated value of $6.25 per share and accrues
non-cash dividends, payable quarterly in shares of the Company's common stock
based on prevailing market prices. The dividends accrue on the stated value of
the outstanding shares of Series A Preferred Stock at a variable rate equal to a
specified bank prime rate, adjusted quarterly, (8.5% as of December 31, 1997).
During the two-year period commencing on November 28, 1995, the Series A
Preferred Stock was convertible at the option of the holders into shares of
common stock on a one-for-one basis. Tekno Simon did not exercise this
conversion option. The Series A Preferred Stock is redeemable at the Company's
option for $7.18 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 $7.18 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) registered by the Company for sale by such holders under the
Securities Act of 1933, as amended. In addition, the Company appointed one
nominee of Tekno Simon to the Company's board of directors.
The Company's agreement with Tekno Simon was amended in October 1996 to extend
the funding arrangement, pursuant to which the Company could 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, 1997, $640,000 ($480,000 during 1997 and $160,000 during 1996)
in additional funding has been provided to the Company for the development of
eight additional Entertainment Super/bullet/Kiosks pursuant to this amended
agreement. 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 is subject to adjustment upon 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,
1997, 122,846 shares of Series B Preferred Stock have been issued to Tekno Simon
at an adjusted purchase price of $5.21 per share.
42
<PAGE>
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 $4,863,465 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.
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.
1997 PRIVATE PLACEMENT
In July 1997, the Company sold 1,000,002 shares of its common stock through a
private placement for $3,500,000. The proceeds to the Company from the issuance
of these shares amounted to $3,069,996, net of expenses. The shares issued
through this private placement were restricted from resale for six months from
the date of issuance; accordingly the shares were sold at a 20% discount to the
then current market price of the common stock reflecting the restrictions on
resale. In conjunction with this offering, the placement agent received warrants
to purchase 100,000 shares of common stock. The warrants expire five years from
the date of issuance and have an exercise price of $5.00 per share.
WARRANTS OUTSTANDING
In August 1995, 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. As of December 31, 1997, the investors have
paid for the warrants in full. Of the total consideration, $10,000 was received
in 1997 and $274,600 was received in 1996.
(10) 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
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<PAGE>
stock were 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 at 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 1997 or 1996.
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.
A summary of stock option and warrant transactions for the years ended December
31, 1997 and 1996 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, 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
Granted 190,865 5.66 169,730 6.12
Cancelled (14,284) 7.70 - -
------- ------ ------- ------
OUTSTANDING AT DECEMBER 31, 1997 947,408 $ 6.34 789,996 $ 7.76
======= ====== ======= ======
</TABLE>
44
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At December 31, 1997, a total of 82,056 and 20,536 options were available for
future grant under the 1993 Plan and Directors Stock Option Plan, respectively.
Additionally, at December 31, 1997, 687,015 stock options and 757,497 warrants
were exercisable.
The weighted average fair value of options and warrants granted in 1997 and 1996
was $2.08 per share and $2.65 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:
1997 1996
---- ----
Exercise Price Equals Market Price
Weighted average exercise price N/A 6.04
Weighted average fair value N/A 2.79
Exercise Price Exceeds Market Price
Weighted average exercise price 6.41 7.39
Weighted average fair value 1.83 2.33
Exercise Price is Less Than Market Price
Weighted average exercise price 4.63 0.01
Weighted average fair value 2.67 7.05
The following table summarizes information about stock options and warrants
outstanding at December 31, 1997:
OPTIONS AND WARRANTS 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 45,648 7.8 $ 0.01 37,648 $ 0.01
4.25 - 5.99 347,962 5.8 5.36 173,797 5.02
6.00 - 7.99 863,923 3.8 6.46 799,299 6.46
8.00 -13.20 479,871 4.6 9.75 433,768 9.94
--------- ---------
.01 -13.20 1,737,404 4.5 6.98 1,444,512 7.16
========= =========
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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:
1997 1996
---- ----
Net loss As Reported $(2,995,347) $(6,655,609)
Pro Forma (3,336,373) (7,334,526)
Basic and diluted As Reported (0.51) (1.23)
loss per share Pro Forma (0.57) (1.36)
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 1997 and 1996: risk free interest rate of 5.7% and 6.1%, respectively;
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 37.0% and 50.2%, respectively.
In 1997 and 1996, the Company recorded selling, general and administrative
expense of $120,646 and $120,495, respectively, related to stock options granted
on various dates throughout the year to non-employees of the Company. An
additional $53,749 was capitalized as debt issuance costs during 1997
representing the value of 62,499 warrants issued in conjunction with obtaining
the bank line of credit and issuance of the convertible debenture (See Note 8).
During 1996 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). Additionally, the Company increased its
investment in NetCo Partners by $51,363 in 1997 and $102,725 in 1996 for 75,000
options granted to an outside consultant hired by NetCo Partners.
(11) INCOME TAXES:
The Company is in a loss position for both financial and tax reporting purposes.
The Company follows SFAS 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 $25,285,000 as a result of the operating losses
incurred for the period from inception (January 22, 1993) to December 31, 1997.
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 had established a valuation allowance
for the full amount of the deferred tax asset in 1996. Based primarily on the
transaction discussed in Note 15, which is expected to generate taxable income
of approximately $4.1 million, the Company has decreased the valuation allowance
by $1,407,600 in 1997. While management believes that the consummation of the
transaction and future taxable operations will be
46
<PAGE>
sufficient in order to realize the deferred tax asset, no assurance can be given
that such events will occur.
Deferred tax asset at December 31, 1997 is comprised of the following:
Deferred tax assets:
Benefit of net operating loss carry forwards $8,850,000
Other 390,000
Valuation allowance (7,832,400)
----------
Deferred tax asset $1,407,600
==========
The loss carryforwards expire as follows:
2009 $ 528,000
2010 5,065,000
2011 7,990,000
2012 6,211,000
2013 5,491,000
--------------
$ 25,285,000
==============
(12) NETCO PARTNERS:
In June 1995, the Company and C.P. Group, Inc., a company in which Tom Clancy is
a 50% 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 CLANCY'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,
ARTHUR C. CLARKE'S WORLDS OF ALEXANDER, 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.
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 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 which will remain owned 50% by the Company and 50% by C.P. Group) 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
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<PAGE>
bankruptcy, dissolution or the sale of all or substantially all its assets.
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.
Through December 31, 1997, the Company has received profit distributions from
NetCo Partners totalling $1,409,585 and pursuant to the NetCo Partners Joint
Venture Agreement, the Company has advanced approximately $58,000 to NetCo
Partners for development costs of NetCo Partners' entertainment properties. The
Company also 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.
NetCo Partners has signed several significant licensing agreements for TOM
CLANCY'S NETFORCE. These agreements include two book licensing agreements for
North American rights to a series of adult and young adult books with the
Berkley Publishing Group, an agreement with ABC for production of TOM CLANCY'S
NETFORCE as a television mini-series, a toy licensing agreement with Playmates
Toys, Inc. for a diverse line of toys to be based on TOM CLANCY'S NETFORCE, a
product placement agreement with Dodge, a division of Chrysler Corporation, for
use of Dodge vehicles in the books, an audio book agreement with Random House
Audio Publishing, and a licensing agreement with Headline Book Publishing Ltd.
for rights to publish TOM CLANCY'S NETFORCE books in the United Kingdom. Netco
Partners has also entered into a licensing agreement with HarperCollins for
publication of TAD WILLIAMS' MIRRORWORLD as an illustrated novel. These
contracts typically provide for payment of non-refundable advances to NetCo
Partners and for additional royalties based on sales of the various products at
levels in excess of the levels implicit in the non-refundable advances. NetCo
Partners recognizes revenue pursuant to these contracts when the earnings
process has been completed based on the terms of the various contracts. The
Company records its investment in NetCo Partners under the equity method of
accounting, recognizing 50% of NetCo Partners' income or loss as Equity in
Earnings of NetCo Partners. Since NetCo Partners is a partnership any income tax
payable is passed through to the partners. The revenues, gross profit and net
income of NetCo Partners for the fiscal years ended December 31, 1997 and 1996
are presented below:
1997 1996
---- ----
Revenues $6,551,470 $23,138
Gross Profit 5,477,625 (6,099)
Net Income 5,404,100 (6,099)
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<PAGE>
(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 2008. Also, certain equipment used in
the Company's operations is leased under operating leases. A schedule of fixed
operating lease commitments at December 31, 1997 are as follows:
1998 $ 1,443,889
1999 1,184,269
2000 1,081,473
2001 819,976
2002 561,141
Thereafter 1,807,535
--------------
Total $ 6,898,283
==============
The fixed operating lease commitments detailed above assume that the Company
continues the leases through their initial lease terms. Several leases for the
Company's retail mall locations contain clauses permitting and/or requiring the
Company to terminate the leases at earlier specified dates without penalty in
the event certain predetermined sales levels are not met. Rent expense,
including equipment rentals, was $1,694,381 and $1,175,443 during 1997 and 1996
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
49
<PAGE>
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, 1997
and 1996 of $218,017 and $241,611, respectively, which is included in salaries
and benefits in the accompanying consolidated statements of operations. During
1997, both Mitchell Rubenstein and Laurie Silvers waived a portion of the salary
payable to them pursuant to the terms of their employment agreements.
CONSULTING AGREEMENTS-
The Company has entered into consulting agreements, with various experts, which
expire through March 2003. Under one such consulting arrangement which expired
during 1997, four of the these consultants (two of which are Directors of the
Company) had 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 1997 and 1996, each of the four consultants received stock options
with a fair market value of $12,500 and $25,000, 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 years ended December 31, 1997 and 1996 was
$50,000 and $100,000, respectively, and is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
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 Tekno Books (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 was
reflected as "Common Stock Subject to Redemption" in the 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 Wasserstein Perella &
Co., an investment
50
<PAGE>
banker, to provide financial and strategic advisory services to the Company. As
consideration for services performed under this agreement, the Company paid 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.
(14) SUPPLEMENTAL DISCLOSURE OF NONCASH RELATED ACTIVITIES:
In 1996 the Company, in connection with the Sale-Leaseback, 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 1997 and 1996, the Company entered into capital lease transactions totaling
$1,913,661 and $158,252, respectively, for equipment.
In 1997, the Company recorded dividends on Series A and B Convertible Preferred
Stock in the amount of $155,630, of which $141,709 was paid through the issuance
of 25,737 shares of common stock and $42,850 is accrued as dividends payable.
In 1996, the Company recorded dividends on Series A and B Convertible Preferred
Stock in the amount of $106,778, of which $78,287 was paid through the issuance
of 13,762 shares of common stock and $28,929 was 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
was reclassified from "Common Stock Subject to Redemption" to $500 of common
stock and $299,500 of additional paid-in capital.
In 1997, the intrinsic value of the conversion feature of the $650,000
convertible debenture was calculated at $215,500 and recorded as additional
paid-in capital.
In 1997, a franchise fee receivable of $350,000 and deferred revenue of $350,000
were offset.
(15) SUBSEQUENT EVENT:
In March 1998, the Company, C.P. Group, and Dr. Martin H. Greenberg, CEO of
Tekno Books and a director of the Company, agreed to contribute certain assets
to a newly formed entity, Huge Entertainment LLC ("Huge Entertainment"), in
exchange for equity ownership and an aggregate of $8 million in promissory notes
from Huge Entertainment. In exchange for 51.75% of the equity of Huge
Entertainment and a promissory note in the amount of $4,140,000, the Company is
contributing (i) 100% of the intellectual properties presently owned by the
Company, (ii) the Company's 50% ownership interest in NetCo Partners, and (iii)
the Company's 51% interest in Tekno Books. In exchange for 46.05% of the equity
of Huge Entertainment and a promissory note in the amount of $3,684,000, C.P.
Group is contributing (i) its 50% ownership interst in NetCo Partners, and (ii)
two additional intellectual properties created by Tom Clancy - TOM CLANCY'S
CYBERNATION and TOM CLANCY'S TOP SECRET. In exchange for 2.20% of the equity in
Huge Entertainment and a promissory note in the amount of $176,000, Dr. Martin
H. Greenberg is contributing a
51
<PAGE>
24.5% ownership interest in Tekno Books. The formation of Huge Entertainment has
been approved by the Company's Board of Directors.
The promissory notes bear interest at the Citibank, N.A. prime rate and mature
in seven years. Any payments on the notes will be made pro rata to all note
holders. The notes provide for optional prepayment without penalty and mandatory
prepayment (except in certain limited circumstances) in the event of an initial
public offering or other issuance of equity by Huge Entertainment.
52
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
53
<PAGE>
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)...... 44 Chairman and Chief Executive Officer
Laurie S. Silvers(2)........ 46 Vice Chairman, President, and Secretary
Dr. Martin H. Greenberg..... 57 Chief Executive Officer of Tekno Books
and Director
Andrew S. Bailen............ 41 Executive Vice President and Chief
Operating Officer-Retail Division
Marci L. Yunes.............. 39 Chief Financial Officer
Harry T. Hoffman(1)(2)...... 70 Director
Dr. Lawrence Gould(1)(2).... 67 Director
E. Donald Lass.............. 60 Director
Jules L. Plangere, Jr....... 77 Director
Deborah J. Simon............ 41 Director
(1) Member of the Compensation and Stock Option Committees.
