U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER 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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2255 GLADES ROAD, SUITE 237 WEST
BOCA RATON, FLORIDA 33431
(Address of principal executive offices) (zip code)
(561) 998-8000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ____
As of November 10, 1998, the number of shares outstanding of the
issuer's Common Stock, $.01 par value, was 7,850,674.
1
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE(S)
- ------ --------------------- -------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997.................................. 3
Consolidated Statements of Operations for the Three
and Nine Months ended September 30, 1998 and 1997
(unaudited) ....................................................... 4
Consolidated Statement of Shareholders' Equity for the Nine
Months ended September 30, 1998 (unaudited)........................ 5
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1998 and 1997 (unaudited)............... 6
Notes to Consolidated Financial Statements
(unaudited)........................................................ 7-12
Item 2. Management's Discussion of Financial Condition and Results of
Operations .................................................................. 13-28
PART II OTHER INFORMATION
- ------- -----------------
Item 2. Changes in Securities and Use of Proceeds.................................... 29
Item 4. Submission of Matters to a Vote of Security Holders............................ 30
Item 5. Other Information.............................................................. 31
Item 6. Exhibits and Reports on Form 8-K............................................. 31-32
Signature................................................................................ 33
</TABLE>
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 200,889 $ 887,153
Subscription receivable from shareholder 2,000,000 -
Receivables, net 550,904 243,168
Merchandise inventories 1,929,472 2,417,224
Prepaid expenses 413,802 548,206
Franchise fee receivable - 350,000
Other current assets 148,394 163,099
----------- -----------
Total current assets 5,243,461 4,608,850
PROPERTY AND EQUIPMENT, net 3,420,186 4,069,171
INVESTMENT IN NETCO PARTNERS 295,031 1,533,567
INTANGIBLE ASSETS, net 154,402 163,393
GOODWILL, net 311,237 325,817
OTHER ASSETS 609,702 531,523
DEFERRED TAX ASSET 1,407,600 1,407,600
----------- -----------
TOTAL ASSETS $11,441,619 $12,639,921
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,624,127 $ 2,108,202
Revolving line of credit 826,640 535,000
Accrued professional fees 131,579 205,313
Other accrued expenses 967,355 559,050
Deferred revenue 130,539 523,301
Loan from shareholder/officer 997,000 85,000
Current portion of capital lease obligations 939,334 768,714
----------- -----------
Total current liabilities 5,616,574 4,784,580
----------- -----------
CAPITAL LEASE OBLIGATIONS, less current portion 1,673,749 1,803,344
----------- -----------
DEFERRED REVENUE 348,639 315,783
----------- -----------
CONVERTIBLE DEBENTURE, net - 542,250
----------- -----------
MINORITY INTEREST 223,187 90,111
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,177 shares
authorized; none outstanding - -
Series A variable rate convertible preferred stock,
$6.25 stated value, 217,600 shares authorized,
issued and outstanding.
Liquidation preference of $1,562,912. 1,360,000 1,360,000
Series B variable rate convertible preferred stock,
$5.21 stated value, 142,223 shares authorized;
122,846 shares issued and outstanding.
Liquidation preference of $640,000. 640,000 640,000
Series C, 4% convertible preferred stock,
$100 stated value, 100,000 shares authorized;
20,000 shares issued and outstanding.
Liquidation preference of $2,000,000. 2,000,000 2,000,000
Series D, 7% convertible preferred stock,
$10,000 stated value, 1,000 shares authorized;
200 shares issued and outstanding.
Liquidation preference of $2,000,000. 1,514,033 -
Common stock, $.01 par value, 25,000,000 shares
authorized; 7,881,683 and 6,896,340 shares
issued and outstanding at September 30,1998
and December 31, 1997, respectively. 78,817 68,963
Deferred compensation (741,359) -
Additional paid-in capital 30,501,313 26,258,500
Accumulated deficit (31,773,334) (25,223,610)
----------- -----------
Total shareholders' equity 3,579,470 5,103,853
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,441,619 $ 12,639,921
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
3
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
NET REVENUES $ 2,330,146 $ 2,003,740 $ 7,598,372 $ 5,618,629
COST OF SALES 1,307,305 1,011,224 3,871,755 2,991,326
------------- ------------ ------------ -------------
Gross profit 1,022,841 992,516 3,726,617 2,627,303
------------- ------------ ------------ -------------
OPERATING EXPENSES:
Selling, general and administrative 1,636,033 1,655,046 5,556,313 4,208,218
Salaries and benefits 902,061 1,040,887 2,981,435 2,828,466
Amortization of goodwill and intangibles 7,857 114,453 23,571 340,749
Reserve for closed kiosks and lease
termination costs 438,956 - 438,956 -
------------- ------------ ------------ -------------
Total operating expenses 2,984,907 2,810,386 9,000,275 7,377,433
------------- ------------ ------------ -------------
Operating loss (1,962,066) (1,817,870) (5,273,658) (4,750,130)
EQUITY IN EARNINGS (LOSS) OF NETCO PARTNERS (388,274) 7,928 (97,880) 1,830,427
OTHER:
Interest, net (172,425) (30,084) (613,549) (149,706)
Other, net 10,097 10,603 32,891 30,797
------------- ------------ ------------ -------------
Loss before minority interest (2,512,668) (1,829,423) (5,952,196) (3,038,612)
MINORITY INTEREST (167,400) (76,972) (410,377) (210,711)
------------- ------------ ------------ -------------
Net loss $(2,680,068) $(1,906,395) $(6,362,573) $(3,249,323)
============= ============ ============ =============
Basic and diluted loss per common share $ (0.36) $ (0.30) $ (0.89) $ (0.56)
============= ============ ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
4
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Preferred Preferred Preferred Preferred Additional
Common Stock Stock Stock Stock Paid-in
Stock Series A Series B Series C Series D Capital
---------- -------------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 $68,963 $1,360,000 $640,000 $2,000,000 $ - $26,258,500
Net loss for the nine months ended
September 30, 1998 - - - - - -
Non-cash dividend - preferred stock 371 - - - - 169,629
Cash dividend on preferred stock
Series C - - - - - -
Conversion of convertible debentures into
common stock 1,736 - - - - 663,953
Issuance of options and warrants for
services rendered - - - - - 34,977
Employee stock bonuses 2,362 - - - - 793,863
Issuance of preferred stock Series D
and warrants in private placement - - - - 1,514,033 241,550
Issuance of common stock in
private placements 3,511 - - - - 1,403,505
Issuance of common stock to the members
of the Company's Board of Directors
in a private placement 1,874 - - - - 935,336
---------- -------------- ------------ ------------- -------------- --------------
Balance - September 30, 1998 $78,817 $1,360,000 $640,000 $2,000,000 $1,514,033 $30,501,313
========== ============== ============ ============= ============== ==============
<CAPTION>
Deferred
Compen- Accumulated
sation Deficit Total
------------ -------------- -------------
<S> <C> <C> <C>
Balance - December 31, 1997 $ - $(25,223,610) $5,103,853
Net loss for the nine months ended
September 30, 1998 - (6,362,573) (6,362,573)
Non-cash dividend - preferred stock - (127,151) 42,849
Cash dividend on preferred stock
Series C - (60,000) (60,000)
Conversion of convertible debentures into
common stock - - 665,689
Issuance of options and warrants for
services rendered - - 34,977
Employee stock bonuses (741,359) - 54,866
Issuance of preferred stock Series D
and warrants in private placement - - 1,755,583
Issuance of common stock in
private placements - - 1,407,016
Issuance of common stock to the members
of the Company's Board of Directors
in a private placement - - 937,210
------------ -------------- -------------
Balance - September 30, 1998 $(741,359) $(31,773,334) $3,579,470
============ ============== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
5
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,362,573) $ (3,249,323)
Ajustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 784,596 862,081
Equity in net earnings (loss) of Netco Partners,
net of return of (invested) capital 1,238,536 (604,537)
Issuance of compensatory stock options and warrants 15,578 17,662
Amortization of deferred compensation costs 54,866
Recognition of deferred gain (32,891) (30,291)
Amortization of deferred financing costs 99,431 13,772
Amortization of discount on convertible debentures 107,750 -
Assets written off - closed kiosks 163,584 -
Minority interest 410,377 210,711
Changes in assets and liabilities:
Receivables 42,264 (16,748)
Prepaid expenses 134,404 208,132
Merchandise inventories 487,752 (601,257)
Other current assets (4,055) (72,237)
Other assets (145,497) 63,302
Accounts payable (484,075) (81,959)
Accrued professional fees (73,734) 8,250
Deferred revenue (318,601) (9,443)
Other accrued expenses 256,893 (108,562)
---------- -----------
Net cash used in operating activities (3,625,395) (3,390,447)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (217,491) (371,445)
Investment in patents and trademarks - (329)
Return of capital from Tekno Books to minority partner (277,301) (161,950)
---------- ------------
Net cash used in investing activities (494,792) (533,724)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 291,640 -
Net proceeds from shareholder/officer loan 912,000 -
Proceeds from the issuance of preferred stock - 480,000
Proceeds from issuance of convertible debentures - 650,000
Net proceeds from issuance of common stock 2,309,759 3,069,996
Dividends on preferred stock (60,000) (60,000)
Proceeds under capital lease obligations 656,660 -
Repayments under capital lease obligations (676,136) (333,602)
Receipts from subsription receivable - 11,300
---------- -----------
Net cash provided by financing activities 3,433,923 3,817,694
---------- -----------
Net decrease in cash and cash equivalents (686,264) (106,477)
CASH AND CASH EQUIVALENTS, beginning of period 887,153 1,675,852
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 200,889 $1,569,375
========== ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 398,803 $ 156,425
========== ===========
Non-Cash Investing and Financing Activities:
During the nine months ended September 30,1998 the Company entered into capital lease transactions totaling $60,501.
During the nine months ended September 30,1998 the Company recorded dividends on Series A and B Convertible Preferred Stock
in the amount of $127,151 which were paid through the issuance of 30,410 shares of common stock.
During the nine months ended September 30,1998 the Company recorded the conversion of $650,000 of convertible debentures, plus
accrued interest, into 173,568 shares of common stock.
During the nine months ended September 30, 1998 Company issued 200 shares of Series D Convertible Preferred Stock for
$2,000,000 less accrued expenses of $244,417; $209,950 of which is non-cash. The proceeds were collected in October 1998 and
are reflected as subscription receivable in the accompanying Balance Sheet as of September 30, 1998.
During the nine months ended September 30, 1998 the Company issued 236,230 shares of restricted common stock valued at
$796,225 to employees of the Company.
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
6
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BIG ENTERTAINMENT INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
In the opinion of management, the accompanying consolidated financial statements
have been prepared by Big Entertainment, Inc. (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations. However,
the Company believes that the disclosures contained herein are adequate to make
the information presented not misleading.
The financial statements reflect, in the opinion of management, all material
adjustments (which include only normal recurring adjustments) necessary to
present fairly the Company's financial position and results of operations.
The results of operations and cash flows for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results of operations
or cash flows which may be recorded for the remainder of 1998.
The accompanying consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
(2) DEBT:
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 (9.25% at
September 30, 1998) 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. In addition, 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. As of September 30, 1998, the Company's outstanding balance on the
line of credit was $826,640, essentially utilizing the then available borrowing
base. The facility is secured by cash, inventory and accounts receivable of the
Company's 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 amortization covenants, 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 Company is in compliance with such covenants as of September
30, 1998, although it is anticipated that the Company will need to modify the
business plan previously submitted to BankBoston and have such plan approved by
BankBoston in order to be in compliance with all such covenants throughout 1999.