(2) Member of the Audit 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 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 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
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<PAGE>
(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 the 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 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 served as its Chairman from 1995 through 1997. Ms. Silvers has served
as a member of the executive advisory board of the School of Business of Florida
Atlantic University, 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 an invited speaker at various business symposiums, 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 since February 1993. 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 mystery genre trade journal of which the Company owns
a majority interest. Dr. Greenberg is widely regarded as the leading anthologist
in trade publishing, and has served as editor or author of more than 700 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. Dr. Greenberg is a former
Dean of Political Science at the University of Wisconsin - Green Bay.
ANDREW S. BAILEN joined the Company in February 1998 to serve as
Executive Vice President and Chief Operating Officer - Retail Division. From
1995 through 1997, Mr. Bailen was employed by Blockbuster Entertainment Group
where he held various positions including Senior Vice President - General
Merchandise Manager. From 1988 through 1994, Mr. Bailen was employed by Greenman
Brothers, Inc. Greenman Brothers owned Play World Toys, where Mr. Bailen held
various positions from 1991 through 1994, including the position of President,
and Circus World Toys, where Mr. Bailen served as Vice President from 1988
through 1990. From 1978 through 1987, Mr. Bailen held various positions at
KayBee Toy Stores, Inc. Mr. Bailen graduated from Adelphi University in 1978.
55
<PAGE>
MARCI L. YUNES joined the Company in August 1997 as its Chief Financial
Officer. From 1994 through 1997, Ms. Yunes served as Vice President and Chief
Financial Officer for Farm Stores, a 200-unit convenience store chain. From 1988
through 1994, Ms. Yunes was Vice President and Treasurer of Pueblo Xtra
International, Inc., an international supermarket and video store chain. Ms.
Yunes began her career as an auditor with Deloitte Haskins & Sells (now Deloitte
& Touche). She is a Certified Public Accountant and she holds a Masters in
Business Administration from Florida Atlantic University (1992) and a Bachelors
Degree in Accounting from the University of Florida (1979).
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., then 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 as Chairman of the Board of Point Sebago Camp Sunshine, Inc., a
not-for-profit corporation, (a respite for families with a critically ill child)
since 1985.
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 to 1991, and as President and Chief
Executive Officer of Ingram Book Company, a national book wholesaler, from 1968
to 1978.
E. DONALD LASS has served as a director of the Company since July 1993.
In October 1997, he sold his family interest in New Jersey Press, Inc., which
owned two daily newspapers in New Jersey (the ASBURY PARK PRESS, the state's
second largest newspaper, and THE HOME NEWS & TRIBUNE). Prior to the sale, Mr.
Lass served as publisher of both newspapers and, since 1991, served as President
and Chief Executive Officer of New Jersey Press, Inc. The broadcasting assets
owned by New Jersey Press, Inc. - three radio stations in New Jersey and a
television station in Orlando, Florida - were split off into a new entity named
Press Communications. Mr. Lass is an investor in the broadcasting properties and
intends to invest in additional entertainment/media properties through the Lass
Family Trust. Mr. Lass is a graduate of Lafayette College (1960) and the
Columbia University Graduate School of Journalism (1961).
JULES L. PLANGERE, JR. has served as a director of the Company since
July 1993. Mr. Plangere is the former Chairman of the Board of New Jersey Press,
Inc. and its two subsidiary companies, Asbury Park Press, Inc. and Press
Broadcasting Co. Mr. Plangere held various positions in his 50-year career,
including Production Manager from 1954 to 1974, President and General Manager
from 1974 to 1977, and Publisher and Chief Executive Officer from 1977 to 1991.
In addition, Mr. Plangere is a former member of the Board of Directors of the
New Jersey State Chamber of Commerce, a former member of the Board of Directors
of New Jersey Bell Telephone Co., the former Chairman of the Board of Trustees
of Monmouth University and a present Life Trustee, and the former President of
the New Jersey Press Association.
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
56
<PAGE>
Simon Property Group. Prior to serving as 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.
Pursuant to the Simon Stock Purchase Agreement, Tekno Simon, an
affiliate of the Simon Property Group, 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 and Series B
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, 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."
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.
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, 1997 have been complied with.
57
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table sets forth the
aggregate compensation paid in 1997, 1996 and 1995 to the Chief Executive
Officer and the President, the only executive officers of the Company whose
total annual salary and bonus during 1997 exceeded $100,000. The Chief Executive
Officer and the President are sometimes referred to herein as the "Named
Executive Officers".
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------- ------------
OTHER SHARES
ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- --------------------------- ---- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Mitchell Rubenstein, 1997 185,217 25,000 7,800(1) 37,500(2)
Chief Executive Officer 1996 208,811 25,000 7,800(1) 75,000(2)
1995 199,200 25,000 7,800(1) 72,500(2)
Laurie S. Silvers, 1997 185,217 25,000 7,800(1) 37,500(2)
President 1996 208,811 25,000 7,800(1) 75,000(2)
1995 199,200 25,000 7,800(1) 72,500(2)
</TABLE>
- ----------
(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").
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 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 $230,000 (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. During 1997 the Named Executive Officers elected to waive a portion of
their base salary.
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
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<PAGE>
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.
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, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
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 37,500 21% $5.938 10/01/07
Laurie Silvers 37,500 21% $5.938 10/01/07
</TABLE>
- ----------
(1) Represents options granted under the 1993 Plan. Such options become fully
exercisable after April 1, 1998.
59
<PAGE>
STOCK OPTIONS HELD AT END OF 1997. 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, 1997. No options were exercised
by the Named Executive Officers during the year ended December 31, 1997.
<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 111,250 73,750 $ - $ 14,044
Laurie S. Silvers 111,250 73,750 $ - $ 14,044
</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 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 to issue 49,999 shares of common stock have been issued under the
Directors Plan. The Company intends to request approval from its shareholders to
increase the number of shares reserved for issuance under the Directors Plan at
its next shareholders meeting. Pending shareholder approval, additional options
will be granted to the directors to compensate for the shortfall in the number
of options granted following their reelection as directors in 1997. 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 19, 1998,
options to purchase shares of Common Stock have been issued to the Company's
current directors under the Directors Plan as follows:
60
<PAGE>
<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
4,107 $5.13 3/2/98 3/2/03
Harry T. Hoffman 3,125 $8.00 11/1/93 11/1/03
4,762 $5.25 8/23/96 8/23/01
4,107 $5.13 3/2/98 3/2/03
E. Donald Lass 4,107 $5.13 3/2/98 3/2/03
Jules L. Plangere, Jr. 4,107 $5.13 3/2/98 3/2/03
Deborah J. Simon 4,166 $6.00 11/8/95 11/8/05
4,762 $5.25 8/23/96 8/23/01
4,107 $5.13 3/2/98 3/2/03
</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 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 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.
61
<PAGE>
As of March 19, 1998, options to purchase 983,444 shares of Common
Stock were outstanding under the 1993 Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. All
compensation decisions during 1997 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 1997.
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 19, 1998 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 Named
Executive Officers 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.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF NUMBER OF SHARES BENEFICIAL
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OWNERSHIP
- -------------------------------------------------------- ------------------ -------------
<S> <C> <C>
Mitchell Rubenstein(2).................................. 2,011,255 27.8%
Laurie S. Silvers(2).................................... 2,011,255 27.8%
Gannett Co., Inc.(3).................................... 758,229 10.8%
Tekno Simon, LLC(4)..................................... 539,961 7.4%
State of Wisconsin Investment Board...................... 400,000 5.8%
Dr. Martin H. Greenberg(5).............................. 263,762 3.8%
Harry T. Hoffman(6)..................................... 7,887 *
Dr. Lawrence Gould(6)................................... 7,887 *
Jules L. Plangere, Jr.(6)............................... 11,764 *
E. Donald Lass(6)....................................... 11,764 *
Deborah J. Simon(6)(7).................................. 8,928 *
All directors and executive officers of the Company
as a group (ten persons)(7)(8)........................ 2,326,747 31.8%
</TABLE>
- ----------
* Less than 1%
(1) Except as noted in this footnote, the address of each beneficial owner is
in care of the Company at 2255 Glades Road, Suite 237 West, Boca Raton,
Florida 33431. The business address of Gannett Co., Inc. is 1100 Wilson
Boulevard, Arlington, VA 22234. The business address of Tekno Simon, LLC
is 115 W. Washington Street, Indianapolis, Indiana 46204. The business
address of the State of Wisconsin Investment Board is P.O. Box 7842,
Madison, WI 53707.
62
<PAGE>
(2) All such shares owned by Mr. Rubenstein and Ms. Silvers are held by them
as tenants by the entirety. Includes an aggregate of 297,500 shares of
Common Stock issuable pursuant to stock options granted to Mr. Rubenstein
and Ms. Silvers that are currently exercisable or are exercisable within
60 days of the date above.
(3) Includes 100,000 shares of Common Stock issuable pursuant to currently
exercisable stock options.
(4) Includes 217,600 shares of Series A Preferred Stock and 122,846 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) 30,278 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 the shares of Common Stock, Series A Preferred Stock and
Series B Preferred Stock owned by Tekno Simon, LLC, with respect to which
Ms. Simon disclaims beneficial ownership. Tekno Simon is controlled by
Melvin Simon, Deborah J. Simon's father.
(8) Includes 376,008 shares of Common Stock issuable pursuant to options that
are currently exercisable or are exercisable within 60 days of the date
above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATION OF THE COMPANY
The Company was incorporated on January 22, 1993 by Mitchell Rubenstein
and Laurie S. Silvers, whose initial capital contribution for the 1,969,192
shares of Common Stock issued to them as tenants by the entirety was $50,000.
Mr. Rubenstein and Ms. Silvers also purchased an additional 25,000 shares of
Common Stock in the Company's initial public offering (the "IPO") for $200,000.
In 1993, the Company sold to Dr. Martin H. Greenberg, a director of the
Company, James R. Fisher and Louis Taylor, 30,881, 10,808 and 10,294 shares of
Common Stock, respectively, for aggregate purchase prices of $100,000, $35,000
and $50,000, respectively. The Company's subscription agreements with Dr.
Greenberg and Messrs. Fisher and Taylor provided that in the event the Company
issued shares in an initial public offering for less than a certain price, the
Company would issue them, for no additional consideration, a certain number of
additional shares based on the public offering price per share. Pursuant to
their respective subscription agreements, upon consummation of the IPO, the
Company issued to Dr. Greenberg and Mr. Taylor an additional 6,619 and 8,456
shares of Common Stock, respectively, and did not issue any additional shares of
Common Stock to Mr. Fisher.
The Company's subscription agreements with Mitchell Rubenstein and
Laurie S. Silvers, Dr. Martin H. Greenberg, James R. Fisher and Louis Taylor
grant each of such persons certain "piggyback" registration rights under the
Securities Act for the shares issued to them pursuant to such agreements.
Pursuant to such registration rights, each of these individuals is entitled,
subject to certain exceptions, to have all or part of their shares of the
Company's common stock included, at the Company's expense, in any registration
statement filed by the Company under the Securities Act of 1933, as amended (the
"Securities Act").
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<PAGE>
GANNETT CO., INC./ASBURY PARK PRESS
In July 1993, the Company and Asbury Park Press entered into a stock
purchase agreement pursuant to which Asbury Park Press acquired an aggregate of
400,000 shares of Common Stock for $1,250,000, $1,000,000 of which was payable
in cash installments and $250,000 of which was payable in the form of services
rendered at the Company's request anytime during the three years following the
date of the agreement. The Company has granted to Asbury Park Press certain
"piggyback" registration rights under the Securities Act for the shares of
Common Stock purchased by it from the Company.
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 (the
"Asbury Option"). The Asbury Option is exercisable until July 2000. In October
1997, Gannett Co., Inc. ("Gannett") acquired 100% of the outstanding stock of
Asbury Park Press. The Company currently has no other outstanding agreements
with Gannett, or its wholly-owned subsidiary 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 Books Acquisition at a price
64
<PAGE>
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
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 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., E. Donald Lass, Robert E. McAllan and Alfred
D. Colantoni (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. Throughout the term of these consulting
agreements, each of the consultants was an executive officer of Asbury Park
Press, and Messrs. Plangere and Lass served as directors of the Company. 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. As of the date hereof, the
consulting agreements have expired and have not been renewed by mutual agreement
of the parties.
65
<PAGE>
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 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.
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 and amended in October 1996, Tekno Simon has also invested a
total of $2,000,000. 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 $640,000 was used to acquire 122,846
shares of the Company's Series B Preferred Stock to fund the costs of developing
eight additional kiosks.
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. 5% as of the date
hereof). During the two-year period commencing on November 28, 1995, the Series
A Preferred Stock was convertible at the option of the holder into shares of
Common Stock on a one-for-one basis. This conversion option was not exercised.
The Series A Preferred Stock is redeemable at any time after November 28, 1997
at the Company's option for $7.1875 per share 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 the Series B Preferred Stock contains a
purchase price adjustment provision, based on the market price of the Common
Stock at the time of each funding. The series B Preferred stock has a stated
value of $5.21, after giving effect to the purchase price adjustment provision.
Pursuant to the Simon Stock Purchase Agreement, Tekno Simon has the
right to designate one
66
<PAGE>
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
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 mini in-line store at the Mall of America. The
Company is also a party to numerous leases with other major mall developers that
are not affiliates of Tekno Simon, as the Company is under no obligation to
enter into leases exclusively with the Simon-DeBartolo Group and other
affiliates of Tekno Simon.
LINE OF CREDIT
Pursuant to a promissory note, the Company's Chairman of the Board and
Chief Executive Officer and the Company's Vice Chairman and President extended
to the Company a $1.1 million unsecured line of credit facility providing for
interest only payments calculated at the JP Morgan Bank prime rate of interest;
prepayable at any time without penalty by the Company; and payable on demand of
the holders. The outstanding balance under this line of credit was $85,000 at
December 31, 1997 and $913,500 at March 19, 1998.
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.
67
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
<TABLE>
<CAPTION>
PAGE NUMBER OR
INCORPORATED BY
EXHIBIT DESCRIPTION REFERENCE FROM
- ------- ----------- --------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (8)
3.2 Bylaws (2)
4.1 Form of Common Stock Certificate (2)
4.2 Rights Agreement dated as of August 23, 1996 between the Company and (3)
American Stock Transfer & Trust Company, as Rights Agent
10.1 Executive Compensation Plans and Arrangements
(a) Employment Agreement between the Company and Mitchell Rubenstein (1)(2)
(b) Employment Agreement between the Company and Laurie S. Silvers (1)(2)
(c) 1993 Stock Option Plan (1)(2)
(d) Directors Stock Option Plan (1)(2)
(e) Promissory Note dated March 18, 1997 between the Company as (9)
borrower and Mitchell Rubenstein and Laurie S. Silvers as lenders.
10.2 Form of Indemnification Agreement between the Company and each of its (1)(2)
Directors and Officers
10.3 Consulting Agreement dated February 7, 1993, between the Company and (2)
Dr. Martin H. Greenberg, and Amendment dated as of July 14, 1993
10.4 Form of Consulting Agreement between the Company and each of Jules L. (1)(2)
Plangere, Jr., E. Donald Lass, Robert E. McAllan and Alfred D. Colantoni
68
<PAGE>
10.5 Sublease and Assignment Agreement dated June 1, 1993, between Titan I (2)
Corp. and the Company
10.6 Form of Agreement between the Company and authors (2)
10.7 Amendment No. 2 to Consulting Agreement, between the Company and (1)(4)
Martin H. Greenberg
10.8 Agreement dated April 24, 1995 with Warner Books (5)
10.9 Agreement dated April 27, 1995 with Miramax Films (5)
10.10 Netco Partners Joint Venture Agreement dated June 29, 1995 with C.P. (5)
Group, Inc.
10.11 Preferred Stock Purchase Agreement dated November 8, 1995 between the (6)
Company and Tekno Simon LLC
10.12 Registration Rights Agreement dated November 8, 1995 with Tekno Simon, (6)
LLC
10.13 Voting Agreement dated November 8, 1995 with Tekno Simon, LLC (6)
10.14 Franchise Agreement with Martin Ergas (7)
10.15 Amendment to Franchise Agreement with Martin Ergas *
10.16 Master Equipment Lease Agreement with Financing for Science (7)
International, Inc.
10.17 Agreement dated February 22, 1996 with Alliance Communications (7)
10.18 Amendment dated as of October 15, 1996 to Preferred Stock Purchase (8)
Agreement dated November 8, 1995
10.19 Preferred Stock Purchase Agreement dated as of December 20, 1996 between (8)
the Company and Auric Partners Limited
10.20 Promissory Note dated March 18, 1997 between the Company as borrower and (9)
Mitchell Rubenstein and Laurie S. Silvers as Lender
10.21 Master Agreement of Terms and Conditions for Lease dated as of November *
13, 1997 between TLP Leasing Programs, Inc. and
69
<PAGE>
Big Entertainment, Inc.
10.22 Master Equipment Lease Agreement No. 0039 Dated October 20, 1997 between *
Big Entertainment, Inc. and Phoenix Leasing Incorporated.
10.23 Loan and Security Agreement dated as of December 30, 1997 between (10)
BankBoston Retail Finance Inc. and Tekno Comix, Inc.
10.24 Master Note dated December 30, 1997 between Tekno Comix, Inc., as (10)
Borrower, and BankBoston Retail Finance Inc., as Lender
10.25 Unlimited Guaranty dated December 30, 1997 between Big Entertainment, (10)
Inc. and BankBoston Retail Finance Inc.
10.26 First Amendment to Preferred Stock Purchase Agreement dated as of *
February 17, 1998 between the Company and Auric Partners Limited.
21.1 Subsidiaries of the Company. *
23.1 Consent of Arthur Andersen LLP. *
27.1 Financial Data Schedule (for SEC use only). *
</TABLE>
- ----------
* 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).
(8) Incorporated by reference from the exhibit filed with the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
(9) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB/A for the quarter ended September 30, 1997.
70
<PAGE>
(10) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form S-3 (No. 333-38219).
(B) REPORTS ON FORM 8-K:
None
71
<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 31, 1998 By:/S/ MITCHELL RUBENSTEIN
--------------------------------------------
Mitchell Rubenstein, Chairman of the Board and
Chief Executive Officer (Principal executive
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 31, 1998 /S/ MITCHELL RUBENSTEIN
-----------------------------------------------
Mitchell Rubenstein, Chairman of the Board and
Chief Executive Officer
Date: March 31, 1998 /S/ MARCI L. YUNES
-----------------------------------------------
Marci L. Yunes, Chief Financial Officer
(Principal financial and accounting officer)
Date: March 31, 1998 /S/ LAURIE S. SILVERS
-----------------------------------------------
Laurie S. Silvers, Vice Chairman of the Board,
President and Secretary
Date: March 31, 1998 /S/ MARTIN H. GREENBERG
-----------------------------------------------
Martin H. Greenberg, Director
Date: March 31, 1998 /S/ HARRY T. HOFFMAN
-----------------------------------------------
Harry T. Hoffman, Director
Date: March 31, 1998 /S/LAWRENCE GOULD
-----------------------------------------------
Lawrence Gould, Director
Date: March 31, 1998 /S/ JULES L. PLANGERE, JR.
-----------------------------------------------
Jules L. Plangere, Jr., Director
Date: March 31, 1998 /S/ E. DONALD LASS
-----------------------------------------------
E. Donald Lass, Director
Date: March 31, 1998 /S/ DEBORAH J. SIMON
-----------------------------------------------
Deborah J. Simon, Director
72
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
10.15 Amendment to Franchise Agreement with Martin Ergas
10.21 Master Agreement of Terms and Conditions for Lease dated as of
November 13, 1997 between TLP Leasing Programs, Inc.
10.22 Master Equipment Lease Agreement No. 0039 dated October 20,
1997 between Big Entertainment, Inc. and Phoenix Leasing
Incorporated.
10.26 First Amendment to Preferred Stock Purchase Agreement dated as
of February 17, 1998 between the Company and Auric Partners
Limited.
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
73
EXHIBIT 10.15
[BIG ENTERTAINMENT LETTERHEAD]
MEMORANDUM
Via FAX 305-854-8601
TO: Marty Ergas
FROM: Mitchell Rubenstein
RE: Franchise Agreement
DATE AS OF: December 15, 1997
- --------------------------------------------------------------------------------
BACKGROUND:
There is an existing franchise agreement providing for you to have the
exclusive right to open (or license others to open) Super-Kiosks in
Canada in return for certain payments ($700,00 for the rights).
However, the agreement has not been fully effectuated and the payment
has not been made. As discussed, you were awaiting additional
information on our franchise plans for the U.S. in order to have that
information for the development of a chain of these kiosk units in
Canada. In the meantime, we also entered into a franchise agreement for
Super-Kiosks in the Philadelphia, PA area. Also, in October and
November 1997, we opened three prototype Studio Stores in in-line
locations in malls in New Jersey. This was an expansion of our kiosk
concept. Each in-line store averages about 3,000 sq. ft. compared to
166 sq. ft. for a kiosk, so the opportunities for carrying a wider
range of merchandise and more styles and sizes is greatly enhanced with
the new in-line studio store. In attendance at these openings was the
francisee for the Philadelphia market. Upon seeing the new prototypes
and discussing the matter with us, we agreed to convert his agreement
from one covering kiosks to in-line units in order to maximize the
potential opportunity.
PROPOSAL:
As a result of the launch of the in-line studio stores and the
conversion of our first U.S.-based franshisee from kiosks to in-line
studio stores, we would like to extend that same opportunity to you.
<PAGE>
Mr. Martin Ergas
December 15, 1997
Page 2
I am proposing the following:
1. Studio Stores: The type of unit is changed from kiosks to in-line
studio store units.
2. Area: Change from Canadian territory to the Phoenix, Arizona market
area.
3. Pricing: Reduce from $700,000 to $350,000 the territorial exclusivity
fee, payable one-third (1/3) now; and two-thirds (2/3) within 120 days.
4. Roll-out commitment: At least one (1) unit to be opened by December 31,
1999; at least one (1) unit annualy thereafter.
5. Big's obligations to you: None. It is agreed that Big will not be
providing any training program or materials.
6. Ongoing Royalty Fees due Big: Same as set forth in our original
agreement.
7. Option: At the option of Big, exercisable at anytime by Big on or
before December 31, 1998, and provided no unit is open hereunder at the
time of this exercise, you will transfer your territorial rights
hereunder back to Big in return for 100,000 shares of BIGE common
stock, which stock shall be registered on or before the earlier of (a)
December 31, 1998, or (b) six months from the date of such exercise.
Such exercise shall not affect the financial obligation set forth in
Paragraph 3 above. In the case Big exercises this option, then the
term of your pre-existing option to acquire shares of BIGE common stock
will be extended by one (1) year.
Please sign where indicated below your approval to this amendment to
our arrangement.
Agreed:
Big Entertainment, Inc.
/S/ MITCHELL RUBENSTEIN, AS C.E.O.
----------------------------------
Mitchell Rubenstein
/S/ MARTIN ERGAS
-----------------------------------
Martin Ergas
EXHIBIT 10.21
Master Agreement No. 673
MASTER AGREEMENT OF TERMS AND CONDITIONS FOR LEASE
MASTER AGREEMENT OF TERMS AND CONDITIONS FOR LEASE MADE AS OF NOVEMBER 13,
1997, BETWEEN TLP LEASING PROGRAMS, INC. HAVING ITS CHIEF EXECUTIVE OFFICES AT
ONE FINANCIAL CENTER, 21ST FLOOR, BOSTON, MA 02111 ("LESSOR") AND BIG
ENTERTAINMENT, INC., A FLORIDA CORPORATION HAVING ITS CHIEF EXECUTIVE OFFICES
AT 2255 GLADES ROAD, #237W, BOCA RATON, FL 33431 ("LESSEE") ("MASTER
AGREEMENT").
1. LEASE
On the terms and conditions of this Master Agreement, Lessor shall lease to
Lessee, and Lessee shall hire from Lessor, the units of personal property which
shall include software (collectively the "Equipment" and individually a "Unit"
or "Item") described in the Schedule(s) which shall incorporate this Master
Agreement. Each Schedule shall constitute a separate, and independent lease and
contractual obligation of Lessee. The term "Lease" shall refer to an individual
Schedule which incorporates this Master Agreement of Terms and Conditions for
Lease. In the event of any inconsistency or conflict between the terms and
provisions of this Master Agreement and the terms and provisions of the
Equipment Schedule, the terms and provisions of the Equipment Schedule shall
prevail. Until a Lease is duly executed by Lessor, a Lease signed by Lessee
constitutes an irrevocable offer by Lessee to lease from Lessor.
2. TERM
a. The Lease shall be comprised of an Acceptance Date and a Base Term. The
Acceptance Date shall commence on the date of installation ("Acceptance Date")
and terminate on the first day of the month following the Acceptance Date. The
first day of the month following the Acceptance Date shall be known as the Base
Term Commencement Date. The Base Term of the Lease shall begin on the Base Term
Commencement Date, and may, as provided in Subsection 2 (b), terminate on the
last day of the last month of the Base Term.
b. A Lease may be terminated as of the last day of the last month of the Base
Term or later, by written notice given by either Lessor or Lessee not less than
six months prior to the date of termination designated in such notice, which
date shall be the last day of a calendar month. If the Lease is not so
terminated at the end of the Base Term and other rental amounts are not
specified in the Schedule or mutually agreed in writing, the Base Monthly Rental
shall continue to be due and payable by Lessee. Any notice of termination may
not be revoked without the written consent of the other party. Lessor shall have
the opportunity to submit or match the last proposal for the financing of any
equipment which is replacing Equipment leased pursuant to a Lease.
3. RENTAL
a. The rental amount payable to Lessor by Lessee for each Item will be on the
Schedule. As rent for Equipment, Lessee shall pay Lessor in immediately
available funds and in advance (i) on the Base Term Commencement Date and on the
first day of each month during the Base Term of the Lease the Base Monthly
Rental, per month, and (ii) on the Installation Date an amount equal to 1/30th
of the Base Monthly Rental for each Item times the number of days which will
elapse from the Installation Date of such Item to the Base Term Commencement
Date of the Lease. Each remittance from Lessee to Lessor shall contain
information as to the Lease for which payment is made.
b. Any payment due under a Lease which is past due for more than five (5) days
shall be immediately payable with interest computed from the day payment was due
at the rate of 2.0% per month, or if such rate shall exceed the maximum rate of
interest allowed by law, then at such maximum rate.