The Company's Chairman of the Board 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, under which the Company had borrowed
$997,000 at September 30, 1998. The line of credit bears interest at the JP
Morgan Bank prime rate of interest. The Company's Chairman of the Board and
Chief Executive Officer
7
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and the Company's Vice Chairman and President also had previously represented
that they would provide the Company, if required, with an additional amount not
to exceed $3.5 million during 1998 in order to enable the Company to meet its
working capital requirements for the balance of 1998; provided, however, that
this commitment would terminate in the event the Company raised no less than
$3.5 million from other sources during the year. The Company has raised gross
proceeds in excess of $3.5 million through the issuance of stock and from other
sources, in effect extinguishing the previous commitment. As of November 10,
1998, the Company had borrowed $280,000 under the unsecured line of credit
facility, and $820,000 remained available for the Company to draw upon pursuant
to the unsecured line of credit facility.
During May 1998, the Company entered into a sale/leaseback transaction with
FINOVA Capital Corporation ("FINOVA") for 17 Entertainment Super-Kiosk units.
The Company entered into a similar transaction with FINOVA during 1996 for its
other kiosk units. The terms of the 1998 sale/leaseback transaction are an
aggregate sales price of $600,674, which approximated 75% of the original
invoice cost for the units, a 42-month lease term, monthly payments
approximating $18,300, and a $1 buy-out at the end of the lease term. The net
proceeds to the Company after all transaction costs were $582,640.
In August 1997, the Company issued a $650,000 4% convertible debenture to a
single institutional investor. The debenture was convertible by the holder into
shares of the Company's Common Stock. During the period from February through
May 1998, the debenture holder converted the entire $650,000 debenture plus
accrued interest into a total of 173,568 shares of Common Stock. In conjunction
with the issuance of the debenture, the investor 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 was amortized as interest
expense from the date of issuance through April 1998.
(3) COMMON STOCK:
In March and April, 1998, the Company sold 248,053 shares of its Common Stock to
five accredited investors for gross proceeds of $1,037,500. In conjunction with
the sale of these shares, the Company issued five-year warrants to three
investors to purchase 55,000 shares of the Company's Common Stock at $4.66 per
share. Costs related to the issuance of these securities totaling $37,500 were
charged to additional paid-in capital. The holders of the above warrants have
the right at any time during the one year period from the date said warrants
were issued to exchange the warrants for an aggregate of 22,145 shares of Common
Stock.
On June 30, 1998, the Company entered into a private equity line of credit
agreement with two accredited investors. Pursuant to this agreement, these
investors issued irrevocable commitments to purchase $1,500,000 of Common Stock
of the Company over a one-year period. On June 30, 1998, these investors
purchased an initial 100,000 shares of the Company's Common Stock at the market
price of $5.00 per share. In conjunction with establishment of the equity line
of credit, the Company issued three-year warrants to these investors to purchase
45,000 shares of the Company's Common Stock for an average price of $2.89 per
share. The exercise price of the warrants for 20,000 of the shares is subject to
reduction depending on the number of initial shares of the Company's Common
Stock that the investors still own six months subsequent to their initial
purchase. The gross proceeds of $500,000 from the sale of these securities were
received in July 1998. Costs related to establishment of the equity line of
credit and for the issuance of the initial securities pursuant to this line of
credit totaling $74,315 were charged to additional paid-in capital. In addition,
the Company issued 3,000 shares of Common Stock to the placement agent as part
of this transaction. As of September 30, 1998 these investors remain obligated
to invest an additional $1,000,000 in the Company's Common Stock. The Company is
under no obligation to sell these shares to the investors, but may elect to do
so in the future based on its need for capital and the market
8
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price of the Company's Common Stock. The remaining shares may be put by the
Company to the investors at a price based on the market price of the Company's
Common Stock, subject to various restrictions and provisions concerning
frequency of the puts, maximum individual put amounts and a minimum market price
for the Company's Common Stock. No additional warrants will be issued in
conjunction with sales, if any, of the remaining shares.
In July 1998, six members of the Company's Board of Directors (including the
Company's Chairman of the Board and Chief Executive Officer, the Company's Vice
Chairman and President, and the Chief Executive Officer of Tekno Books, the
Company's 51%-owned subsidiary) purchased an aggregate of 187,442 shares of the
Company's Common Stock for $5.00 per share, the then market price of the stock.
In conjunction with the private placement of these shares, the investors
received five-year warrants to purchase an aggregate of 93,721 shares of the
Company's Common Stock at $5.00 per share.
In September 1998, the Company sold 200 shares of its 7% Series D Convertible
Preferred Stock (the "Series D Preferred Stock") to an accredited investor. The
Company realized gross proceeds of $2,000,000 from this private placement, less
expenses and commissions of $244,417. In connection with this transaction, the
Company also issued two five-year warrants to the investor. The two warrants
entitle the investor to purchase that number of shares of Common Stock equal to
the aggregate purchase price of shares of Series D Preferred Stock acquired
divided by the closing price of the Common Stock on the trading date immediately
before the date of purchase, multiplied by 20% and 30%, respectively, at
exercise prices equal to 150% and 125%, respectively, of such closing price,
subject to certain adjustments. The value of the warrants on the date of
issuance of $275,280 has been deducted from the stated value of the Series D
Preferred Stock and is reflected as additional paid-in capital. Commissions and
costs of issuance have been prorated between the Series D Preferred Stock and
the warrants. The Stock Purchase Agreement also provides for the potential
issuance of adjustment shares of the Company's Common Stock to the holder of the
Series D Preferred Stock under certain limited conditions.
Holders of Series D Preferred Stock are entitled to cumulative dividends at the
annual rate of 7% payable on each conversion date. Each share of Series D
Preferred Stock is convertible by the holder into shares of Common Stock based
on an initial conversion price equal to 105% of the average of the closing
prices of the Common Stock for the five trading days ending on the trading day
immediately preceding the closing. All shares of Series D Preferred Stock shall
be automatically converted into shares of the Company's Common Stock on the
earlier to occur of (i) September 30, 2001, (ii) the third trading day
immediately preceding the closing of the first sale under a bona fide
underwritten initial public offering of the common stock of Huge Entertainment,
Inc. with net proceeds to Huge Entertainment, Inc. (or any successor of Huge
Entertainment, Inc.) of at least $10,000,000, or (iii) the 10th trading day
immediately preceding the closing of a transaction resulting in a change of
control of the Company. The Company has the option to redeem all or any portion
of the shares of Series D Preferred Stock that are outstanding at the time for a
cash redemption price per share which is equivalent to a 20% premium over the
value that the holder of the preferred shares would realize if the preferred
shares were converted to Common Stock at the time of redemption. Upon any
liquidation, dissolution or winding up of the Company, holders of Series D
Preferred Stock are entitled to payment of the $10,000 stated value for each
such share plus all due but unpaid dividends before any payment is made to
holders of Common Stock. The Series D Preferred Stock carries no voting rights,
and ranks junior to the Series A, B and C Preferred Stock.
(4) FRANCHISE FEE INCOME:
Net revenues for the nine months ended September 30, 1998 include franchise fee
income of $350,000 as the Company received $350,000 as a territorial exclusivity
fee under its amended franchise agreement with its franchisee for the Phoenix,
Arizona market. The Company is not obligated to provide any additional support
to the franchisee under this agreement.
(5) NETCO PARTNERS:
The Company owns a 50% interest in a joint venture called NetCo Partners. NetCo
Partners is engaged in the publishing and licensing of entertainment properties.
NetCo Partners has entered into numerous licensing agreements, including book
publishing agreements with The Berkley Publishing Group, Books on Tape, Inc. and
various foreign publishers, an ABC television mini-series agreement, and a
product placement agreement with the Dodge division of Chrysler Corporation.
NetCo Partners recognizes revenues pursuant to these contracts when the earnings
process has been completed based on the terms of the various contracts and at
the point where ultimate collection of such revenue is no longer subject to
significant contingencies such that collection is substantially assured. The
revenues, gross profit and net
9
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income (loss) of NetCo Partners for the three and nine months ended September
30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $(880,140) $25,000 $ (99,195) $4,256,149
Gross Profit (761,197) 19,125 (123,774) 3,669,383
Net Income (Loss) (776,548) 15,856 (195,760) 3,660,854
</TABLE>
During the three months ended September 30, 1998, NetCo Partners and ABC
modified their agreement, which resulted in a modification of revenues
previously accrued in 1997 under the ABC mini-series agreement for NET FORCE.
The mini-series agreement originally provided for a payment to NetCo Partners of
$1.6 million should the NET FORCE mini-series not air by May 1999 and a minimum
guaranteed license fee if it aired. During the third quarter, ABC substantially
completed production of the mini-series (at a sizable cost which was funded
entirely by ABC), and the mini-series was scheduled by ABC to air for four hours
over two nights in early 1999. Under the new agreement Netco Partners is to
receive a $400,000 rights fee and a profit participation in the mini-series in
lieu of the original license fee. Since it is probable the mini-series will air
in early 1999, as scheduled, NetCo Partners recorded a $1.2 million revenue
modification during Q3-98, representing the difference between the $1.6 million
penalty payment previously accrued and the $400,000 rights fee, which was
received during Q3-98. Future revenues under the ABC mini-series agreement will
be based on profit participation. This revenue adjustment has resulted in
negative revenues, negative gross profit, and a net loss for NetCo Partners for
the three and nine months ended September 30, 1998. These negative amounts are
not necessarily indicative of the future operating results expected to be
generated by NetCo Partners.
As of September 30, 1998, NetCo Partners has $1,744,831 in accounts receivable.
Management of NetCo Partners believes that these receivables will be collected
in full and no reserves have been established.
NetCo Partners' deferred revenues, consisting of advances received but not yet
recognized as income, amounted to $2,532,375 as of September 30, 1998.
As of September 30, 1998, the Company has received cumulative profit
distributions from NetCo Partners since its formation totaling $2,574,721, in
addition to reimbursement of substantially all amounts advanced by the Company
to fund the operations of NetCo Partners.
(6) LOSS PER COMMON SHARE:
Basic 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.
The following table sets forth the computation of basic and diluted loss per
share for the three and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator for Basic and Diluted Loss per Share:
Net Loss $(2,680,068) $(1,906,395) $ (6,362,573) $(3,249,323)
Plus: Preferred Stock Dividends (62,849) (62,849) (187,151) (166,351)
------------ ------------ ------------- ------------
Loss Available to
Common Shareholders $(2,742,917) $(1,969,244) $ (6,549,724) $(3,415,674)
Denominator for Basic and Diluted Loss per Share:
Weighted Average Shares 7,652,124 6,605,957 7,321,143 6,122,789
------------ ------------ ------------- ------------
Basic and Diluted
Loss per Share $ (0.36) $ (0.30) $ (0.89) $ (0.56)
============ ============ ============= ============
</TABLE>
Inclusion of convertible preferred shares as dilutive securities would have an
antidilutive effect on the loss per share calculation. Accordingly, these shares
have been excluded from the calculation for the three and nine months ended
September 30, 1998 and 1997. The aggregate number of shares of Common Stock that
is issuable upon conversion of all outstanding shares of Preferred Stock (Series
A, B, C, and D) at September 30, 1998 is 1,440,830 shares. Options and warrants
to purchase 2,364,742 shares of Common Stock at exercise prices ranging from
$0.01 to $13.20 per share were also not included in the computation of loss per
share for the three and nine months ended September 30, 1998 and September 30,
1997 because the result would be antidilutive. In addition, 394,466 shares of
Common Stock are held in escrow as additional collateral under the FINOVA
sale/leaseback transactions described in Note 2. These shares, which may be
released by the escrow agent in the event that the Company is in default under
the FINOVA sale/leaseback agreement, as well as the potentially issuable
adjustment shares pursuant to the Series D Preferred Stock Purchase Agreement
(see Note 3) have not been included in the computation of loss per share.