4. TAXES
The Lessee agrees (i) to pay any and all taxes, assessments and other
governmental charges of whatever kind or character and by whomever payable on or
relating to each Item of Equipment and on the sale, ownership, use, shipment,
transportation, delivery or operation thereof or the exercise of any option,
election or performance of an obligation by the Lessee or Lessor under a Lease,
including any penalties or interest thereon, which are levied, assessed or
imposed during the Base Term, (ii) to pay all taxes, assessments and charges of
the kind above referred to, including any penalties or interest thereon, which
remain unpaid as of the date of delivery of such Item of Equipment to the Lessee
irrespective of when the same may have been levied, assessed or imposed and
(iii) to pay all taxes or like charges levied, assessed or imposed on or
measured by the rents or other sums payable under such Lease, including any
penalties or interest thereon, whether such taxes are payable by the Lessor or
the Lessee. The foregoing obligations of Lessee shall include preparation and
submission of all required Personal Property Tax filings to the applicable
taxing authorities for any assessment date falling within the term of this
Lease, or extension thereof, whether such Personal Property Tax Filings shall
be, under applicable law, the obligation of the Lessor or Lessee, and Lessor
hereby appoints Lessee its agent and attorney-in-fact for the purpose of making
such filings on behalf of Lessor. Lessor agrees to cooperate fully with Lessee
by executing any documents prepared by Lessee for filing (where the taxing
authority will not accept Lessee's appointment as agent for Lessor) and
forwarding promptly to Lessee any assessments, tax bills or other correspondence
received in connection therewith.
This Section 4 shall not be deemed to obligate the Lessee to pay (i) any taxes,
fees, assessments and charges which may have been included in the cost of each
Item of Equipment as set forth in the Schedule, or (ii) any taxes, fees or other
charges based on or measured by net income incurred as the result (whether
solely or in part) of business or transactions unrelated to the applicable
Lease, or (iii) any income, franchise and like taxes against the Lessor on or
measured by the net income from the rents; provided, however, that the Lessee
agrees to pay any such taxes on or measured by rents payable hereunder or the
net income therefrom which are in substitution for or relieve the Lessee from
any tax which the Lessee would otherwise be obligated to pay under the terms of
this Section.
The Lessee shall not be obligated to pay any amount under this Section 4 so long
as it shall, in good faith and by appropriate proceedings, be contesting the
validity or the amount thereof unless such contest would adversely affect the
title of the Lessor to an Item of Equipment or would subject it to forfeiture or
sale. The Lessee agrees to indemnify and defend the Lessor against any loss,
claim, demand or expense including any reasonable legal expense resulting from
such non-payment or contest.
Page 1 of 7
<PAGE>
Master Agreement No. 673
The obligations and liabilities of the Lessee under this Section 4 which arise
during the Base Term shall continue in full force and effect notwithstanding the
termination of the Lease or the termination of the term thereof whether by
expiration of time, by operation of law or otherwise unless and until expressly
released by the Lessor.
5. NET LEASE
The Lease is a net lease, it being the intention of the parties that all costs,
expenses and liabilities associated with the Equipment or its lease or purchase
shall be borne by Lessee unless expressly agreed to the contrary in the Lease.
Lessee's agreement to pay all obligations under the Lease, including but not
limited to rent, is absolute and unconditional and such agreement is for the
benefit of Lessor its successors and assigns. Lessee's obligations shall not be
subject to any abatement, deferment, reduction, setoff, defense, counterclaim or
recoupment for any reason whatsoever. Except as may be otherwise expressly
provided in the Lease, it shall not terminate, nor shall the obligations of
Lessee be affected, by reason of any defect in or damage to, or any loss or
destruction of, or obsolescence of, the Equipment or any Unit from any cause
whatsoever, or the interference with the use by any private person, corporation
or governmental authority, or as a result of any war, riot, insurrection or Act
of God. It is the express intention of Lessor and Lessee that all rent and other
sums payable by Lessee under the Lease shall be, and continue to be, payable in
all events throughout the term of the Lease. The Lease shall be binding upon the
Lessee, its successors and assigns and shall inure to the benefit of Lessor, its
successors and assignees. All references to Lessor shall include the Lessor's
successors and assigns.
6. INSTALLATION, RETURN, AND USE OF EQUIPMENT
a. Upon delivery of the Equipment to Lessee, Lessee shall pay all
transportation, installation, rigging, packing and insurance charges with
respect to the Equipment. In the case of a sale and leaseback transaction,
Lessee shall, upon the request of Lessor, certify the date the Equipment was
first put into use. Lessee will provide the required electric current and a
suitable place of installation for the Equipment with all appropriate facilities
as specified by the manufacturer. No cards, tapes, disks, data cells or other
input/output and storage media may be used by Lessee to operate any Unit unless
it meets the specifications of the manufacturer. If applicable, Lessee agrees
that it will not install, or permit the installation of, the Equipment without
Lessor's consent. Such consent and all consents required to be obtained in the
Lease shall be requested in writing, setting forth such facts as Lessor may
reasonably require and such consent and all consents of Lessor shall not be
unreasonably withheld.
b. Lessee shall, at all times during the term of the Lease, be entitled to
unlimited use of the Equipment. Lessee will at all times keep the Equipment in
its sole possession and control. The Equipment shall not be moved from the
location stated in the Schedule without the prior written consent of Lessor and
in no event shall the Equipment be moved outside the United States. Any time
during the term of the Lease and upon the written request of Lessor, Lessee
shall at Lessee's expense certify to Lessor (i) the location of the Equipment,
(ii) the serial numbers, features, additions to or other characteristics of the
Equipment and (iii) the eligibility of the Equipment for the manufacturer of the
Equipment's standard maintenance contract. Lessee will comply with all laws,
regulations, and ordinances, and all applicable requirements of the manufacturer
of the Equipment which apply to the physical possession, use, operation,
condition, and maintenance of the Equipment. Lessee agrees to obtain all permits
and licenses necessary for the operation of the Equipment.
c. Lessee shall not, without the prior written consent of Lessor, affix or
install any accessory, feature, equipment or device to the Equipment or make any
improvement, upgrade, modification, alteration or addition to the Equipment (any
such accessory, feature, equipment, device or improvement, upgrade,
modification, alteration or addition affixed or installed is an "Improvement").
Title to all Improvements shall, without further act, upon the making, affixing
or installing of such Improvement, vest in Lessor, except such Improvements as
may be readily removed without causing material damage to the Equipment and
without in any way affecting or impairing the originally intended function,
value or use of the Equipment. Removal of the Improvement shall be performed by
the manufacturer, at the sole expense of Lessee. Provided the Equipment is
returned to Lessor in the condition required by the Lease, including, but not
limited to, coverage under the manufacturer's standard maintenance contract,
title to the Improvement shall vest in the Lessee upon removal. Any Improvement
not removed from the Equipment prior to return shall remain the property of
Lessor and shall be certified for maintenance by the manufacturer, at Lessee's
expense.
Lessee shall notify Lessor in writing no less than 60 days prior to the
anticipated installation date of the type of Improvement Lessee desires to
obtain. Lessor may, at any time within 30 days after receipt of the notice offer
to provide the Improvement to Lessee upon terms and conditions to be agreed
upon. Lessee shall notify Lessor of any third party offers and shall lease the
Improvement from Lessor, if Lessor meets the terms of the third party offer.
Any new Improvement shall not be placed in service by Lessee prior to
acquisition by Lessor. Lessee shall execute and deliver any document necessary
to vest title to such Improvement in Lessor.
During the Lease term and any renewal term, Lessee shall cause all Improvements
to be maintained, at Lessee's expense, in accordance with the requirements of
Section 7. Unless otherwise agreed to by Lessor, upon the expiration or earlier
termination of the Lease term, any Improvement shall be de-installed and removed
from the Equipment by the manufacturer, at Lessee's expense. If the Improvement
is removed, the Equipment shall be restored to its unmodified condition and
shall be certified for maintenance by the manufacturer, at Lessee's expense.
In the event an Improvement is provided to Lessee by a party other than Lessor,
Lessee shall cause such party to execute and deliver to Lessor such documents as
shall be required by Lessor to protect the interests of Lessor and any Assignee
in the Equipment, this Master Agreement and any Schedule.
d. Lessee shall, at the termination of the Lease, at its expense, de-install,
pack and return the Equipment to Lessor at such location within the continental
United States as shall be designated by Lessor in the same operating order,
repair, condition and appearance as of the Installation Date, reasonable wear
and tear excepted, with all current engineering changes prescribed by the
manufacturer of the Equipment or a maintenance contractor approved by Lessor
(the "Maintenance Organization") incorporated in the Equipment. Until the return
of the Equipment to Lessor, Lessee shall be obligated to pay the Base Monthly
Rental and all other sums due under the Lease. Upon redelivery to Lessor, Lessee
shall arrange and pay for such repairs (if any) as are necessary for the
manufacturer of the
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Master Agreement No. 673
Equipment or Maintenance Organization to accept the Equipment under a
maintenance contract at its then standard rates.
7. MAINTENANCE AND REPAIRS
If applicable, Lessee shall, during the term of the Lease, maintain in full
force and effect a contract with the manufacturer of the Equipment or
Maintenance Organization covering at least prime shift maintenance of the
Equipment. If applicable, Lessee upon request shall furnish Lessor with a copy
of such maintenance contract as amended or supplemented. During the term of the
Lease, Lessee shall, at its expense, keep the Equipment in good working order,
repair, appearance and condition and make all necessary adjustments, repairs and
replacements, all of which shall become the property of Lessor. Lessee shall not
use or permit the use of the Equipment for any purpose for which, in the opinion
of the manufacturer of the Equipment or Maintenance Organization, the Equipment
is not designed or intended.
8. OWNERSHIP, LIENS AND INSPECTIONS
a. Lessee shall keep the Equipment free from any marking or labeling which might
be interpreted as a claim of ownership by Lessee or any party other than Lessor,
its successors and assigns and shall affix and maintain tags, decals or plates
furnished by Lessor to the Equipment indicating ownership and title to the
Equipment in Lessor (or its successors or assigns). Upon reasonable notice to
Lessee, Lessor or its agents shall have access to the Equipment and Lessee's
books and records with respect to the Lease and the Equipment at reasonable
times for the purpose of inspection and for any other purposes contemplated by
the Lease, subject to the reasonable security requirements of Lessee.
b. Lessee shall execute and deliver such instruments, including Uniform
Commercial Code financing statements, as are required to be filed to evidence
the interest of Lessor, its successors and assigns in the Equipment or the
Lease. Lessee has no interest in the Equipment except as expressly set forth in
the Lease, and that interest is a lease-hold interest. Lessor and Lessee agree,
and Lessee represents for the benefit of Lessor, its successors and assigns,
that the Lease is intended to be a "finance lease" and not a "lease intended as
security" as those terms are used in the Uniform Commercial Code; and that the
Lease is intended to be a "true lease" as the term is commonly used under the
Internal Revenue Code of 1986, as amended.
c. LESSEE SHALL KEEP THE LEASE, THE EQUIPMENT AND ANY IMPROVEMENTS FREE AND
CLEAR OF ALL LIENS AND ENCUMBRANCES AND LESSEE SHALL NOT ASSIGN THE LEASE OR ANY
OF ITS RIGHTS UNDER THE LEASE OR SUBLEASE ANY OF THE EQUIPMENT OR GRANT ANY
RIGHTS TO THE EQUIPMENT WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. No
permitted assignment or sublease shall relieve Lessee of any of its obligations
under the Lease and Lessee agrees to pay all costs and expenses Lessor may incur
in connection with such sublease or assignment. Lessee grants to Lessor the
right of first refusal on any sublease or grant of Lessee's rights to the
Equipment.
9. DISCLAIMER OF WARRANTIES
a. LESSOR LEASES THE EQUIPMENT "AS IS", AND BEING NEITHER THE MANUFACTURER OF
THE EQUIPMENT NOR THE AGENT OF EITHER THE MANUFACTURER OR SELLER, LESSOR
DISCLAIMS ANY REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WITH
RESPECT TO THE CONDITION OR PERFORMANCE OF THE EQUIPMENT, ITS MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR WITH RESPECT TO PATENT INFRINGEMENTS OR THE
LIKE. LESSOR SHALL HAVE NO LIABILITY TO LESSEE FOR ANY CLAIM, LOSS OR DAMAGE OF
ANY KIND OR NATURE WHATSOEVER INCLUDING THE ACTIVE OR PASSIVE NEGLIGENCE OR
STRICT LIABILITY OF LESSOR, NOR SHALL THERE BE ANY ABATEMENT OF RENTAL FOR ANY
REASON INCLUDING CLAIMS ARISING OUT OF OR IN CONNECTION WITH (i) THE DEFICIENCY
OR INADEQUACY OF THE EQUIPMENT FOR ANY PURPOSE, WHETHER OR NOT KNOWN OR
DISCLOSED TO LESSOR, (ii) ANY DEFICIENCY OR DEFECT IN THE EQUIPMENT, (iii) THE
USE OR PERFORMANCE OF THE EQUIPMENT, OR (iv) ANY LOSS OF BUSINESS OR OTHER
CONSEQUENTIAL LOSS OR DAMAGE RESULTING FROM ANY OF THE FOREGOING.
b. For the term of the Lease, Lessor assigns to Lessee (to the extent possible),
and Lessee may have the benefit of, any and all manufacturer's warranties,
service agreements and patent indemnities, if any, with respect to the
Equipment; provided, however, that Lessee's sole remedy for the breach of any
such warranty, indemnification or service agreement shall be against the
manufacturer of the Equipment and not against Lessor, nor shall any such breach
have any effect whatsoever on the rights and obligations of Lessor or Lessee
with respect to the Lease.