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(7) RECENTLY ISSUED ACCOUNTING STANDARDS:
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income", was issued by the Financial Accounting Standards Board in
June 1997. This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company has adopted SFAS 130 beginning January, 1
1998. For the periods being reported on, comprehensive income and net income are
the same.
Statement of Financial Accounting Standards 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 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
with the annual financial statements for the year ended December 31, 1998. The
Company is currently evaluating the additional disclosure which will be provided
pursuant to SFAS 131.
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities", is effective for
fiscal years ending after June 15, 1999. This statement establishes accounting
and reporting standards that require that every derivative instrument be
recorded in the balance sheet as either an asset or a liability at its fair
value. The Company will adopt SFAS 133 on January 1, 1999. The adoption of this
statement will not have an impact on the Company's consolidated financial
position since the Company does not presently have any derivative or hedging
type investments as defined by SFAS 133.
On April 3, 1998 the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities". SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company will adopt SOP 98-5 on January 1, 1999. Adoption will not materially
impact the Company's reported financial position or results of operations.
(8) FORMATION OF HUGE ENTERTAINMENT:
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, 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% ownership
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 interest in NetCo Partners, and (ii) one
additional intellectual property, TOM CLANCY'S TOP SECRET. In addition, the
Company and C.P. Group have agreed that TOM CLANCY'S CYBERNATION, an
intellectual property that was created as part of the creative process of
developing TOM CLANCY'S NET FORCE, will also be contributed to Huge
Entertainment. 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 formation of Huge
Entertainment has been approved by the Company's Board of Directors. Plans are
for Huge Entertainment to go public via an IPO of Huge Entertainment securities
although there can be no assurances that Huge Entertainment will successfully
complete an IPO. It is currently anticipated that the contribution of the
various assets to Huge Entertainment will occur simultaneously with the closing
of such IPO. The promissory notes will 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
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<PAGE>
prepayment without penalty and mandatory prepayment (except in certain limited
circumstances) in the event of an initial public offering or other issuance of
equity securities by Huge Entertainment.
(9) INCOME TAXES:
A deferred tax asset and income tax benefit of $1,407,600 was recorded in the
fourth quarter of 1997. The Company believes that the deferred tax asset will be
realized through a combination of the following three actions and events: (i) as
a result of the transaction discussed above (see Note 8) taxable income of $4.1
million is expected to be generated, (ii) through the Company's measures to
reverse the losses that have been sustained in its retail division, including
the closing of 21 kiosk locations to date in 1998, the continued evaluation and
closing of remaining marginal kiosk and studio store locations, or the potential
sale of its retail division, and (iii) from the projected revenues that will be
recognized by NetCo Partners under its various licensing agreements for
NETFORCE, certain of which are triggered by the ABC television mini-series which
is scheduled by ABC to air in early 1999.
(10) RESERVE FOR CLOSED KIOSKS AND LEASE TERMINATION COSTS:
The Company has aggressively pursued closure of its marginal entertainment
retail kiosks and has closed 21 kiosk locations during the nine months ended
September 30, 1998. Ten of the 21 mall leases were terminated at the expiration
of the lease, or at the mutual consent of both parties, at no additional cost to
the Company. The Company has reached agreement with certain of the other lessors
to terminate the leases based on a maximum rental payment stream to be paid out
over time, in most cases over a four-month period. The Company is currently
negotiating with the remaining lessors to obtain assignment of and/or release
from certain of its lease obligations, which are typically short term in
duration.
The Company currently has 35 retail kiosks under capital leases, of which 25 are
not currently used in operations. Six kiosks have been earmarked for disposal
through abandonment. The Company is currently exploring alternatives for the
future use of the remaining 19 kiosks. The primary alternative that the Company
is exploring is a sale of such units. Based on preliminary estimates, management
believes that the kiosks could be sold to third parties for an amount which,
after deducting costs to sell, would equal or exceed the carrying amount of the
kiosks, accordingly, no impairment has been recognized as of September 30, 1998.
However, there can be no assurance that the kiosks could be sold or that their
current carrying value could be realized.
During the third quarter of 1998, the Company recorded a $438,956 charge,
representing the carrying value of the six kiosks earmarked for abandonment and
the estimated cost of the early lease terminations.
(11) RENEWAL OF EMPLOYMENT CONTRACTS FOR KEY OFFICERS AND OTHER EMPLOYEE
INCENTIVES:
During the quarter ended September 30, 1998, the Company renewed its employment
contracts with the Company's Chairman of the Board and Chief Executive Officer
and with the Company's Vice Chairman and President. The contracts were renewed
for a five-year period beginning on July 1, 1998 on the same terms and at the
same salaries as in the prior employment contracts. In connection with the
renewal of these employment contracts, the Company granted 100,000 shares of
restricted Common Stock to each of these executive officers. The shares vest
over three years, except in the case of a change in control, as defined in the
stock grant, in which case the shares vest immediately. The fair market value of
the shares on the measurement date of approximately $306,200 per executive was
recorded as deferred compensation and is being amortized to expense over the
three-year period that the shares vest. Additionally, in connection with the
renewal of the employment contracts, the Company awarded the Chairman of the
Board and Chief Executive Officer and the Vice Chairman and President each a
cash bonus equal to two months' salary to be paid on or before December 28,
1998. The restricted stock grant and bonus represent an inducement for renewal
of the contracts, plus compensation for services as well as for the officers'
extension to the Company of a $1.1 million unsecured line of credit and their
willingness to forgo two months' salary in 1997.
During the nine months ended September 30, 1998, the Company also issued 36,230
shares of restricted and/or unregistered stock to several other officers and
employees. The fair value of these shares on the respective measurement dates
aggregated $183,825, which was recorded as deferred compensation and is being
amortized to expense over the period that the shares vest.
(12) USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Significant estimates include management's estimate that accounts receivable of
NetCo Partners as of September 30, 1998 will be collected in full, and that no
reserve for uncollectable accounts is necessary (See Note 5).
Significant accounting estimates also include management's assessment that the
deferred tax asset as of September 30 1998 will be realized through a
combination of actions and events, described in Note 9, which are expected to
generate taxable income. Failure to achieve one or all these actions could
adversely impact the recovery of the deferred tax asset.
Significant estimates also include management's assessment that 19 entertainment
kiosks not currently used in operations (see Note 10) could be sold for an
amount, which, net of selling costs, equals or exceeds the current carrying
value of the kiosks. There is no assurance that the ultimate net sales proceeds
will equal or exceed the carrying amount.
(13) RECLASSIFICATION:
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 classification.
(14) SUBSEQUENT EVENT:
During the month of October 1998, the Company purchased 42,850 shares of its
Common Stock in the open market for an aggregate consideration of $103,088.
These shares will be recorded as treasury stock.
During November 1998, the Company issued 50 shares of its 7% Series D
Convertible Preferred Stock for gross proceeds of $500,000, less $42,500 in
costs associated with issuance of these shares, under terms similar to those
of the Series D Convertible Preferred shares issued in September 1998.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion contains, in addition to historical information,
"forward-looking statements" with respect to Big Entertainment, Inc. ("Big
Entertainment" or the "Company") which represent the Company's expectations or
beliefs, including, but not limited to, statements concerning industry
performance, the Company's operations, performance, financial condition, growth,
acquisition and divestiture strategies, margins, and growth in sales of the
Company's products. For this purpose, any statements contained in this report
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," "will," "expect," "believe," "anticipate," "intend," "could," "estimate,"
or "continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors. Such factors include,
but are not limited to, the Company's limited availability of cash and working
capital; operating losses and accumulated deficit; limited operating history;
risks related to retail operations; competition; risks related to trademarks and
proprietary rights; dependence on management; dependence on licensees; and other
factors discussed in the Company's filings with the Securities and Exchange
Commission.
GENERAL
Big Entertainment is a diversified entertainment company presently engaged in
the development and licensing of intellectual properties and the operation of
entertainment-related retail stores. This Thanksgiving the Company is launching
"www.bige.com," with plans for it to be the world's largest online entertainment
studio store selling licensed branded merchandise from Hollywood studios,
television networks, and popular culture. The Company's online internet studio
store will carry merchandise from over 150 film and television titles. In
addition, "www.bige.com" will be the exclusive movie merchandise store on
"usatoday.com", one of the most frequently visited sites on the internet.
Big Entertainment conducts these activities through the Company and its
subsidiaries, including 51%-owned Tekno Books and 100%-owned Big Online, Inc.
(which owns "www.bige.com"), as well as through a joint venture known as NetCo
Partners, in which the Company has a 50% ownership interest.
The Company has agreed to contribute its intellectual properties (i.e., LEONARD
NIMOY'S PRIMORTALS, GENE RODDENBERRY'S XANDER IN LOST UNIVERSE, etc.), but not
its on-line business, to a newly formed entity, Huge Entertainment, which is
discussed on page 16. Upon consummation of this transaction, the Company will
have a 51.75% ownership interest in Huge Entertainment (on a pre-IPO basis).
Plans are for Huge Entertainment to go public in an IPO and for shareholders of
Big Entertainment to receive shares in Huge Entertainment, although there can be
no assurances that these transactions will be completed as planned. All of the
Company's intellectual properties activities will then be conducted through Huge
Entertainment as further discussed on page 16.
Pending the consummation of the Huge Entertainment transaction, the Company has
two current operating divisions: the intellectual properties division and the
entertainment retail division. A third operating division, Big Online, Inc.,the
owner of "www.bige.com", will commence operations when it debuts this
Thanksgiving as noted above.
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 (such as MICKEY SPILLANE'S MIKE DANGER and LEONARD
NIMOY'S PRIMORTALS). The intellectual properties division also includes a book
development and licensing operation which focuses on developing and executing
book projects, frequently with best-selling authors. These books are then
licensed for publication to book publishers such as HarperCollins, Bantam
Doubleday Dell, Random House, Simon & Schuster, Viking Press and Warner Books.
The entertainment retail division operates a chain of retail studio stores and
Super-Kiosks that sell entertainment-related merchandise. In addition, the
Company has an agreement with The ABC Television
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Network ("ABC"), a division of The Walt Disney Company ("Disney") pursuant to
which the entertainment retail division runs ABC video clips on the television
monitors in the Entertainment Super-Kiosks in exchange for promotional and
advertising spots on ABC affiliate television stations. The Company has
contracted its traditional retail operations during 1998 and is currently
focusing on the launch and operation of its new internet-based retailing venture
discussed above.
INTELLECTUAL PROPERTIES DIVISION
INTELLECTUAL PROPERTIES AND 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 such as 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 licensing to
third parties the rights to produce 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 intellectual properties include, among others: LEONARD NIMOY'S
PRIMORTALS; GENE RODDENBERRY'S XANDER IN LOST UNIVERSE; ISAAC ASIMOV'S I-BOTS;
MICKEY SPILLANE'S MIKE DANGER; JOHN JAKES' MULLKON EMPIRE; ANNE MCCAFFREY'S
ACORNA: THE UNICORN GIRL; MARGARET WEIS' TESTAMENT OF THE DRAGON; NEIL GAIMAN'S
MR. HERO - THE NEWMATIC MAN; NEIL GAIMAN'S TEKNOPHAGE; NEIL GAIMAN'S LADY
JUSTICE; NEIL GAIMAN'S ADAM CAIN, THE WANDERER; and NEIL
GAIMAN'S WHEEL OF WORLDS.
The Company's licensing agreements include:
/bullet/ An initial joint publishing agreement with HarperCollins, one of the
largest publishers in the world and a division of The News
Corporation, to publish hardcover books, paperback books, and/or
illustrated novels for ANNE MCCAFFREY'S ACORNA: THE UNICORN GIRL,
ISAAC ASIMOV'S I-BOTS, and MARGARET WEIS' TESTAMENT OF THE DRAGON, and
a second agreement with HarperCollins for publication of additional
novels in the ANNE MCCAFFREY'S ACORNA series.
/bullet/ A publishing agreement with Warner Books, a division of Time Warner,
Inc., for LEONARD NIMOY'S PRIMORTALS.
/bullet/ A film licensing agreement with Pressman Films for MICKEY SPILLANE'S
MIKE DANGER. (Pressman Films may co-produce and/or co-distribute this
property as a feature film or television series in conjunction with
Miramax Films, a division of Disney.) Pressman Films is expected to
produce this film in 1999. Pressman Films has produced over 50 motion
pictures including WALL STREET, THE CROW, REVERSAL OF FORTUNE AND DAS
BOOT.
/bullet/ A joint publishing agreement with Miramax Books and Hyperion Books,
both divisions of Disney, for publication of a MICKEY SPILLANE'S MIKE
DANGER book written by Mickey Spillane.
/bullet/ A licensing agreement with Books on Tape, Inc. for production of
unabridged audio recordings of two novels based on ANNE MCCAFFREY'S
ACORNA: THE UNICORN GIRL.
/bullet/ A book licensing agreement with DAW Books, a partner of Penguin
Putnam, Inc., for two novels based on GENE RODDENBERRY'S XANDER IN
LOST UNIVERSE. Gene Roddenberry is the creator of STAR
TREK /trademark/.
/bullet/ A joint CD-ROM publishing venture with Sierra On-Line, one of the
largest worldwide publishers of interactive entertainment,
productivity and educational software, for an interactive CD-ROM of
LEONARD NIMOY'S PRIMORTALS.
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/bullet/ Various foreign licensing agreements for publication of both LEONARD
NIMOY'S PRIMORTALS and ANNE MCCAFFREY'S ACORNA: THE UNICORN GIRL.
Other significant licensing activities are carried out by the Company through
its NetCo Partners joint venture. These licensing activities are discussed on
page 18 herein.
BOOK DEVELOPMENT AND LICENSING. Big Entertainment conducts its book development
and licensing activities through its 51%-owned subsidiary, Tekno Books. Tekno
Books is a leading developer of fiction and non-fiction books, with over 1,000
books published to date (including approximately 75 books published during 1997
and approximately 50 books published during the first three quarters of 1998)
and approximately another 180 books under contract that are forthcoming. Tekno
Books is not a book publisher itself, and therefore it does not bear the
expenses and risks of a typical book publisher. Instead, Tekno Books works to
develop concepts, frequently in conjunction with one or more best-selling
authors and/or media celebrities, which it then licenses to various publishers
for publication. In addition, Tekno Books provides the Company with access to a
number of best-selling authors. Tekno Books has worked with approximately 50 NEW
YORK TIMES best-selling authors, including 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 80 publishers (including HarperCollins, Bantam
Doubleday Dell, Random House, Simon & Schuster, Viking Penguin and Warner
Books), translated into 31 languages, and selected by 22 different book clubs.
Tekno Books is also a leading producer of novels and anthologies in the science
fiction, fantasy, mystery, horror and western genres.
Tekno Books has several agreements through which it plans to expand the scope of
its projects. The first is 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. 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 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 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. The first three books, based on the MGM
property POLTERGEIST: THE LEGACY, which is presently airing on Showtime and in
syndication, are scheduled to be published beginning in 1999.
Also during 1997, Tekno Books 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. Classica has advised the
Company that until this time, the bulk of these files have not been seen outside
of Russia. This agreement with The Classica Foundation grants Tekno Books the
exclusive use of this catalogue to the Russian archives, and the right to copy
the materials contained therein for use in licensing rights for books, CD-ROMs,
on-line, documentaries, television specials and feature
15
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films based on these materials. Tekno Books has developed an extensive list of
major book projects that may be developed from these archives, including books
on topics such as the German military, German intelligence activities before and
during World War II, the Nazi party, certain of 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 and another $100,000 during the
first quarter of 1998 to secure these rights through March 12, 1999. Tekno Books
has an option, and under certain circumstances an obligation, to extend this
agreement through 2003 for an additional payment of $300,000, payable in March
1999, as well as an additional five-year option exercisable in 2003 to extend
the term for another five years for an additional payment of $500,000. One-half
of the payments to Classica are advances to be credited against The Classica
Foundation's 50% profit participation in the project.
FORMATION OF HUGE ENTERTAINMENT. 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, 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% ownership 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 interest in NetCo
Partners, and (ii) one additional intellectual property TOM CLANCY'S TOP SECRET.
In addition, the Company and C.P. Group have agreed that TOM CLANCY'S
CYBERNATION, an intellectual property that was created as part of the creative
process of developing TOM CLANCY'S NET FORCE, will also be contributed to Huge
Entertainment. 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 formation of Huge
Entertainment has been approved by the Company's Board of Directors. Plans are
for Huge Entertainment to go public via an IPO of Huge Entertainment securities,
although there can be no assurances that Huge Entertainment will successfully
complete an IPO. It is currently anticipated that the contribution of the
various assets to Huge Entertainment will occur simultaneously with the closing
of such IPO. The promissory notes will 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.
ENTERTAINMENT RETAIL DIVISION
The Company operates mall-based retail stores which sell entertainment-related
branded 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
formats - Entertainment Super-Kiosks and in-line studio stores. The
Entertainment Super-Kiosks average 166 square feet in size. During the fourth
quarter of 1997, the Company opened its first 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-Kiosks and enables the Company
to offer a broader array of merchandise targeted at a wider segment of the
market.
The Company currently operates 14 mall-based retail stores consisting of nine
Entertainment Super-Kiosks and five in-line stores, including four studio stores
and one mini in-line store. This represents a significant reduction in the
number of kiosk locations, as the Company has aggressively pursued closing its
marginal
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kiosk locations throughout 1998. To date in 1998, the Company has closed 21
kiosk locations and eliminated approximately 100 positions, primarily store
employees, as a result of the reduction in the number of kiosks. Other expense
savings from the reduction in kiosks include reduced travel and distribution
costs. Unlike a typical retail store, a closed kiosk can be temporarily placed
in storage and later redeployed to a more desirable location, or sold. The
Company is currently exploring alternatives for the future use of the kiosks,
which may include a sale. The Company plans to focus its future efforts in this
area on the launch and operation of its new e-commerce internet studio store,
"www.bige.com".
INTERNET E-COMMERCE STORE - "www.bige.com". The new online store,
"www.bige.com", will launch this Thanksgiving with a substantial product line
including branded licensed merchandise from the Hollywood studios, television
networks, and popular culture such as Southpark, Wrestling, Rug Rats, Star Trek,
and Teletubbies. The Company has entered into an agreement with USA Today
Information Network to be the exclusive e-commerce studio store on the
newspaper's frequently visited (6 million unique visitors per month) website
"www.usatoday.com". The Company's e-commerce website will appear on
usatoday.com's Homefront Page as well as the Front Pages of the Movies,
Entertainment and Life sections of "www.usatoday.com". The owner of USA Today is
Gannett Co., Inc., a shareholder in the Company. The Company is currently
engaged in discussions to expand its e-commerce presence with other highly
trafficked websites, as well as search engines and portal companies; such
discussions are presently ongoing.
The Company has entered into an amended agreement in principle with an internet
entrepreneur to sell 25% of the Company's internet studio store in exchange for
$6 million (which will be reinvested in marketing of the internet studio store
on the worldwide web). Although a definitive agreement is currently being
negotiated, there are no guarantees or assurances that this transaction will be
completed or be completed on the terms as outlined above.
ABC PROGRAMMING AGREEMENT. In March 1997, the Company entered into an exclusive
programming agreement with ABC, a division of Disney. Under this programming
agreement, on May 1, 1997, the Company commenced running two times each hour on
the video monitors at each of its Entertainment Super-Kiosks, a 12-minute
programming segment provided by ABC and its local affiliate television stations.
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 and new, non-repetitive programming is provided to the
Company each month. The Company also agreed to display ABC's logo and other
promotional materials complementing the then-current video monitor campaigns. In
exchange for its agreement to run the ABC programming exclusively, ABC affiliate
stations in the markets where the Company's Entertainment Super-Kiosks are
located run promotional and advertising spots on the ABC affiliate stations
featuring the Company's Entertainment Super-Kiosks and in-line studio stores.
The Company also agreed to sell selected ABC products featuring the ABC logo or
its programs (such as "Home Improvement" t-shirts and "Monday Night Football"
caps), in its retail outlets. The Company believes that this arrangement with
ABC provides its Entertainment Super-Kiosks with a steady source of current
programming for the Entertainment Super-Kiosks that appeals to the target
customers, at no cost to the Company. Additionally and most importantly, the
promotional spots 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.
FRANCHISING. All of the Big Entertainment retail stores are currently operated
by the Company. As part of its expansion strategy, the Company entered into a
franchise agreement dated December 1995 with a private investor. This agreement
was amended in December 1997. Under the amended 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. Management has represented that it does not intend
to exercise this option. The territorial exclusivity fee of $350,000 was
17
<PAGE>
received and recorded as income during the first quarter of 1998. The franchise
agreement provides for a continuing royalty payable to the Company based upon
sales. The Company signed a second franchise agreement with a private investor
on May 1, 1997, for the Philadelphia area. In view of the Company's focus on its
internet studio store, the Company and this franchisee have mutually agreed not
to proceed, and the Company refunded the franchisee's initial $50,000 payment
upon termination of and mutual release of each party from the franchise
agreement.
NETCO PARTNERS
The Company also carries out substantial activities through its joint venture
known as NetCo Partners. The Company and CP Group are each 50% partners in NetCo
Partners. NetCo Partners owns the following intellectual properties: TOM
CLANCY'S NET FORCE; ARTHUR C. CLARKE'S WORLDS OF ALEXANDER; TAD WILLIAMS' MIRROR
WORLD; CATHY CASH SPELLMAN'S MILLENIUM; ANNE MCCAFFREY'S SARABAND; and NEIL
GAIMAN'S LIFERS.
The most significant licensing agreements currently involve TOM CLANCY'S NET
FORCE, a property owned by NetCo Partners. ABC has agreed to develop and license
a television mini-series based on TOM CLANCY'S NET FORCE. The production of the
mini-series has been substantially completed and ABC has begun to sell
advertising for it. ABC currently plans to air the mini-series for four hours
over two nights in early 1999.
NetCo Partners also has 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 NET FORCE. This contract includes total maximum
advances of $22 million plus the potential for royalties. Plans are to publish a
book every nine months, with the first book scheduled to go on sale in December
1998, approximately six weeks prior to the airing of the ABC mini-series
referred to above.
NetCo Partners also has a second agreement with Berkley to publish up to 18
young adult novels based on TOM CLANCY'S NET FORCE. This contract includes total
maximum advances of $900,000 plus the potential for royalties. Plans are to
publish two books in December 1998, approximately six weeks prior to the airing
of the ABC mini-series referred to above, and one book every other month
thereafter.