10. ASSIGNMENT
a. Lessee acknowledges and understands that Lessor may assign to a successor,
lender or purchaser (the "Assignee"), all or any part of the Lessor's right,
title and interest in and to the Lease and the Equipment and Lessee consents to
such assignment. In the event Lessor transfers or assigns, or retransfers or
reassigns, to an Assignee all or part of Lessor's interest in the Lease, the
Equipment or any sums payable under the Lease, whether as collateral security
for loans or advances made or to be made to Lessor by such Assignee or
otherwise, Lessee covenants that, upon receipt of notice of any such transfer or
assignment and instructions from Lessor, (i) Lessee shall, if so instructed, pay
and perform its obligations under the Lease to the Assignee (or to any other
party designated by Assignee), and shall not assign the Lease or any of its
rights under the Lease or permit the Lease to be amended, modified or terminated
without the prior written consent of Assignee. (ii) Lessee's obligations under
the Lease with respect to Assignee shall be absolute and unconditional and not
be subject to any abatement, reduction, recoupment, defense, offset or
counterclaim for any reason, alleged or proven, including, but not limited to,
defect in the Equipment, the condition, design, operation or fitness for use of
the Equipment or any loss or destruction or obsolescence of the Equipment or any
part, the prohibition of or other restrictions against Lessee's use of the
Equipment, the interference with such use by any person or entity, any failure
by Lessor to perform any of its obligations contained in the Lease, any
insolvency or bankruptcy of Lessor, or for any other cause, (iii) Lessee shall,
upon request of Lessor, submit such documents and certificates as may be
reasonably required by Assignee to secure and complete such transfer or
assignment, including but not limited to the documents set forth in Section
15(c) of this Master Agreement. (iv) Lessee shall deliver to Assignee copies of
any notices which are required under the Lease to be sent to Lessor; and (v)
Lessee shall, if requested, restate to Assignee the representations, warranties
and covenants contained in the Lease (upon which Lessee acknowledges Assignee
may rely) and shall make such other representations, warranties and covenants to
Assignee as may be reasonably required to give effect to the assignment.
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Master Agreement No. 673
b. Lessor shall not make an assignment or transfer to any Assignee who shall not
agree that, so long as Lessee is not in default under the Lease, including but
not limited to a default in the payment of rent to Assignee pursuant to a notice
of assignment, such Assignee shall take no action to interfere with Lessee's
quiet enjoyment and use of the Equipment in accordance with the terms of the
Lease. No such assignment or conveyance shall relieve Lessor of its obligations
under the Lease and Lessee agrees it shall not look to any Assignee to perform
any of Lessor's obligations under the Lease.
11. QUIET ENJOYMENT
Lessor covenants that so long as Lessee is not in default under a Lease Lessee
will quietly possess the Equipment subject to and in accordance with the
provisions of the Lease.
12. INDEMNIFICATION
Lessee shall and does agree to indemnify, protect, save and keep harmless
Lessor, its agents, successors and assigns, from and against any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs, or expenses (including legal fees and expenses) of any kind and nature
whatsoever which may be imposed upon, incurred by or asserted against Lessor or
its respective agents, successors, or assigns, in any way relating to or arising
out of the Lease, the manufacture, purchase, acceptance, rejection, return,
ownership, lease, disposition, installation, delivery, possession, use,
condition, operation, or accident in connection with the Equipment (including,
without limitation, those claims based on latent and other defects, whether or
not discoverable, or claims based on strict liability, or any claim for patent,
trademark or copyright infringement). Lessor's rights arising from this Section
shall survive the expiration or other termination of the Lease.
13. RISK OF LOSS
a. Unless otherwise provided for in the Schedule, Lessee assumes and shall bear
the entire risk of loss and damage, whether or not insured against, of the
Equipment from any and every cause whatsoever as of the date the Equipment is
delivered to Lessee.
b. In the event of loss or damage of any kind to any Item, Lessee shall use all
reasonable efforts to place the Item in good repair, condition and working order
to the reasonable satisfaction of Lessor within 90 days of such loss or damage,
unless the manufacturer of the Equipment determines that such Item has been
irreparably damaged, in which case Lessee shall, within 10 days of the
manufacturer's determination of irreparable loss, make its election to either
pay Lessor the Stipulated Loss Value (as set forth in Attachment A to this
Master Agreement) for the irreparably damaged Item or replace the irreparably
damaged Item, all as provided in this Section. To the extent that the Item is
damaged but not irreparably damaged and if Lessee is entitled, pursuant to the
insurance coverage, to obtain proceeds from such insurance for the repair of the
Item, Lessee may arrange for the disbursement of such proceeds to pay the cost
of repair.
c. In the event that Lessee elects to pay Lessor the Stipulated Loss Value for
the irreparably damaged Item, Lessee shall (i) pay such amount (computed as of
the first day of the month following the determination of the irreparable damage
by the manufacturer) to Lessor on the first day of the month following the
election by Lessee as provided in (b) above, (ii) pay all Base Monthly Rental
for the Equipment up to the date that the Stipulated Loss Value is paid to
Lessor; and (iii) arrange, with the consent of Lessor, for the disposition of
the irreparably damaged Item with the insurance company paying the Lessee or
Lessor the proceeds relating to the irreparably damaged Item. If not all the
Equipment is irreparably damaged, the original list price of the irreparably
damaged Item shall be multiplied by the applicable percentage set forth in Annex
A to compute the Stipulated Loss Value for such irreparably damaged Item, and
the Base Monthly Rental for the undamaged Equipment remaining due (after payment
of the Stipulated Loss Value for the irreparably damaged Item) shall be that
amount resulting from multiplying the original Base Monthly Rental by the ratio
of the original list price of the undamaged Equipment divided by the original
list price for all the Equipment prior to the damage.
d. If Lessee elects to replace the irreparably damaged Item, Lessee shall
continue all payments under the Lease without interruption, as if no such
damage, loss or destruction had occurred, and shall replace such irreparably
damaged Item, paying all such costs associated with the replacement. Lessee
shall within 20 days following the date of determination of irreparable damage
by the manufacturer, effect the replacement by replacing the irreparably damaged
Item with replacement equipment so that Lessor has good and valid title to such
replacement equipment. The "Replacement Item" or "Replacement Equipment" shall
have a fair market value at the time of such replacement equal to the then fair
market value of the Equipment or Items thereof for which replacement is made,
and anticipated to have a fair market value at the expiration of the Base Term
equal to the fair market value which the Equipment or Items for which
replacement is made would have had at the end of the Base Term, and (i) be the
same type and of at least equal capacity to the Equipment for which the
replacement is being made. Upon delivery, such Replacement Equipment shall
become subject to all of the terms and conditions of the Lease. Lessee shall
execute all such documents necessary to effect the foregoing.
e. For the purpose of the Lease, the term "fair market value" shall mean the
price that would be obtained in an arm's-length transaction between an informed
and willing buyer-user under no compulsion to buy or lease and an informed and
willing seller-lessor under no compulsion to sell or lease. If Lessor and Lessee
are unable to agree upon fair market value, such value shall be determined, at
Lessee's expense, in accordance with the foregoing definition, by three
independent appraisers, one to be appointed by Lessee, one to be appointed by
Lessor and the third to be appointed by the first two.
14. INSURANCE
During the term of the Lease, Lessee, at its own expense, shall maintain in
regard to the Equipment all risk and comprehensive public liability insurance in
amounts and with carriers reasonably satisfactory to Lessor. Any such insurance
shall name Lessor and the Assignee as additional insureds and, as for the all
risk insurance, loss payees as their interest may appear. All such insurance
shall provide that it may not be terminated, canceled or altered without at
least 30 days' prior written notice to Lessor and its successors and assigns.
Coverage afforded to Lessor shall not be rescinded, impaired, or invalidated by
any act or neglect of Lessee. Lessee agrees to supply to Lessor, upon request,
evidence of such insurance.
15. REPRESENTATIONS AND WARRANTIES OF LESSEE, FINANCIAL STATEMENTS
a. Lessee represents and warrants to Lessor and its successors and assigns (i)
that the execution, delivery and performance of this Master Agreement and the
Lease was duly authorized and that upon execution of this Master Agreement and
the Lease by Lessee and
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<PAGE>
Master Agreement No. 673
Lessor, the Master Agreement and the Lease will be in full force and effect and
constitute a valid legal and binding obligation of Lessee, and enforceable
against Lessee in accordance with their respective terms; (ii) the Equipment
subject to the Lease is accurately described in the Lease and all documents of
Lessee relating to the Lease; (iii) that Lessee is in good standing in the
jurisdiction of its incorporation and in any jurisdiction in which any of the
Equipment is located; (iv) that no consent or approval of, giving of notice to,
registration with, or taking of any other action in respect of, any state,
federal or other government authority or agency is required with respect to the
execution, delivery and performance by the Lessee of this Master Agreement or
the Lease or, if any such approval, notice, registration or action is required,
it has been obtained; (v) that the entering into and performance of this Master
Agreement and the Lease will not violate any judgment, order, law or regulation
applicable to Lessee or any provision of Lessee's Articles of Incorporation or
By-Laws or result in any breach of, or constitute a default under, or result in
the creation of any lien, charge, security interest or other encumbrance upon
any assets of Lessee or upon the Equipment pursuant to any instrument to which
Lessee is a party or by which it or its property may be bound; (vi) there are no
actions, suits or proceedings pending, or to the knowledge of Lessee,
threatened, before any court or administrative agency, arbitrator or
governmental body which will, if determined adversely to Lessee, materially
adversely affect its ability to perform its obligations under the Lease or any
related agreement to which it is a party; (vii) that aside from the Master
Agreement, the Lease and the Warrant Agreement there are no additional
agreements between Lessee and Lessor relating to the Equipment; and (viii) that
any and all financial statements and other information with respect to Lessee
supplied to Lessor at the time of execution of the Lease and any amendments, are
true and complete. The foregoing representations and warranties shall survive
the execution and delivery of the Lease and any amendments hereto and shall upon
the written request of Lessor, be made to Lessor's successors and assigns.
b. Prior to and during the term of the Lease, Lessee will furnish Lessor, when
reasonably available, with Lessee's audited financial statements. If Lessee is a
subsidiary of another company, Lessee shall supply such company's financial
statements and guarantees as are reasonably acceptable to Lessor. For income tax
purposes, Lessor and Lessee agree to treat the Schedule(s) as finance leases.
Lessee shall also provide Lessor with such other statements concerning the Lease
and the condition of the Equipment as Lessor may from time to time request.
c. Upon Lessor's request, Lessee shall, with respect to each Lease, deliver to
Lessor (i) a certificate of a secretarial officer of Lessee certifying the
by-law, resolution (specific or general) or corporate action authorizing the
transactions contemplated in the Lease; (ii) an incumbency certificate
certifying that the person signing this Master Agreement and the Lease holds the
office the person purports to hold and has authority to sign on behalf of
Lessee; (iii) an opinion of Lessee's counsel with respect to the representations
in Section 15(a); (iv) an agreement with Lessor's Assignee with regard to any
assignment as referred to in Section 10; (v) the purchase documents if Lessee
has sold or assigned its interest in the Equipment to Lessor; (vi) an insurance
certificate evidencing any insurance provided by Lessee pursuant to Section 14;
and (vii) an acceptance certificate in a form reasonably acceptable to Lessor
and duly executed by Lessee. Failure by Lessee to deliver any of these documents
when reasonably due shall operate, at Lessor's option, to continue the
Installation Term for the Lease thus delaying the Base Term Commencement Date,
or to increase the Base Monthly Rental to recover costs incurred by Lessor
consequent to the delay, or to terminate the Lease as provided in Section 16.