Both of the Berkley contracts grant to Berkley only the North American
publishing rights to TOM CLANCY'S NET FORCE. NetCo Partners has also licensed
the rights to TOM CLANCY'S NET Force books in other countries. NetCo Partners
has entered into an agreement with Headline Book Publishing Ltd. ("Headline")
for the rights to publish the first four TOM CLANCY'S NET FORCE novels and all
18 young adult books in the United Kingdom. The first novel to be published
under this agreement was shipped to retailers by Headline in October 1998. NetCo
Partners has also entered into contracts licensing some or all of the adult and
young adult TOM CLANCY'S NET FORCE books for publication in the German, French,
Dutch, Danish, Spanish, Swedish and Norwegian languages. Total contractual
advances payable under the foreign licensing agreements aggregate approximately
$3.9 million. NetCo Partners continues to negotiate license agreements for TOM
CLANCY'S NET FORCE 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 NET FORCE novels
for an aggregate consideration of $600,000. NetCo Partners anticipates licensing
additional audio books in the series.
NetCo Partners also entered into an agreement with the Dodge division of
Chrysler Corporation for placement of Chrysler and Dodge products in TOM
CLANCY'S NET FORCE novels.
NetCo Partners has also entered into an agreement to license TAD WILLIAMS'
MIRROR WORLD to HarperCollins for publication as an illustrated novel.
18
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 ("Q3-98") AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997 ("Q3-97"), AND NINE MONTHS ENDED SEPTEMBER 30, 1998
("Y3-98") AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 ("Y3-97").
The following table summarizes the Company's revenues, cost of sales, and gross
profit by division for Q3-98, Q3-97, Y3-98, and Y3-97, respectively:
<TABLE>
<CAPTION>
INTELLECTUAL ENTERTAINMENT
PROPERTIES RETAIL TOTAL
------------ ------------- -----
<S> <C> <C> <C>
Q3-98
- -----
Net Revenues $ 819,490 $ 1,510,656 $ 2,330,146
Cost of Sales 465,375 841,930 1,307,305
------------- ------------- -------------
Gross Profit $ 354,115 $ 668,726 $ 1,022,841
============= ============= =============
Q3-97
- -----
Net Revenues $ 343,657 $ 1,660,083 $ 2,003,740
Cost of Sales 97,958 913,266 1,011,224
------------- ------------- -------------
Gross Profit $ 245,699 $ 746,817 $ 992,516
============= ============= =============
Y3-98
- -----
Net Revenues $ 1,964,943 $ 5,633,429 $ 7,598,372
Cost of Sales 999,238 2,872,517 3,871,755
------------- ------------- -------------
Gross Profit $ 965,705 $ 2,760,912 $ 3,726,617
============= ============= =============
Y3-97
- -----
Net Revenues $ 1,477,336 $ 4,141,293 $ 5,618,629
Cost of Sales 737,962 2,253,364 2,991,326
------------- ------------- -------------
Gross Profit $ 739,374 $ 1,887,929 $ 2,627,303
============= ============= =============
</TABLE>
19
<PAGE>
NET REVENUES
Net revenues for Q3-98 increased by 16%, or $326,406, to $2,330,146 from
$2,003,740 for Q3-97. Net revenues for Y3-98 increased by $1,979,743, or 35%, to
$7,598,372 from $5,618,629 for Y3-97. The increase in net revenues for Q3-98 was
driven by an increase in net revenues for the intellectual properties, while the
increase in net revenues for Y3-98 is attributable primarily to growth in the
Company's entertainment retail division coupled with an increase in net revenues
in the intellectual properties division. For Q3-98, revenues generated by the
entertainment retail division amounted to 65% of the Company's total revenues
while revenues from the intellectual properties division amounted to 35% of the
total. By comparison for Q3-97, entertainment retail revenues amounted to 83% of
the total and intellectual properties revenues amounted to 17% of the total.
GROSS PROFIT
Overall Company gross profit increased by 3%, or $30,325, to $1,022,841 for
Q3-98 from $992,516 in Q3-97, reflecting higher gross profit in the intellectual
properties division. The Company's overall gross profit increased 42%, or
$1,099,314, to $3,726,617 in Y3-98 from $2,627,303 in Y3-97, primarily due to
increases in gross profit in the Company's entertainment retail division
resulting from the impact of the ABC programming agreement. As a percentage of
net revenues, gross profit decreased to 44% in Q3-98 from 50% in Q3-97.
INTELLECTUAL PROPERTIES DIVISION
The intellectual properties division generates revenues from several different
activities including book development and licensing, intellectual property
licensing, and publishing MYSTERY SCENE MAGAZINE and its web site,
"mysterypages.com". In Y3-97, publishing also included minor residual revenues
from publication of comic books, which the Company has discontinued. The revenue
breakdown from these activities is as follows:
<TABLE>
<CAPTION>
Q3-98 Q3-97
------------------ --------------------
$ % $ %
------------ ---- ------------ ----
<S> <C> <C> <C> <C>
Book Development & Licensing $ 759,363 93% $ 308,613 90%
Licensing 58,184 7 17,268 5
Publishing 1,943 - 17,776 5
------------ ---- ------------ ----
Total $ 819,490 100% $ 343,657 100%
============ ==== ============ ====
</TABLE>
<TABLE>
<CAPTION>
Y3-98 Y3-97
------------------ --------------------
$ % $ %
------------ ---- ------------ ----
<S> <C> <C> <C> <C>
Book Development & Licensing $ 1,736,267 88% $ 1,284,205 87%
Licensing 196,355 10 141,414 10
Publishing 32,321 2 51,717 3
------------ ---- ------------ ----
Total $ 1,964,943 100% $ 1,477,336 100%
============ ==== ============ ====
</TABLE>
Book development and licensing represents 93% of the revenues generated by the
intellectual properties division for Q3-98 and 88% for Y3-98. The Company's book
development and licensing activities are conducted through Tekno Books, its
51%-owned subsidiary. Tekno Books focuses on developing and executing book
projects, frequently with best-selling authors, and then licensing the books for
publication with various publishers. Book development and licensing revenues
increased by $450,750, or 146% to $759,363 for Q3-98 from $308,613 for Q3-97,
and by $452,062, or 35%, to $1,736,267 for Y3-98 from
20
<PAGE>
$1,284,205 for Y3-97. These increases were largely due to contractual advances
payable under several significant book contracts based on performance benchmarks
met under the contracts. The Company anticipates continued significant increases
in the revenues generated by Tekno Books in the future 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 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, with
several books currently under development.
Licensing revenues (excluding revenues generated by NetCo Partners) increased by
237%, or $40,916, from $17,268 in Q3-97 to $58,184 in Q3-98. Licensing revenues
include advances and royalties received under the Company's various licensing
agreements with HarperCollins, Warner Books, Sierra On-Line, Alliance
Entertainment, Books on Tape, Inc. and various licensees for foreign
publications. Licensing revenues for Q3-98 primarily consisted of advances under
the HarperCollins licensing agreements as two of Big Entertainment's
intellectual properties were published as novels by HarperCollins during the
quarter - ANNE MCCAFFREY'S ACORNA'S QUEST and MARGARET WEIS' DRAGON'S DISCIPLE.
Licensing revenues for Q3-98 also include secondary publication rights payments
received for publication of ANNE MCCAFFREY'S ACORNA: THE UNICORN GIRL, MICKEY
SPILLANE'S MIKE DANGER and NEIL GAIMAN'S TEKNOPHAGE comic books as well as
royalties from the sales of LEONARD NIMOY'S PRIMORTALS CD-ROM. Licensing
revenues for Q3-97 included an advance for an illustrated novel to be published
by HarperCollins, as well as secondary publications rights payments for several
comic books. 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 23.
Publishing revenues decreased by 89%, or $15,833, to $1,943 in Q3-98 from
$17,776 in Q3-97. Publishing revenues decreased by 38%, or $19,396, to $32,321
for Y3-98 from $51,717 for Y3-97. Publishing revenues during Q3-98 consist of
revenues from publication of MYSTERY SCENE MAGAZINE, a mystery-genre trade
journal published by the Company's 51%-owned subsidiary, Fedora, Inc. MYSTERY
SCENE MAGAZINE has recently joined with two other mystery magazines owned by
Dell Publishing, ELLERY QUEEN MYSTERY MAGAZINE and ALFRED HITCHCOCK MYSTERY
MAGAZINE, in the formation of a combined internet website called
"mysterypages.com," which sells subscriptions to all three magazines, provides
an overview of the current magazine issues, includes interviews with mystery and
suspense authors, and contains a message board for mystery fans to contact their
favorite authors. The combined monthly circulation for the three publications is
in excess of 600,000 readers. It will soon be possible to buy mystery books over
the site through an arrangement with Barnesandnoble.com. The decrease in
publishing revenues is attributable to the Company's decision to discontinue its
comic book publishing operation. 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, although residual revenues were earned
throughout 1997. The Company has continued to exploit the intellectual
properties it acquired while publishing comic books through licensing agreements
for illustrated novels with HarperCollins and other media, as discussed above.
21
<PAGE>
Gross profit for the intellectual properties division (not including the
Company's 50% equity in the earnings of NetCo Partners) increased by 44%, or
$108,416, to $354,115 in Q3-98 from $245,699 in Q3-97 and by 31%, or $226,331,
to $965,705 for Y3-98 from $739,374 for Y3-97. This increase in gross profit for
Q3-98 reflects increased gross profits from Tekno Books and increased licensing
activities with HarperCollins.
ENTERTAINMENT RETAIL DIVISION
Net revenues for the Company's entertainment retail division decreased by 9%, or
$149,427, to $1,510,656 for Q3-98 from $1,660,083 for Q3-97, while increasing by
36%, or $1,492,136, to $5,633,429 for Y3-98 from $4,141,293 for Y3-97. The
decline in net revenues for Q3-98 resulted from the closure of kiosks during
Y3-98 as discussed below. Net revenues are derived from sales of
entertainment-related products and merchandise at the Entertainment Super-Kiosks
and in-line studio stores, imputed income from the ABC programming agreement,
and franchise fee income.
The composition of net revenues is as follows:
<TABLE>
<CAPTION>
Q3-98 Q3-97
------------------ --------------------
$ % $ %
------------ ---- ------------ ----
<S> <C> <C> <C> <C>
Retail Sales $ 1,128,006 75% $ 1,485,083 89%
ABC Advertising Income 382,650 25 175,000 11
------------ ---- ------------ ----
$ 1,510,656 100% $ 1,660,083 100%
============ ==== ============ ====
</TABLE>
<TABLE>
<CAPTION>
Y3-98 Y3-97
------------------ --------------------
$ % $ %
------------ ---- ------------ ----
<S> <C> <C> <C> <C>
Retail Sales $ 4,000,779 71% $ 3,966,293 96%
ABC Advertising Income 1,282,650 23 175,000 4
Franchise Fee Income 350,000 6 - -
------------ ---- ------------ ----
$ 5,633,429 100% $ 4,141,293 100%
============ ==== ============ ====
</TABLE>
The Company had 13 retail units in operation at September 30, 1998 as compared
to 32 units at September 30, 1997. Over the 12-month period from September 30,
1997 to September 30, 1998, the Company closed 22 kiosks and opened three new
prototype in-line studio stores. Retail sales decreased by 24%, or $357,077, to
$1,128,006 for Q3-98 from $1,485,083 for Q3-97, as a result of the closure of 22
kiosks. Comparable store sales growth for the quarter was modest, up by less
than 1%. On a year-to-date basis, retail sales increased by 1%, or $34,486, to
$4,000,779 for Y3-98 from $3,966,293 for Y3-97. The increase in retail sales was
entirely attributable to the revenues generated by the new in-line studio
stores. The additional sales from the new in-line studio stores were partially
offset by the loss of sales from kiosks that were closed and by a decrease in
comparable store sales of 6% for Y3-98. The decline in comparable store sales
was principally caused by lower dollar sales, although unit movement was strong,
reflecting significant mark-downs as part of an effort during the months of
March, April and May of 1998 to move out older merchandise and make room for new
merchandise. The turnaround in comparable store sales to positive for Q3-98 was
partially attributable to this new fresh merchandise. Other factors contributing
to the sales turnaround in Q3-98 include the Company's shift in its
merchandising focus to the core mall
22
<PAGE>
customer, quicker reaction to trends in the entertainment industry, new product
sourcing, and a broader merchandise mix.
Net revenues 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. This imputed income amounted to $382,650 for Q3-98 and
$1,282,650 for Y3-98, as compared to $175,000 for both Q3-97 and Y3-97 as the
barter arrangement with ABC commenced during Q3-97. 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.
Revenues for the entertainment retail division also include $350,000 of
franchise fee income during Y3-98. This income represents the territorial
exclusivity fee which the Company received during the first quarter of 1998 from
the franchisee for the Phoenix, Arizona territory. Under the Company's agreement
with this franchisee, the franchisee must open at least one store by December
1999 and one store each year thereafter in order to preserve its exclusivity.
The agreement also provides for a continuing royalty based upon sales of the
franchised units, though no franchised units have been opened yet. The Company
is not obligated to provide any additional support to the franchisee under this
agreement.
Gross profit for the entertainment retail division decreased by 10%, or $78,091,
to $668,726 for Q3-98 from $746,817 for Q3-97 as a result of the decline in
sales due to the closed kiosk units. On a year-to-date basis, gross profit
increased by 46%, or $872,983, to $2,760,912 for Y3-98 from $1,887,929 for
Y3-97. As a percentage of entertainment retail division revenues, gross profit
decreased to 44% for Q3-98, from 45% for Q3-97. The decrease in gross profit
margin for Q3-98 stemmed primarily from the mark-downs which were taken in order
to sell off merchandise in the kiosks that closed during Q3-98. For Y3-98, gross
profit margin increased to 49% from 46% in Y3-97 as a result of the impact of
the ABC programming agreement and the franchise fee income discussed above, for
which there were no offsetting costs included in cost of sales.
EQUITY IN EARNINGS (LOSS) OF NETCO PARTNERS
The Company's 50% share in the loss of NetCo Partners amounted to $(388,274) for
Q3-98 as compared to income of $7,928 for Q3-97, and a loss of $(97,880) for
Y3-98 as compared to income of $1,830,427 for Y3-97. The loss in Q3-98 and Y3-98
is attributable to a modification of the licensing agreement between NetCo
Partners and ABC, which resulted in a modification of revenues accrued by NetCo
Partners in 1997 under the ABC mini-series agreement for NET FORCE. The
mini-series agreement originally provided for a payment to NetCo Partners of
$1.6 million should the NET FORCE mini-series not air by May 1999 and a minimum
guaranteed license fee if it aired. During the third quarter, ABC substantially
completed production of the mini-series (at a sizable cost which was funded
entirely by ABC), and the mini-series was scheduled by ABC to air for four hours
over two nights in early 1999. Under the new agreement, Netco Partners is to
receive a $400,000 rights fee and a profit participation in the mini-series in
lieu of the original license fee. Since it is probable the mini-series will air
in early 1999, as scheduled, NetCo Partners recorded a $1.2 million revenue
modification during Q3-98, representing the difference between the $1.6 million
penalty payment previously accrued and the $400,000 rights fee, which was
received during Q3-98. Future revenue under the ABC mini-series agreement will
be based on profit participation. This revenue adjustment has resulted in
negative revenues, negative gross profit, and a net loss for NetCo Partners for
the three and nine months ended September 30, 1998. These negative amounts are
not necessarily indicative of the future operating results expected to be
generated by NetCo Partners. Offsetting this revenue modification was $304,236
in revenues recognized in Q3-98 by NetCo Partners from licensing agreements to
publish certain of the NET FORCE novels and young adult books in various foreign
languages. The first NET FORCE novel has been published under a foreign
licensing agreement in the U.K. and this book is already in its fifth printing.
The income in Y3-97 reflects the revenues recorded for NET FORCE during the
second quarter of 1997 ("Q2-97") for the initial signature advances under
several of the licensing agreements (including the subsequently reversed
revenues from the ABC mini-series discussed above) as Q2-97 was the first
quarter in which any revenues were recognized by NetCo Partners for NET FORCE.
The income recognized by NetCo Partners during Q2-97 reflected the culmination
of the efforts to reach agreements with ABC and Berkley, including acceptance of
the ABC teleplay, thereby enabling NetCo Partners to recognize the sizable
signature advances under the various licensing agreements then in place.
NetCo Partners recognizes revenues when the earnings process has been completed
based on the terms of the various agreements and when ultimate collection of
such revenues is no longer subject to significant contingencies such that
collection is substantially assured. 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 intellectual properties and their licensed products are
expensed in proportion to the revenues that have been recognized.
OPERATING EXPENSES
Operating expenses consist of selling, general and administrative expenses,
salaries and benefits, amortization of goodwill and intangibles, and a reserve
for closed kiosks and lease termination costs. Excluding the reserve for closed
kiosks and lease termination costs, which is discussed on the following page,
operating expenses decreased by 9%, or $264,435, to $2,545,951 for Q3-98 from
$2,810,386 for Q3-97 as a result of closing 22 kiosks during the 12 months ended
September 30, 1998. On a year-to-date basis, operating expenses increased by
16%, or $1,183,886, to $8,561,319 for Y3-98 from $7,377,433 for Y3-97. Note that
$1,107,650, or 94% of the increase in Y3-98 represents non-cash
23
<PAGE>
advertising expense imputed under the ABC barter agreement discussed below.
Excluding the non-cash ABC advertising expense, operating expenses decreased by
$472,085, or 18%, in Q3-98 and increased by $76,236, or 1%, in Y3-98. As a
percentage of net revenues, total operating expenses decreased to 109% in Q3-98
from 140% in Q3-97. The Company expects to further reduce this ratio throughout
the balance of 1998 as it realizes the full favorable impact of closing the
marginal kiosks. The decrease in total operating expenses in Q3-98 as compared
to total operating expenses in Q3-97 reflects decreases in selling, general and
administrative expenses of $19,013, or 1%, salaries and benefits of $138,826, or
13%, and amortization of goodwill and intangibles of $106,596, or 93%. The
increase in total operating expenses for Y3-98 as compared to Y3-97 reflects a
$1,348,095, or 32%, increase in selling, general and administrative expenses and
a $152,969, or 5%, increase in salaries and benefits, partly offset by a
decrease of $317,178, or 93%, in amortization of goodwill and intangibles. Of
the $1,348,095 increase in selling, general and administrative expenses,
$1,107,650 consists of imputed advertising expense under the ABC barter
arrangement. 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, although the Company does not actually expend any funds
for this advertising. The $152,969 net increase in salaries and benefits for
Y3-98 is attributable to nine months of additional expenses in the entertainment
retail division during Y3-98 for the new employees added to staff the in-line
studio stores and the minimum wage rate increase which was effective September
1, 1997 being offset, in part, by the savings from closing 22 kiosk locations.
RESERVE FOR CLOSED KIOSKS AND LEASE TERMINATION COSTS
The Company has aggressively pursued closure of its marginal entertainment
retail kiosks and has closed 21 kiosk locations during the nine months ended
September 30, 1998. Ten of the 21 mall leases were terminated at the expiration
of the lease, or at the mutual consent of both parties, at no additional cost to
the Cpmpany. The Company has reached agreement with certain of the other lessors
to terminate the leases based on a maximum rental payment stream to be paid out
over time, in most cases over a four-month time frame. The Company is currently
negotiating with the remaining lessors to obtain assignment of and/or release
from certain of its lease obligations, which are typically short term in
duration. The Company is currently exploring alternatives for the future use of
the kiosks, including a possible sale. A charge in the amount of $438,956 was
recorded in Q3-98, representing a write-off of six kiosks which the
Company has earmarked for abandonment plus the estimated cost of the early lease
terminations.
INTEREST EXPENSE, NET
Net interest expense increased by 473%, or $142,341, to $172,425 for Q3-98 as
compared to $30,084 for Q3-97 and by 310%, or $463,843, to $613,549 for Y3-98 as
compared to $149,706 for Y3-97, due to additional interest expense for the
inventory line of credit, the shareholder line of credit, the capital leases
entered into to finance the cost of the new in-line studio stores and the
convertible debenture, including non-cash interest expense pertaining to the
convertible debenture of $107,750 during Y3-98 and $26,937 during Y3-97.
NET LOSS
The Company generated a net loss of $2,680,068 for Q3-98, which was a $773,673,
or 41%, greater loss than the $1,906,395 loss for Q3-97. The increased loss in
Q3-98 is attributable to two factors: the $438,956 reserve that was recorded for
the kiosks that were closed and (ii) the decrease in the equity in earnings of
NetCo Partners which was caused by the revenue modification described on page
23. The net impact of this revenue modification on the Company's bottom line was
$504,000. Excluding the impact of both the reserve for closed kiosks and the
NetCo Partners' revenue modification, the net loss generated by the Company for
Q3-98 would have been $1,737,112, which represents a $169,283, or 9%, reduction
of the net loss generated in Q3-97 of $1,906,395. For Y3-98, the net loss
increased by 96%, or $3,113,250, to $6,362,673 as compared to a net loss of
$3,249,323 for Y3-97. The single largest factor contributing to the Company's
reduced bottom line was the significant income that was recorded during Y3-97 as
equity in earnings of NetCo Partners. Q2-97 was the first quarter in which NetCo
Partners recognized any income related to NET FORCE, and significant advances on
various NET FORCE contracts were recorded in Q2-97. It is anticipated that NetCo
Partners will generate significant revenues in future years, particularly in
early 1999 as revenue recognition for certain advances payable under the various
licensing agreements (some of which have already been received) is triggered by
the airing of the ABC television
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mini-series which is scheduled for early 1999. Another factor contributing to
the Company's increased net loss was an increase in net interest expense of
$142,341 for Q3-98 and $463,843 for Y3-98.
Without the impact of both the reserve for closed kiosks and the revenue
modification by NetCo Partners, basic and diluted loss per share would have been
($0.24) for Q3-98 as compared to ($0.30) for Q3-97, a narrower loss of $0.06 per
share. Taking into account both the reserve for closed kiosks and the revenue
modification by NetCo Partners, basic and diluted loss per common share was
($0.36) for Q3-98 as compared to ($0.30) for Q3-97, an additional loss of $.06
per share. Without the impact of both the reserve for closed kiosks and the
revenue modification by NetCo Partners, basic and diluted loss per share would
have been ($0.77) for Y3-98 as compared to ($0.56) for Y3-97, an additional loss
of $0.21 per share. Taking into account both the reserve for closed kiosks and
the revenue modification by NetCo Partners, basic and diluted loss per share was
($0.89) for Y3-98 and ($0.56) for Y3-97, an additional loss of $.33 per share.