16. DEFAULT, REMEDIES
a. The following shall be deemed "Events of Default" under the Lease: (i) Lessee
fails to pay any installment of rent or other charge within 10 days of the date
such payment is due; or (ii) Except as expressly permitted in the Lease, Lessee
attempts to remove, sell, encumber, assign or sublease or fails to insure any of
the Equipment, or fails to deliver any documents required of Lessee under the
Lease; or (iii) Any representation or warranty made by Lessee or Lessee's
guarantor in the Lease or any document supplied in connection with the Lease or
any financial statement is misleading or materially inaccurate; or (iv) Lessee
fails to observe or perform any of the other obligations required to be observed
or performed by Lessee under the Lease within 30 days of Lessee's first
knowledge of such failure; or, if more than 30 days are reasonably required to
cure such failure, Lessee fails to commence and to continue to diligently
perform such obligations within such 30 days; or (v) Lessee or Lessee's
guarantor ceases doing business as a going concern; makes an assignment for the
benefit of creditors; admits in writing its inability to pay its debts as they
become due; files a voluntary petition in bankruptcy; is adjudicated a bankrupt
or an insolvent; files a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law or regulation or files an
answer admitting or fails to deny the material allegations of a petition filed
against it in any such proceeding; consents to or acquiesces in the appointment
of a trustee, receiver, or liquidator for it or of all or any substantial part
of its assets or properties, or if it or its trustee, receiver, liquidator or
shareholders shall take any action to effect its dissolution or liquidation; or
(vi) If within 30 days after the commencement of any proceedings against Lessee
or Lessee's guarantor seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such proceedings shall not have been
dismissed, or if within 30 days after the appointment (with or without Lessee's
or Lessee's guarantor's consent) of any trustee, receiver or liquidator of it or
of all or any substantial part of its respective assets and properties, such
appointment shall not be vacated.
b. Upon the happening of any Event of Default, Lessor may declare the Lessee in
default. Lessee authorizes Lessor at any time thereafter to enter any premises
where the Equipment may be and take possession of the Equipment. Lessee shall,
without further demand, immediately pay Lessor an amount which is equal to (i)
any unpaid amount due on or before Lessor declared the Lease to be in default,
plus (ii) as liquidated damages for loss of a bargain and not as a penalty, an
amount equal to the Stipulated Loss Value for the Equipment computed as of the
date Lessor declares the Lease in default, together with interest, as provided
herein, plus (iii) all attorney and court costs incurred by Lessor relating to
the enforcement of its rights under the Lease. In the Event of Default, at the
request of Lessor and to the extent requested by Lessor, Lessee shall
immediately comply with the provisions of Section 6(d). Lessor may sell the
Equipment at private or public sale, in bulk or in parcels, with or without
notice, without having the Equipment present at the place of sale; or Lessor may
lease, otherwise dispose of or keep idle all or part of the Equipment, subject,
however, to its obligation to mitigate damages; and Lessor may use Lessee's
premises for any or all of the foregoing. The proceeds of sale, lease or other
disposition, if any, of the Equipment
Page 5 of 7
<PAGE>
Master Agreement No. 673
shall be applied (1) to all Lessor's costs, charges and expenses incurred in
taking, removing, holding, repairing and selling, leasing or otherwise disposing
of the Equipment including attorney fees; then (2) to the extent not previously
paid by Lessee, to pay Lessor the Stipulated Loss Value for the Equipment and
all other sums owed by Lessee under the Lease, including any unpaid rent and
indemnities then remaining unpaid under the Lease; then (3) to reimburse to
Lessee any such sums previously paid by Lessee as liquidated damages; (4) any
surplus shall be retained by Lessor. Lessee shall pay any deficiency in (1) and
(2) immediately. The exercise of any of the foregoing remedies by Lessor shall
not constitute a termination of the Lease unless Lessor so notifies Lessee in
writing. Lessor may also proceed by appropriate court action, either at law or
in equity to enforce performance by Lessee of the applicable covenants of the
Lease or to recover damages for the breach of the Lease.
c. The waiver by Lessor of any breach of any obligation of Lessee shall not be
deemed a waiver of any future breach of the same or any other obligation. The
subsequent acceptance of rental payments under the Lease by Lessor shall not be
deemed a waiver of any such prior existing breach at the time of acceptance of
such rental payments. The rights afforded Lessor under Section 16 shall be
cumulative and concurrent and shall be in addition to every other right or
remedy provided for in the Lease or now or later existing in law (including as
appropriate all the rights of a secured party or lessor under the Uniform
Commercial Code) or in equity and Lessor's exercise or attempted exercise of
such rights or remedies shall not preclude the simultaneous or later exercise of
any or all other rights or remedies.
d. In the event Lessee shall fail to perform any of its obligations under the
Lease, then Lessor, in addition to all of its rights and remedies under the
Lease, may perform the same, but shall not be obligated to do so, at the cost
and expense of Lessee. In any such event, Lessee shall promptly reimburse Lessor
for any such costs and expenses incurred by Lessor.
17. GENERAL
a. The Lease shall be deemed to have been made and delivered in the Commonwealth
of Massachusetts and shall be governed in all respects by the laws of such
state.
b. The Master Agreement, the Lease (including the Exhibits and Schedules
thereto) and the Warrant Agreement constitute the entire and only agreement
between Lessee and Lessor with respect to the Equipment. The covenants,
conditions, terms and provisions may not be waived or modified orally and shall
supersede all previous proposals, both oral and written, negotiations,
representations, commitments, writings or agreements or any other communication
between the parties. The Lease may not be amended or discharged except by a
subsequent written agreement entered into by duly authorized representatives of
Lessor and Lessee.
c. All notices, covenants or requests desired or required to be given under the
Lease shall be in writing and shall be delivered in person or sent by certified
mail, return receipt requested, or by courier service to the address of the
other party set forth in the introduction of the Master Agreement or to such
other address as such party shall have designated by proper notice.
d. Each Lease may be executed in one or more counterparts, each of which shall
be deemed an original, but there shall be a single executed original of each
Lease which shall be marked "Counterpart No. 1" (the "Original"); all other
counterparts shall be marked "Counterpart No. 2 and Counterpart No. 3". To the
extent, if any, that a Lease constitutes chattel paper (as such term is defined
in the Uniform Commercial Code) no security interest in the Lease may be created
through the transfer or possession of any counterpart other than the Original.
e. Section headings are for convenience only and shall not be construed as part
of the Lease.
f. It is expressly understood that all of the Equipment shall be and remain
personal property, notwithstanding the manner in which the same may be attached
or affixed to realty, and Lessee shall do all acts and enter into all agreements
necessary to assure Lessor that the Equipment remains personal property and that
the respective interests of Lessor and its assignees are protected and
represented. Lessor may upon written notice to Lessee inform Lessee that certain
items supplied to Lessee are leased to Lessor and are supplied to Lessee under
the Lease as a sublease. Lessee agrees to execute and deliver such
acknowledgments and assignments in connection with such a Lease as are
reasonably required.
g. If, at any time during the term of the Lease, Lessor's right to lease the
Equipment expires, Lessor may remove the Equipment from Lessee's premises and
shall promptly provide identical substitute Equipment. All expenses of such
substitution, including de-installation, installation and transportation
expenses, shall be borne by Lessor.
h. The obligations of Lessor hereunder shall be suspended to the extent that it
is hindered or prevented from complying therewith because of labor disturbances,
including strikes and lockouts, acts of God, fires, storms, accidents, failure
to deliver any Unit of Equipment, governmental regulations or interferences or
any cause whatsoever not within the sole control of Lessor.
i. Any provision of the Master Lease or any Schedule prohibited by or unlawful
or unenforceable under any applicable law or any jurisdiction shall, at the sole
option of the Lessor, be ineffective as to such jurisdiction without
invalidating the remaining provisions of the Master Agreement and such Schedule.
j. Lessee agrees not to discriminate against any employee or applicant for
employment because of race, color, religion, sex, national origin, handicap, or
status as disabled or Vietnam veteran and shall during the performance of this
contract comply with all applicable Executive Orders and federal regulations
which are deemed to be incorporated by reference into this contract.
The parties have executed this Master Agreement of Terms and Conditions for
Lease as of the date written below.
LESSOR: TLP LEASING PROGRAMS, INC. LESSEE: BIG ENTERTAINMENT, INC.
- ---------------------------------- --------------------------------
Name: ___________________________ Name:___________________________
Page 6 of 7
EXHIBIT 10.22
MASTER EQUIPMENT LEASE AGREEMENT NO. 0039
THIS MASTER EQUIPMENT LEASE AGREEMENT NO. 0039 is entered into effective October
20, 1997 by and between PHOENIX LEASING INCORPORATED as lessor ("Lessor") and
BIG ENTERTAINMENT, INC. as lessee ("Lessee").
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
equipment, machinery, fixtures and intangibles, whether now owned or hereafter
acquired, described on the Schedule attached hereto or on any
subsequently-executed Schedule entered into by Lessor and Lessee which
incorporates this Master Equipment Lease Agreement No. 0039 by reference, and
all present and future substitutions and replacements of and additions,
improvements, accessions and accumulations to the same, together with all rents,
issues, income, profits and proceeds therefrom (collectively, the "Equipment").
Lessor leases the Equipment to Lessee upon the terms and conditions set forth in
the Terms and Conditions of Lease attached hereto and incorporated herein by
this reference.
LESSOR: LESSEE:
PHOENIX LEASING INCORPORATED BIG ENTERTAINMENT, INC.
By:_________________________ By:________________________________
Name:_______________________ Name (Print):______________________
Title:______________________ Title:_____________________________
LESSEE'S SIGNATURE ON THIS DOCUMENT MUST BE NOTARIZED.
<PAGE>
TERMS AND CONDITIONS OF LEASE
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, upon the
following terms and conditions, the Equipment described on each schedule to this
Master Equipment Lease Agreement entered into by Lessor and Lessee, which
schedule(s) incorporate(s) this Master Equipment Lease Agreement and Terms and
Conditions of Lease by reference ("Schedule"). Each Schedule shall constitute a
separate and independent lease and contractual obligation of Lessee. The term
"Lease" as used herein refers collectively to any Schedule, the Master Equipment
Lease Agreement, these Terms and Conditions of Lease, and any other documents
executed in connection with any of the above.
1. TERM OF LEASE. The term of this Lease commences on the date Lessee executes
an acceptance notice for the Equipment. Rental payments shall commence on the
"Rent Commencement Date" as provided in Section 7 hereof and remaining rents are
due on the first day of each consecutive month thereafter. The term ends upon
the expiration of the number of months in the "Base Term," as shown on any
Schedule(s) after the Rent Commencement Date.
2. NON-CANCELLABLE LEASE. This Lease cannot be cancelled or terminated except as
expressly provided herein. This Lease is a net lease, and the obligations of
Lessee to pay rent and other sums hereunder and the rights of Lessor and its
assignee to those payments are absolute and unconditional. If Lessee is a
franchisee, Lessee shall remain fully liable under this Lease notwithstanding
any modification or termination of Lessee's status as a franchisee.
3. LESSOR COMMITMENT. So long as no Event of Default or event which with the
giving of notice or passage of time, or both, could become an Event of Default
has occurred or is continuing, Lessor agrees to lease to Lessee the groups of
Equipment described on the Schedule, subject to the following conditions: (a)
that in no event shall Lessor be obligated to lease Equipment to Lessee
hereunder where the aggregate purchase price of all Equipment leased to Lessee
hereunder would exceed the commitment amount shown in the commitment letter
executed by Lessee and Lessor ("Commitment Letter"); (b) Lessor shall not be
obligated to purchase Equipment hereunder after the expiration or revocation of
the commitment indicated in the Commitment Letter; (c) the equipment described
on the Schedule is acceptable to Lessor; (d) with respect to each funding Lessee
has provided to Lessor each of the closing documents described in the Commitment
Letter (which documents shall be in form and substance acceptable to Lessor) and
which list may be modified for each subsequent funding; (e) there is no material
adverse change in Lessee's condition, financial or otherwise, as determined by
Lessor; (f) Lessor has not discovered any additional adverse information about
Lessee's condition, financial or otherwise, as determined by Lessor; (g) Lessor,
or its agent, has, at its option inspected and placed identification labels on
the Equipment; and (h) the amount of Equipment purchased by Lessor at any one
time shall be at least equal to $20,000 except for a final advance which may be
less than $20,000. In the event of a conflict between the terms and conditions
of the Commitment Letter and of this Lease, the terms and conditions of this
Lease shall govern.
4. NO WARRANTIES BY LESSOR. (a) Lessee has selected both (i) the Equipment and
(ii) the supplier named on any Schedule(s) (herein called "Vendor") from whom
Lessor is to purchase the Equipment. LESSOR MAKES NO WARRANTY EXPRESS OR IMPLIED
AS TO ANY MATTER WHATSOEVER, INCLUDING THE CONDITION OF THE EQUIPMENT, ITS
MERCHANTABILITY, ITS FITNESS FOR ANY PARTICULAR PURPOSE, ITS COMPLIANCE WITH ANY
APPLICABLE GOVERNMENTAL REQUIREMENTS OR REGULATIONS AND ITS NON-INFRINGEMENT OF
ANY PATENTS OR OTHER RIGHTS AND, AS TO LESSOR AND ITS ASSIGNEE, LESSEE LEASES
THE EQUIPMENT "AS IS." (b) If the Equipment is not properly installed, does not
operate as represented or warranted by the Vendor or is unsatisfactory for any
reason, Lessee shall make any claim on account thereof solely against the Vendor
and shall, nevertheless, pay Lessor all rent payable under this Lease. Lessee
hereby waives any such claims as against Lessor or its assignee. Lessor hereby
agrees to assign to Lessee solely for the purpose of making and prosecuting any
said claim, all of the rights which Lessor has against the Vendor for breach of
warranty or other representation respecting the Equipment. Lessor shall have no
responsibility for delay or failure to fill the order. (c) LESSEE UNDERSTANDS
AND AGREES THAT NEITHER THE VENDOR NOR ANY SALESMAN OR OTHER AGENT OF THE VENDOR
IS AN AGENT OF LESSOR. NO SALESMAN OR AGENT OF THE VENDOR IS AUTHORIZED TO WAIVE
OR ALTER ANY TERM OR CONDITION OF THIS LEASE. (d) LESSEE'S DUTY TO PAY THE RENT
AND PERFORM ITS OTHER OBLIGATIONS AS SET FORTH IN THIS LEASE IS ABSOLUTE AND
SHALL NOT BE AFFECTED BY (i) ANY REPRESENTATIONS AS TO THE EQUIPMENT OR ANY
OTHER MATTER BY THE VENDOR, (ii) THE DEFICIENCY OR INADEQUACY OF THE EQUIPMENT
FOR ANY PURPOSE, WHETHER OR NOT KNOWN OR DISCLOSED TO LESSEE, (iii) ANY
DEFICIENCY OR DEFECT IN THE EQUIPMENT, (iv) THE USE OR PERFORMANCE OF THE
EQUIPMENT, OR (v) ANY LOSS OF BUSINESS OR OTHER CONSEQUENTIAL LOSS OR DAMAGE
WHETHER OR NOT RESULTING FROM ANY OF THE FOREGOING. The undersigned Lessee
hereby requests Lessor to lease Equipment to Lessee on the terms and conditions
of this Lease. Lessee hereby authorizes Lessor to insert in this Lease the
serial numbers and other identification data of the Equipment when determined by
Lessor.
5. LESSEE'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Lessee represents and
warrants that: (a) it is in good standing under the laws of the state of its
formation, and duly qualified to do business in each state where the Equipment
will be located; (b) it has full authority to execute and deliver this Lease and
perform the terms hereof, and this Lease has been duly authorized and
constitutes the valid and binding obligation of Lessee, enforceable in
accordance with its terms; (c) this Lease will not contravene any law,
regulation or judgment affecting Lessee or any affiliate of Lessee or result in
any breach of any agreement or other instrument binding on Lessee; (d) no
consent of Lessee's shareholders, partners, trustee(s), officers, members or
managers, as applicable, or holder of any indebtedness, or filing with, or
approval of, any governmental agency or commission, is a condition to the
performance of the terms hereof; (e) there is no action or proceeding pending or
threatened against Lessee or any affiliate of Lessee before any court or
administrative agency which might have a materially adverse effect on the
business, financial condition or operations of Lessee; (f) no deed of trust,
mortgage or third party interest or lien have attached or will attach to the
Equipment and Lessee will take all actions reasonable and necessary to remove
any deed of trust, mortgage or third party interest or lien that attaches to the
Equipment; (g) the Equipment will remain at all times under applicable law
removable personal property, free and clear of any lien or encumbrance in favor
of Lessee or any other person, notwithstanding the manner in which the Equipment
may be attached to any real property; (h) the Equipment will be located within
the United States; and (i) all credit, financial information and all documents
regarding Lessee or any affiliate of Lessee submitted to Lessor herewith or at
any time is true and correct.
6. EQUIPMENT ORDERING. Lessee shall be responsible for all packing, rigging,
transportation and installation charges for the Equipment. Lessee shall arrange
for delivery of Equipment so that it can be accepted in accordance with Section
7 hereof.
7. LESSEE ACCEPTANCE. By execution of an acceptance notice, Lessee acknowledges
receipt of the Equipment in good condition and further acknowledges acceptance
thereof as satisfactory for purposes of this Lease or related documents. The
first day of the month following the date Lessee accepts the Equipment shall be
the Rent Commencement Date.
8. LOCATION; INSPECTION; LABELS. The Equipment shall be delivered to the
Equipment location shown in this Lease, or if none is specified, to the address
of Lessee as shown on the Schedule(s). Lessee must obtain Lessor's written
consent before the Equipment is moved to a new location. Lessor shall have the
right to inspect the Equipment at any reasonable time. Lessee shall be
responsible for all labor, material and freight charges incurred in connection
with any removal or relocation of such Equipment which is requested by Lessee
and consented to by Lessor, as well as for any charges due to the installation
or moving of the Equipment. The rent payments shall continue during any period
in which the Equipment is in transit during a relocation. If Lessor supplies
Lessee with labels stating that Equipment is owned by Lessor, Lessee shall affix
such labels to and keep them in a prominent position on the Equipment. Lessee
will notify Lessor at least 30 days prior to changing its name, principal place
of business or chief executive office.
9. EQUIPMENT MAINTENANCE. Lessee, at Lessee's expense, will maintain the
Equipment in good condition and working order and repair and replace parts
thereof as required. All such replacement parts shall be the sole property of
Lessor and shall be part of the Equipment, without payment of any consideration
to Lessee. Lessee shall not cause or permit to be caused any manufacturer's
warranty covering any of the Equipment to become void for any reason.
10. LOSS OR DAMAGE. Lessee assumes the entire risk of loss to the Equipment
through use, operation or otherwise, and Lessee hereby indemnifies and holds
harmless Lessor from and against all claims, costs, damages and expenses
relating to or resulting from any loss, damage or destruction of the Equipment.
Upon any loss, damage or destruction of any unit of Equipment, Lessee shall pay
to Lessor all amounts due under this Lease up to the date of the loss or damage
and, at Lessor's option, Lessee shall either (a) repair such item, returning it
to good operating condition, unless damaged beyond repair, (b) replace the
damaged Equipment with identical equipment, acceptable to Lessor, in good
condition and of equivalent value, which shall become the property of Lessor, be
included as Equipment hereunder and become subject to the terms of this Lease,
or (c) pay to Lessor all rents which would accrue through to the end of the Base
Term, plus any other amounts due.
11. INDEMNITY. Lessee will protect, indemnify and save harmless Lessor, its
agents, affiliates, employees, successors and assigns from and against all
liabilities (including negligence, tort and strict liability), claims, damages,
losses, costs and expenses, including attorneys' fees, imposed upon or incurred
by or asserted against Lessor by Lessee or any third party by reason of the
occurrence or existence (or alleged occurrence or existence) of any act or event
relating to or caused by the Equipment (regardless of where, how and by whom the
Equipment is operated), including, but not limited to, consequential or special
damages of any kind, or any failure on the part of Lessee to perform or comply
with any of the terms of this Lease. In the event that any action, suit or
proceeding is brought against Lessor by reason of any such occurrence, Lessee,
upon request of Lessor, will at Lessee's expense resist and defend such action,
suit or proceeding or cause the same to be resisted and defended by counsel
designated and approved by Lessor. The indemnities and obligations provided
herein shall continue in full force and effect notwithstanding the expiration or
termination of this Lease.
12. INSURANCE. Lessee, at its expense, shall keep the Equipment insured for the
entire term and any extensions of this Lease against all risks of physical loss
or damage and in such amounts as Lessor shall approve, and such insurance shall
provide for a loss payable endorsement to Lessor and any assignee of Lessor, for
the full replacement value of the Equipment. Lessee, at its expense, shall also
maintain commercial general liability insurance with respect to loss or damage
for personal injury, death, or property damage naming Lessor and/or any assignee
of Lessor as additional insured, in amounts acceptable to Lessor. The insurer
shall agree to give thirty (30) days written notice to Lessor before
cancellation or material change of any policy of insurance. Lessee will provide
Lessor and any assignee of Lessor with a certificate of insurance from the
insurer evidencing Lessor's or such assignee's interest in the policy of
insurance. If Lessee fails to provide or maintain insurance as required herein,
Lessor shall have the right, but shall not be obligated, to obtain such
insurance. In that event, Lessee shall reimburse Lessor for the cost thereof.
Lessee acknowledges that insurance purchased by Lessor covering loss and damage
to the Equipment may not include full coverage for computer software, and Lessee
will remain fully liable for loss or damage to such software.
13. TAXES. (a) Lessee agrees to report the Equipment as equipment leased from
Lessor and not as equipment owned by Lessee on Lessee's personal property tax
return. (b) Lessee agrees to reimburse Lessor for (or pay directly, as
instructed by Lessor), and to indemnify and hold Lessor harmless from, all fees
including (but not limited to, license, documentation, recording and
registration fees), and all sales, use, gross receipts, personal property,
occupational, value added or other taxes, levies, imposts, duties, assessments,
charges, or withholdings of any nature whatsoever, together with any penalties,
liens, additions to tax, or interest thereon (all of the foregoing being
hereafter referred to as "Impositions") arising at any time prior to or during
the term of this Lease, or upon expiration or early termination of this Lease
and levied or imposed upon Lessor directly or otherwise by any Federal, state or
local government in the United States or by any foreign country or foreign or
international taxing authority upon or with respect to (i) the Equipment, (ii)
the exportation, importation, registration, purchase, ownership, delivery,
leasing, possession, use, operation, storage, maintenance, repair, return, sale,
transfer of title, or other disposition thereof, (iii) the rentals, receipts or
earnings arising from the Equipment, or any disposition thereof, (iv) any
payment pursuant to this Lease, or (v) this Lease or the transaction or any part
thereof excluding, however, taxes based upon or measured by Lessor's net income
imposed or levied by the United States or any state thereof but not excluding
any such net income taxes which by the terms of the statute imposing such tax
expressly relieves Lessee or Lessor from the payment of any Impositions which
Lessee could otherwise have been obligated to pay or indemnify. The indemnities
and obligations provided herein shall continue in full force and effect
notwithstanding the expiration or termination of this Lease.
<PAGE>
14. PAYMENT BY LESSOR. If Lessee shall fail to make any payment or perform any
act required hereunder, the Lessor, at its option, and after such notice to
Lessee as is reasonable under the circumstances, may make such payment or
perform such act with the same effect as if made or performed by Lessee. Lessee
will reimburse Lessor upon demand for all sums paid and all costs and expenses
incurred in connection with the performance of any such act.
15. SURRENDER OF EQUIPMENT. Unless otherwise provided for herein, upon
termination or expiration of this Lease, Lessee will surrender the Equipment to
Lessor in as good order and condition as originally installed, reasonable wear
and tear excepted. Lessor may, at its sole option, arrange for removal and
transportation of the Equipment provided that Lessee's obligations under Section
10, 11, 12 and 13 shall not be released. Lessee shall bear all expenses of
returning the Equipment to Lessor's location or other location within the United
States as Lessor may request. In the event Lessee fails to return the Equipment
as herein provided, the term of this Lease shall be automatically extended on a
month-to-month basis cancellable by either party on 60 days prior written notice
to the other party on the same Terms and Conditions of Lease, including Monthly
Rental Payment, as were in effect during the Base Term.
16. ASSIGNMENT. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT (a)
ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THIS LEASE,
EQUIPMENT, OR ANY INTEREST THEREIN, OR (b) SUBLET OR LEND EQUIPMENT OR PERMIT IT
TO BE USED BY ANYONE OTHER THAN LESSEE OR LESSEE'S EMPLOYEES OR (c) MERGE INTO,
CONSOLIDATE WITH OR CONVEY OR TRANSFER ITS PROPERTIES SUBSTANTIALLY AS AN
ENTIRETY TO ANY OTHER PERSON OR ENTITY. Lessor may assign this Lease or grant an
interest in the Equipment, or both, in whole or in part without notice to
Lessee. If Lessee is given notice of such assignment it agrees to acknowledge
receipt thereof in writing and to sign such other documents as Lessor or the
assignee may reasonably require. Each such assignee and/or secured party shall
have all of the rights, but none of the obligations, of Lessor under this Lease
unless it expressly agrees to assume such obligations in writing. Lessee shall
not assert against assignee and/or secured party any defense, counterclaim or
offset that Lessee may have against Lessor. Notwithstanding any such assignment
and provided no Event of Default has occurred and is continuing, Lessor or its
assignees, secured parties, or their agents or assigns shall not interfere with
Lessee's right to quietly enjoy use of the Equipment subject to the terms and
conditions of this Lease. Subject to the foregoing, this Lease inures to the
benefit of and is binding upon the successors and assignees of the parties
hereto.