The Company has made several modifications to its initial business plan in an
effort to reverse its losses. During 1997, the Company stopped publishing comic
books, an activity that required a substantial amount of resources and had not
proven to be profitable as a result of a significant downturn in the comic book
industry. 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 with the development of three
prototype in-line studio stores. Substantial resources were devoted to the
development of the three prototype in-line studio stores which opened in the
fourth quarter of 1997 as the Company believed that the in-line studio store
concept would allow it to more quickly achieve economies of scale in its
entertainment retail division. The Company also aggressively pursued closing its
marginal kiosk locations, and it has reduced the number of kiosks in operation
to nine locations at the present time. Unlike a typical retail store, a closed
kiosk can be temporarily placed in storage and later redeployed to a more
desirable location, or possibly sold. The Company is currently exploring a sale
of its kiosks.
The Company has curtailed its retail store expansion plans and presently is
focusing its efforts on development of its e-commerce internet business. The
Company is utilizing its existing distribution center, certain existing
personnel and information systems for the launch of its internet studio store,
"www.bige.com", thereby realizing considerable cost savings in comparison to a
traditional e-commerce launch. In addition, through an agreement with USA Today
Information Network, "www.bige.com" will be the exclusive e-commerce studio
store on "www.usatoday.com", one of the most frequently visited sites on the
internet. This agreement, which was reached with a subsidiary of one of the
Company's major shareholders, Gannett Co., Inc., is expected to bring traffic to
the Company's new internet studio store more quickly than would typically be
expected for a new site. 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. The Company has agreed to contribute its
intellectual properties to a newly-formed entity, Huge Entertainment, as
discussed on page 16.
SHAREHOLDERS' EQUITY
Shareholders' equity decreased 30%, or $1,524,383, to $3,579,470 at September
30, 1998 as compared to shareholder's equity of $5,103,853 as of December 31,
1997. The decrease in shareholders' equity is attributable to the Company's net
loss for Y3-98 of $6,362,573, which was largely offset by new shares of stock
issued pursuant to several stock purchase agreements and conversion of the
Company's $650,000 convertible debenture to Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of $200,889 and
a working capital deficit of $373,113 compared to cash and cash equivalents of
$887,153 and a working capital deficit of $175,730 at December 31, 1997. The
proceeds from the sale of $2 million of Series D Convertible Preferred Stock
were not received until October 7, 1998, and therefore are not reflected in the
Company's cash balance at September 30, 1998. Net cash used in operating
activities during Y3-98 was $3,625,395, primarily representing cash used to fund
the Company's net loss. Net cash used in investing activities was $494,792,
while $3,433,923 in cash was provided by financing activities for a total
decrease in cash and cash equivalents of $686,264. During Y3-97, net cash used
in operating activities was $3,390,447, net cash used in investing activities
was $533,724, and $3,817,694 in cash was provided by financing activities.
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
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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 (9.25% at
September 30, 1998) and the prime rate plus 1/2% for the third and fourth years.
In conjunction with the inventory line of credit, the Company issued five-year
warrants to BankBoston to acquire 30,000 shares of the Company's Common Stock at
$9.68 per share. As of September 30, 1998, the Company's outstanding balance on
the line of credit was $826,640, essentially utilizing the then available
borrowing base. 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 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 Company is in compliance with such covenants as of September
30, 1998, although it is anticipated that the Company will need to modify the
business plan previously submitted to BankBoston and have such plan approved by
BankBoston in order to be in compliance with all such covenants throughout 1999.
In March and April, 1998, the Company issued 248,053 shares of Common Stock to
five accredited investors for gross proceeds of $1,037,500. Expenses related to
the issuance of these securities totaling $37,500 were charged to additional
paid-in capital. In conjunction with this stock issuance, the Company issued
five-year warrants to three of the investors to acquire 55,000 shares of the
Company's Common Stock at $4.66 per share. The holders of the above warrants
have the right at any time during the one year period from the date said
warrants were issued, to exchange the warrants for an aggregate of 22,145 shares
of Common Stock.
During May 1998, the Company entered into a sale/leaseback transaction with
FINOVA Capital Corporation ("FINOVA") for 17 Entertainment Super-Kiosk units.
The Company entered into a similar transaction with FINOVA during 1996 for its
other kiosk units. The terms of the 1998 sale/leaseback transaction are an
aggregate sales price of $600,674, which approximated 75% of the original
invoice cost for the units, a 42-month lease term, monthly payments
approximating $18,300, and a $1 buy-out at the end of the lease term. The net
proceeds to the Company after all transaction costs were $582,640.
On June 30, 1998 the Company entered into a private equity line of credit
agreement with two accredited investors. Pursuant to this agreement, these
investors issued irrevocable commitments to purchase $1,500,000 of the Company's
Common Stock over a one-year period, and on June 30, 1998 these investors
purchased an initial 100,000 shares of the Company's Common Stock at the market
price of $5.00 per share. Therefore, only $500,000 of the $1,500,000 has been
tapped and $1,000,000 remains available to the Company. In conjunction with the
establishment of the equity line of credit, the Company issued warrants to these
investors to purchase 45,000 shares of the Company's Common Stock for an average
price of $2.89 per share. The exercise price of the warrants for 20,000 of the
shares is subject to reduction, depending on the number of initial shares of the
Company's Common Stock that the investors still own six months subsequent to
their initial purchase. All of the warrants are exercisable through December 1,
2001. The gross proceeds of $500,000 from the sale of the 100,000 shares of
Common Stock were received in July 1998. Expenses related to establishment of
the equity line of credit and for the issuance of the initial securities
pursuant to this line of credit amounted to $74,315. In addition, the Company
issued 3,000 shares of Common Stock to the placement agent as part of this
transaction. As of September 30, 1998 these investors remain obligated to invest
an additional $1,000,000 in the Company's Common Stock. The Company is under no
obligation to sell these shares to the investors, but may elect to do so in the
future based on the Company's need for capital and the price of the Company's
Common Stock. The remaining shares may be put by the Company to the investors at
a price based on the market price of the Company's Common Stock, subject to
various restrictions and provisions concerning frequency of the puts, maximum
individual put amounts and a minimum market price for the Company's Common
Stock. No additional warrants will be issued in conjunction with sales, if any,
of the remaining shares.
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In July 1998, six members of the Company's Board of Directors, including the
Company's Chairman and Chief Executive Officer and the Company's Vice Chairman
and President, as well as the Chief Executive Officer of Tekno Books, purchased
an aggregate of 187,442 shares of the Company's Common Stock for $5.00 per
share, the then market price of the stock. In conjunction with the private
placement of these shares, the investors received five-year warrants to purchase
an aggregate of 93,721 shares of the Company's Common Stock for $5.00 per share.
The Company sold an aggregate of 250 shares of its 7% Series D Convertible
Preferred Stock (the "Series D Preferred Stock") in two private placements in
September and November 1998, each with an accredited investor. The Company
realized gross proceeds of $2,500,000 from these private placements, less
expenses and commissions of $286,917. In connection with these transactions, the
Company also issued to each investor two five-year warrants. The warrants
entitle the investors to purchase that number of shares of Common Stock equal to
the aggregate purchase price of shares of Series D Preferred Stock acquired
divided by the closing price of the Common Stock on the trading date immediately
before the date of purchase, multiplied by 20% and 30%, respectively, at
exercise prices equal to 150% and 125%, respectively, of such closing price,
subject to certain adjustments.
Holders of Series D Preferred Stock are entitled to cumulative dividends at the
annual rate of 7% payable on each conversion date. Each share of Series D
Preferred Stock is convertible by the holder into shares of Common Stock based
on an initial conversion price equal to 105% of the average of the closing
prices of the Common Stock for the five trading days ending on the trading day
immediately preceding the date of the closing. All shares of Series D Preferred
Stock shall be automatically converted into shares of the Company's Common Stock
on the earlier to occur of (i) September 30, 2001, (ii) the third trading day
immediately preceding the closing of the first sale under a bona fide
underwritten initial public offering of the common stock of Huge Entertainment,
Inc. with net proceeds to Huge Entertainment, Inc. (or any successor of Huge
Entertainment, Inc.) of at least $10,000,000, or (iii) the 10th trading day
immediately preceding the closing of a transaction resulting in a change of
control of the Company. The Company has the option to redeem all or any portion
of the shares of Series D Preferred Stock that are outstanding at the time for a
cash redemption price per share which is equivalent to a 20% premium over the
value that the holder of the preferred shares would realize if the preferred
shares were converted to Common Stock at the time of this redemption. Upon any
liquidation, dissolution or winding up of the Company, holders of Series D
Preferred Stock are entitled to payment of the $10,000 stated value for each
such share plus all due but unpaid dividends before any payment is made to
holders of Common Stock. The Series D Preferred Stock carries no voting rights,
and ranks junior to the Series A, B and C Preferred Stock.
The Company's Chairman of the Board 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, under which the Company had borrowed
$997,000 at September 30, 1998. The line of credit bears interest at the JP
Morgan Bank prime rate of interest. The Company's Chairman of the Board and
Chief Executive Officer and the Company's Vice Chairman and President had
previously committed to provide up to $3.5 million in additional funds to the
Company. This commitment was to be reduced on a "dollar for dollar" basis to the
extent funds were received from other sources. To date in 1998, the Company has
raised gross proceeds in excess of $3.5 million through the issuance of stock
and from other sources, in effect extinguishing the previous commitment. As of
November 10, 1998, the Company had drawn $280,000 from the unsecured line of
credit facility. Therefore $820,000 remained available for the Company to draw
upon pursuant to the terms of the unsecured line of credit facility.
The success of the Company's future operations is dependent on its ability to
generate adequate revenue to offset operating expenses. Unless otherwise noted,
the proceeds from the financing transactions described above are for general
corporate purposes. The Company has curtailed its plans to expand the in-line
mall studio stores, although additional financing may still be required to
support working capital requirements and for expansion of the e-commerce
internet business in future years. The Company's internet studio store is set to
launch this Thanksgiving, with additional plans for expansion of the e-commerce
business in the near future. There can be no assurance that such financing will
be available to the Company or will be obtained on terms favorable to the
Company.
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YEAR 2000 ISSUES
The Company has initiated, but not completed, its assessment of the impact of
year 2000 on its business. The majority of the Company's systems consist of
packaged software purchased from vendors, and the critical software is either
already year 2000 compliant or, based on representations from the vendors, on
schedule to be year 2000 compliant by the end of 1998. In addition, the Company
purchased new computer hardware and software during 1997 for its entertainment
retail division which is year 2000 compliant. Any new software acquired for the
e-commerce internet business will be year 2000 compliant. The Company is not
presently aware of any significant expenditures which will be necessitated in
order to be ready for the year 2000, beyond those already being incurred,
although there can be no assurances that significant expenditures may not be
required in the future.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on the Company's
sales or results of operations. The Company does, however, consider 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
development and licensing operation as a result of the general publishing
industry practice of paying royalties semi-annually. The Company's entertainment
retail business is also seasonal with the holiday season accounting for the
largest percentage of annual net sales. 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 periodic basis.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company sold an aggregate of 250 shares of its 7% Series D Convertible
Preferred Stock (the "Series D Preferred Stock") in two private placements in
September and November 1998, each with an accredited investor. The Company
realized gross proceeds of $2,500,000 from these private placements, less
expenses and commissions of $286,917. In connection with these transactions, the
Company also issued to each investor two five-year warrants. The warrants
entitle the investors to purchase that number of shares of Common Stock equal to
the aggregate purchase price of shares of Series D Preferred Stock acquired
divided by the closing price of the Common Stock on the trading date immediately
before the date of purchase, multiplied by 20% and 30%, respectively, at
exercise prices equal to 150% and 125%, respectively, of such closing price,
subject to certain adjustments.