17. DEFAULT. (a) EVENTS OF DEFAULT. Any of the following events or conditions
shall constitute an Event of Default hereunder: (i) Lessee's failure to pay any
monies due to Lessor hereunder beyond the fifth (5th) day after the same is due;
(ii) Lessee's default in performing any term, covenant or condition hereof or
under any other agreement between Lessee and Lessor if such default is not cured
by Lessee within five (5) days of receipt of notice thereof; (iii) seizure of
any or all the Equipment under legal process; (iv) the filing by or against
Lessee of a petition for reorganization or liquidation under the Bankruptcy Code
or any amendment thereto or under any other insolvency law providing for the
relief of debtors; (v) the voluntary or involuntary making of an assignment of a
substantial portion of its assets by Lessee, or any guarantor ("Guarantor")
under any guaranty executed in connection with this Lease ("Guaranty") for the
benefit of its creditors, the appointment of a receiver or trustee for Lessee or
any Guarantor, PROVIDED that in the case of all such involuntary proceedings,
same are not dismissed within sixty (60) days after commencement; for any of
Lessee's or Guarantor's assets, the institution by or against Lessee or any
Guarantor of any formal or informal proceeding for dissolution, liquidation,
settlement of claims against or winding up of the affairs of Lessee or any
Guarantor; (vi) the making by Lessee or any Guarantor of a transfer of all or a
material portion of Lessee's or Guarantor's assets or inventory not in the
ordinary course of business; (vii) Lessee's default under any other agreement or
Schedule between Lessor and Lessee or default shall occur under any lease of
real property covering the location of the Equipment if such failure to comply
or perform is not cured by Lessee within 5 days after Lessee knows of the
noncompliance or nonperformance or notice from Lessor; or (viii) with respect to
any mortgage, deed of trust, intercreditor agreement or any other credit
enhancement or credit support agreement signed or issued by any party in
connection with Lessee's obligations under this Lease, the party signing or
issuing any such agreement defaults in its obligations thereunder or any such
agreement shall cease to be in full force and effect. (b) REMEDIES. If an Event
of Default shall have occurred and be continuing as to any Schedule, Lessor
shall have the right to exercise, at its sole discretion, any one or more of the
following remedies: (i) terminate this Lease; (ii) without affecting Lessor's
title or right to possession of the Equipment, declare due and recover all
monthly rental payments and other amounts then accrued or thereafter accruing
for the entire Base Term or any extension thereof, which the parties agree is a
fair and reasonable amount; (iii) require the Lessee to promptly redeliver the
Equipment in the manner specified in Section 15 hereof; (iv) repossess the
Equipment without notice, legal process, prior judicial hearing or liability for
trespass or other damages (WHICH RIGHTS LESSEE HEREBY VOLUNTARILY, INTELLIGENTLY
AND KNOWINGLY WAIVES); (v) take possession of the Equipment and sell all or any
portion at public or private sale without demand or notice of intention to sell.
Such repossession of the Equipment shall not terminate Lessee's obligations
under this Lease unless Lessor so notifies Lessee in writing. If Lessor is
unable to repossess the Equipment, then it is deemed a total loss and Lessee
must pay the replacement cost as determined by Lessor; (vi) foreclose on any
personal property, real property or other collateral granted to, or repossess
any Equipment purchased by, Lessor pursuant to any other agreement or any
Schedule between Lessor and Lessee; and (vii) exercise any rights and remedies
available under the Uniform Commercial Code, any other applicable law or in
equity. All such remedies are cumulative and may be enforced separately or
concurrently.
18. LATE PAYMENTS. Lessee shall pay Lessor an amount equal to 10% per month of
all amounts owed Lessor by Lessee which are not paid by the first of the month,
but in no event shall Lessee pay more than an amount greater than the highest
rate of interest permitted by applicable law. Any excess amounts shall be
applied to Lease payments. If such funds have not been received by Lessor at
Lessor's place of business or by Lessor's designated agent or assignee by the
date such funds are due under this Lease, Lessor shall bill Lessee for such
charges. Lessee acknowledges that invoices for accounts due under this Section
18 or under this Lease and Schedules are sent by Lessor for Lessee's convenience
only. Lessee's non-receipt of an invoice will not relieve Lessee of its
obligation to make payments hereunder.
19. LESSOR'S EXPENSE. Lessee shall pay Lessor all costs and expenses, including
reasonable attorneys' fees and the fees of collection agencies, incurred by
Lessor in (a) enforcing any of the terms, conditions or provisions hereof, and
(b) in connection with any bankruptcy or post-judgment proceeding, whether or
not suit is filed and, including, without limitation, those incurred in each and
every action, suit or proceeding, including any and all appeals and petitions
therefrom and all fees and costs incurred by Lessor.
20. OWNERSHIP; PERSONAL PROPERTY. The Equipment shall be and remain personal
property of Lessor notwithstanding any attachment or fixation to other items of
equipment or real property or any building thereon and Lessee shall have no
right, title or interest therein or thereto except as expressly set forth in
this Lease; and upon termination of the Lease term, Lessee shall have the duty
and Lessor shall have the right, to remove the Equipment from the premises where
the same be located whether or not affixed or attached to the real property or
any building, at the cost and expense of Lessee.
21. ALTERATIONS; ATTACHMENTS. No alterations or attachments shall be made to the
Equipment without Lessor's prior written consent, which shall not be given for
changes that will affect the reliability and utility of the Equipment, or which
cannot be removed without damage to the Equipment or which in any way affect the
value of the Equipment for purposes of resale or re-lease, unless the Lessee
agrees in writing to bear the costs of restoration of the Equipment to the
original condition. All alterations and attachments to the Equipment shall
become part of the Equipment hereunder.
22. PURCHASE OPTION. If no Event of Default shall have occurred and be
continuing, Lessee shall be entitled at its option upon written notice to Lessor
at least ninety (90) days prior to the end of the Base Term, to purchase the
Equipment from Lessor at the end of the Base Term for $1.00. On the date of such
purchase Lessee shall pay to Lessor the purchase price for the Equipment (plus
any taxes levied thereon) and Lessor shall sell the Equipment AS-IS-WHERE-IS
WITHOUT ANY WARRANTY OR REPRESENTATION WHATSOEVER. IN THE EVENT THAT A PROVISION
REGARDING PURCHASE OF THE EQUIPMENT IS INCLUDED IN ANY SCHEDULE OR ON A RIDER TO
A SCHEDULE, THAT PROVISION SHALL PREVAIL AND THE TERMS OF THIS SECTION SHALL NOT
BE APPLICABLE.
23. ASSIGNMENT OF PURCHASE RIGHTS AND LICENSE RIGHTS. If the Equipment is
subject to a purchase agreement or license agreement to which Lessee is a party,
Lessee hereby assigns to Lessor its rights, including the right to take title to
the Equipment, but none of the obligations, except the obligation to pay for the
Equipment upon its acceptance by the Lessee.
24. SOFTWARE, FRANCHISE FEES, AND SOFT COSTS. The term "Equipment" as used
herein shall include Lessor's right, title and interest in any computer software
purchased and/or licensed from a software vendor, ("Software"), franchise fees
financed by Lessor, ("Franchise Fees") and other items financed by Lessor which
have no resale value to Lessor ("Soft Costs"). Lessee acknowledges that all
Lessee's obligations under this Lease with respect to the Equipment will apply
equally to such Software, Franchise Fees, and Soft Costs, including, but not
limited to, Lessee's obligation to pay rent to Lessor. The term "purchase" as
used herein with respect to Equipment shall mean "license" with respect to
Software which is the subject of a license agreement.
25. UPGRADE. At Lessee's request and upon approval by Lessor of credit and other
terms, Equipment subject to this Lease may be upgraded. Upgrades shall be leased
to Lessee at the then current lease rate as determined by Lessor.
26. FINANCING STATEMENTS. Lessee will execute financing statements pursuant to
the Uniform Commercial Code when so requested by Lessor. Pursuant to Section 35
hereof, Lessee irrevocably appoints Lessor as Lessee's attorney-in-fact and
hereby authorizes Lessor to sign and file Uniform Commercial Code Financing
statements at all places where Lessor deems necessary.
27. MISCELLANEOUS. (a) Lessee shall provide Lessor with such corporate
resolutions, opinions of counsel, financial statements, and other documents as
Lessor shall require from time to time. (b) If more than one Lessee is named in
this Lease, the liability of each shall be joint and several. (c) LESSEE
REPRESENTS THAT THE EQUIPMENT IS BEING LEASED HEREUNDER FOR BUSINESS PURPOSES
AND AGREES THAT UNDER NO CIRCUMSTANCES SHALL THIS LEASE BE CONSTRUED AS A
CONSUMER CONTRACT. (d) Time is of the essence with respect to this Lease. (e)
There shall be only one original of this Lease and it shall be so marked. No
security interest may be created in this Lease through transfer or possession of
any copy other than the original.
28. NOTICES. All notices hereunder shall be in writing, by registered mail, and
shall be directed, as the case may be to Phoenix Leasing Incorporated, 2401
Kerner Boulevard, San Rafael, California 94901, Attention: Asset Management, and
to the Lessee at its address as shown on the Schedule(s), unless otherwise
specified.
29. GOVERNING LAW; VENUE. This Lease shall be deemed to have been negotiated,
entered into and performed in the State of California and it is understood and
agreed that the validity of this Lease and of any of its terms and provisions,
as well as the rights and duties of the parties to this Lease shall be construed
pursuant to and in accordance with the laws of the State of California, without
giving effect to conflicts of law principles. Lessee agrees that any action or
proceeding arising out of or relating to this Lease may be brought in the courts
of Marin County, California and by execution and delivery of this Lease, Lessee
irrevocably submits to such jurisdiction and waives personal service of process
and any right to assert the doctrine of forum non conveniens.
30. TRIAL BY JURY WAIVER. LESSEE AND LESSOR EACH KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVE ALL RIGHTS TO TRIAL BY JURY OF ALL DISPUTES BETWEEN THEM.
31. ENTIRE AGREEMENT. The Lessee acknowledges that Lessee has read this Lease,
understands it and agrees to be bound by its terms, and further agrees that it
constitutes the entire agreement between Lessor and Lessee with respect to the
subject matter hereof and supersedes all previous agreements, promises, or
representations.
32. AMENDMENTS. This Lease, or any provision hereunder, may not be waived,
changed, altered or modified except by an instrument in writing signed by a duly
authorized representative of Lessee and of Lessor.
33. WAIVER. Any failure of Lessor to require strict performance by Lessee or any
waiver by Lessor of any provision herein shall not be construed as a consent or
waiver of any other breach of the same or any other provision.
34. SEVERABILITY. If any provision of this Lease is held invalid, such
invalidity shall not affect any other provisions hereof.
<PAGE>
35. POWER OF ATTORNEY. Lessee hereby irrevocably appoints Lessor as Lessee's
attorney-in-fact, with full authority in the place and stead of Lessee and in
the name of Lessee, from time to time in Lessee's discretion, to take any action
and to execute any instrument which Lessor may deem necessary or advisable to
accomplish the purposes of this Lease and any documents and instruments
contemplated therein or thereby to the extent permitted by law.
LESSEE'S INITIALS:____________________ LESSOR'S INITIALS:__________________
EXHIBIT 10.26
FIRST AMENDMENT
TO
PREFERRED STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO PREFERRED STOCK PURCHASE AGREEMENT (the
"Amendment") is made and entered into as of the 17th day of February, 1998
between Big Entertainment, Inc. (the "Company") and Auric Partners Limited (the
"Purchaser").
R E C I T A L S:
1. The Company and the Purchaser are parties to a Preferred Stock
Purchase Agreement dated December 20, 1996 (the "Purchase Agreement"), pursuant
to which the Purchaser acquired 20,000 shares of the Company's 4% $100
Convertible Series C Preferred Stock (the "Preferred Stock");
2. The parties desire to set forth their agreements as to certain
modifications to the terms of the Purchase Agreement and the Preferred Stock,
all as 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
Purchaser hereby agree as follows:
1. ADJUSTMENT TO CONVERSION PRICE.
(a) The Conversion Price of the Preferred Stock shall be
reduced to $5.06 per share. The parties hereby agree
and acknowledge that the foregoing reduction in the
Conversion Price shall be in complete satisfaction of
any and all adjustments to the Conversion Price that
may have occurred prior to the date of this Amendment
or that may hereafter occur.
(b) The parties agree that an amendment to the Company's
Articles of Incorporation effecting the foregoing
modifications to the terms of the Preferred Stock
shall be filed with the Florida Secretary of State as
soon as reasonably practicable following the
execution of this Amendment.
2. PLACEMENT AGENT'S COMPENSATION. In addition to the compensation
provided for in Section 4(i) of the Purchase Agreement, the Placement Agent
shall receive five-year warrants to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $6.50 per share.
3. DEFINED TERMS. Unless otherwise defined herein, all capitalized
terms shall have the meanings ascribed to them in the Purchase Agreement
(including Exhibit A thereto).
<PAGE>
4. VALIDITY OF PURCHASE AGREEMENT. Except to the extent specifically
amended herein, all of the terms of the Purchase Agreement shall remain
unmodified.
5. GOVERNING LAW. This Amendment 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.
6. COUNTERPARTS. This Amendment 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.
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
officers, have executed this Amendment as of the date first written above.
COMPANY:
BIG ENTERTAINMENT, INC.
By:_____________________________________________
Mitchell Rubenstein, Chairman of the Board and
Chief Executive Officer
PURCHASER:
AURIC PARTNERS LIMITED
By:_____________________________________________
Name:________________________________________
Title:_______________________________________
-2-
EXHIBIT 21.1
Subsidiaries of the Registrant
NAME OF CORPORATION STATE OF INCORPORATION
- ------------------- ----------------------
Big Entertainment Franchise Corp. Florida
Fedora, Inc. Iowa
Tekno Books International, LLC Wisconsin
Tekno Comix, Inc. Florida
Tomorrow, Inc. Wisconsin
Huge Entertainment LLC Delaware
Tekno Books(1)
NetCo Partners(2)
- -----------
(1) Tekno Books is a general partnership formed under the laws of the State of
Wisconsin in which the company has a 51% ownership interest.
(2) NetCo Partners is a general partnership formed under the laws of the State
of New York in which the Company has a 50% partnership interest.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference of our report dated March 20, 1998 included in this
Form 10-KSB into Big Entertainment, Inc.'s previously filed Registration
Statements on Form S-3 File Numbers 333-21173, 333-38219 and 333-14659.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 30, 1998.
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