Holders of Series D Preferred Stock are entitled to cumulative dividends at the
annual rate of 7% payable on each conversion date. Each share of Series D
Preferred Stock is convertible by the holder into shares of Common Stock based
on an initial conversion price equal to 105% of the average of the closing
prices of the Common Stock for the five trading days ending on the trading day
immediately preceding the date of the closing. All shares of Series D Preferred
Stock shall be automatically converted into shares of the Company's Common Stock
on the earlier to occur of (i) September 30, 2001, (ii) the third trading day
immediately preceding the closing of the first sale under a bona fide
underwritten initial public offering of the common stock of Huge Entertainment,
Inc. with net proceeds to Huge Entertainment, Inc. (or any successor of Huge
Entertainment, Inc.) of at least $10,000,000, or (iii) the 10th trading day
immediately preceding the closing of a transaction resulting in a change of
control of the Company. The Company has the option to redeem all or any portion
of the shares of Series D Preferred Stock that are outstanding at the time for a
cash redemption price per share which is equivalent to a 20% premium over the
value that the holder of the preferred shares would realize if the preferred
shares were converted to Common Stock at the time of this redemption. Upon any
liquidation, dissolution or winding up of the Company, holders of Series D
Preferred Stock are entitled to payment of the $10,000 stated value for each
such share plus all due but unpaid dividends before any payment is made to
holders of Common Stock. The Series D Preferred Stock carries no voting rights,
and ranks junior to the Series A, B and C Preferred Stock.
The Company also issued 100,000 shares of its Common Stock to each of its Chief
Executive Officer and its President as merit bonuses in connection with the
extension of the employment agreements between the Company and each of these
executive officers. Ownership of these shares vests at the rate of 1/36 of such
shares per month over a period of 36 months, unless a change in control occurs
prior to such 36-month period, in which case the ownership of such shares vests
in full.
The foregoing securities were all issued without registration under the
Securities Act of 1933, as amended, by reason of the exemption from registration
afforded by the provisions of Section 4(2) thereof, as transactions by an issuer
not involving a public offering, each recipient of securities having delivered
appropriate investment representations to the Company with respect thereto and
having consented to the imposition of restrictive legends upon the certificates
evidencing such securities.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on July 2, 1998. The
following describes the matters voted upon at the annual meeting and the number
of votes cast for, against or withheld, as well as abstentions and broker
non-votes, if any, with respect to each matter:
A. Election of Directors:
NOMINEE VOTES FOR VOTES WITHHELD
Dr. Lawrence Gould 6,816,629 4,900
Dr. Martin H. Greenberg 6,816,629 4,900
Harry T. Hoffman 6,817,129 4,400
E. Donald Lass 6,817,129 4,400
Jules L. Plangere, Jr. 6,816,629 4,900
Mitchell Rubenstein 6,817,129 4,400
Laurie S. Silvers 6,816,629 4,900
Deborah J. Simon 6,816,629 4,900
B. Approval of the amendment to the Company's Directors Stock Option Plan
to increase the number of shares of the Company's Common Stock reserved
for the issuance thereunder from an aggregate of 50,000 shares to an
aggregate of 100,000 shares:
NUMBER PERCENTAGE
For 4,340,517 87%
Against 513,879 10%
Abstaining 137,572 3%
C. Approval of the amendment to the Company's 1993 Stock Option Plan to
increase the number of shares of the Company's Common Stock reserved for
issuance thereunder from an aggregate of 1,000,000 shares to an
aggregate of 1,500,000 shares:
NUMBER PERCENTAGE
For 4,303,338 87%
Against 604,883 12%
Abstaining 56,768 1%
D. Ratification of the selection of Arthur Anderson LLP as the Company's
independent public accountants for the Company's year ending December
31, 1998:
NUMBER PERCENTAGE
For 6,440,813 99%
Against 9,370 --%
Abstaining 30,900 1%
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ITEM 5. OTHER INFORMATION
The Company in October 1998 repurchased an aggregate of 42,850 shares of its
Common Stock in open market transactions at the then-current market prices
pursuant to an open market repurchase program announced in August 1998.
In November 1998, the Company and the holder of all outstanding shares of the
Company's 4% $100 Series C Convertible Preferred Stock entered into a Second
Amendment to Preferred Stock Purchase Agreement under which the conversion price
of said preferred stock was adjusted to $4.00 per share and the holder of said
shares of Series C Preferred Stock agreed to certain changes: (i) to receive, at
the Company's option, payment of dividends thereon in the form of shares of the
Company's common stock, (ii) mandatory conversion of the Series C Preferred
Stock before the closing of the Huge Entertainment IPO, and (iii) waiver of
prior anti-dilution adjustments.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
EXHIBIT NUMBER DESCRIPTION
3.1 Articles of Incorporation as amended
4.1 Articles of Amendment to Articles of Incorporation of the Company for
Designation of Preferences, Rights and Limitations of 7% Series D
Convertible Preferred Stock
10.1 Convertible Preferred Stock Purchase Agreement dated as of September 30,
1998
10.2 Convertible Preferred Stock Purchase Agreement dated as of November 6,
1998
10.3 Second Amendment to Preferred Stock Purchase Agreement between the
Company and Auric Partners Limited entered into as of October 28, 1998
10.4 Extension and Amendment Agreement between the Company and Laurie S.
Silvers entered into as of July 1, 1998
10.5 Extension and Amendment Agreement between the Company and Mitchell
Rubenstein entered into as of July 1, 1998
10.6 The Company's 1993 Stock Option Plan as amended effective July 2, 1998
10.7 The Company's Directors Stock Option Plan as amended effective July 2,
1998
27.1 Financial Data Schedule
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(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
- -------------------
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIG ENTERTAINMENT, INC.
Date: November 20, 1998 By: /s/ Mitchell Rubenstein
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: November 20, 1998 By: /s/ Marci L. Yunes
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- ------------- -----------
3.1 Articles of Incorporation as amended
4.1 Articles of Amendment to Articles of Incorporation of the
Company For Designation of Preferences, Rights and Limitations
of 7% Series D Convertible Preferred Stock
10.1 Convertible Preferred Stock Purchase Agreement dated as of
September 30 1998
10.2 Convertible Preferred Stock Purchase Agreement dated as of
November 6, 1998
10.3 Second Amendment to Preferred Stock Purchase Agreement between
the Company and Auric Partners Limited dated as of
October 28, 1998
10.4 Extension and Amendment Agreement between the Company and
Laurie S. Silvers entered into as of July 1, 1998
10.5 Extension and Amendment Agreement between the Company and
Mitchell Rubenstein entered into as of July 1, 1998
10.6 The Company's 1993 Stock Option Plan as amended effective July
2, 1998
10.7 The Company's Directors Stock Option Plan as amended effective
July 2, 1998
27.1 Financial Data Schedule
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
ORIGINAL ARTICLES OF INCORPORATION FILED
WITH THE FLORIDA DEPARTMENT OF STATE ON
JANUARY 22, 1993
The shareholders of BIG ENTERTAINMENT INC. (the "Corporation") have duly
adopted the following Amended and Restated Articles of Incorporation pursuant to
the provisions of Sections 607.0704, 607.1003 and 607.1007 of the Florida
Business Corporation Act:
ARTICLE I
NAME
The name of the corporation is BIG ENTERTAINMENT, INC. (the
"Corporation").
ARTICLE II
PRINCIPAL OFFICE
The address of the principal office and the mailing address of the
Corporation is 2255 Glades Road, Suite 237 West, Boca Raton, Florida 33431.
ARTICLE III
CAPITAL STOCK
The total number of shares of stock which the Corporation shall have the
authority to issue is twenty-six million (26,000,000) shares, consisting of (i)
twenty-five million (25,000,000) shares of common stock, par value $0.01 per
share (the "Common Stock") and (ii) one million (1,000,000) shares of preferred
stock, par value $0.01 per share (the "Preferred Stock").
The designations and the preferences, limitations and relative rights of
the Common Stock and the Preferred Stock of the Corporation are as follows:
A. PROVISIONS RELATING TO THE COMMON STOCK
1. VOTING RIGHTS.
<PAGE>
(a) Except as otherwise required by law or as may be provided by the
resolutions of the Board of Directors authorizing the issuance of any class or
series of Preferred Stock, as provided in Section B of this Article III, all
rights to vote and all voting power shall be vested exclusively in the holders
of the Common Stock.
(b) The holders of the Common Stock shall be entitled to one vote per
share on all matters submitted to a vote of shareholders, including, without
limitation, the election of directors.
2. DIVIDENDS. Except as otherwise provided by law or as may be provided by
the resolutions of the Board of Directors authorizing the issuance of any class
or series of Preferred Stock, as provided in Section B of this Article III, the
holders of the Common Stock shall be entitled to receive when, as and if
provided by the Board of Directors, out of funds legally available therefor,
dividends payable in cash, stock or otherwise.
3. LIQUIDATING DISTRIBUTIONS. Upon any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, and after
payment or provision for payment of the debts and other liabilities of the
Corporation, and except as may be provided by the resolutions of the Board of
Directors authorizing the issuance of any class or series of Preferred Stock, as
provided in Section B of this Article III, the remaining assets of the
Corporation shall be distributed pro-rata to the holders of the Common Stock.
B. PROVISIONS RELATING TO THE PREFERRED STOCK.
1. GENERAL. The Preferred Stock may be issued from time to time in one or
more classes or series, the shares of each class or series to have such
designations, powers, preferences, rights, qualifications, limitations and
restrictions thereof as are stated and expressed herein and in the resolution or
resolutions providing for the issue of such class or series adopted by the Board
of Directors as hereinafter prescribed.
2. PREFERENCES. Authority is hereby expressly granted to and vested in the
Board of Directors to authorize the issuance of the Preferred Stock from time to
time in one or more classes or series, to determine and take necessary
proceedings fully to effect the issuance and redemption of any such Preferred
Stock, and, with respect to each class or series of the Preferred Stock, to fix
and state by the resolution or resolutions from time to time adopted providing
for the issuance thereof the following:
(a) whether or not the class or series is to have voting rights, full
or limited, or is to be without voting rights;
(b) the number of shares to constitute the class or series and the
designations thereof;
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<PAGE>
(c) the preferences and relative, participating, optional or other
special rights, if any, and the qualifications, limitations or restrictions
thereof, if any, with respect to any class or series;
(d) whether or not the shares of any class or series shall be
redeemable and if redeemable the redemption price or prices, and the time or
times at which and the terms and conditions upon which, such shares shall be
redeemable and the manner of redemption;
(e) whether or not the shares of a class or series shall be subject to
the operation or retirement of sinking funds to be applied to the purchase or
redemption of such shares for retirement, and if such retirement or sinking fund
or funds be established, the annual amount thereof and the terms and provisions
relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash, stock of
the Corporation, or other property, the conditions upon which and the times when
such dividends are payable, the preference to or the relation to the payment of
the dividends payable on any other class or classes or series of stock, whether
or not such dividend shall be cumulative or noncumulative, and if cumulative,
the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof that the holders
of any class or series thereof shall be entitled to receive upon the voluntary
or involuntary dissolution of, or upon any distribution of the assets of, the
Corporation;
(h) whether or not the shares of any class or series shall be
convertible into, or exchangeable for, the shares of any other class or classes
or of any other series of the same or any other class or classes of the
Corporation and the conversion price or prices or ratio or ratios or the rate or
rates at which such conversion or exchange may be made, with such adjustments,
if any, as shall be stated and expressed or provided for in such resolution or
resolutions; and
(i) such other special rights and protective provisions with respect to
any class or series as the Board of Directors may deem advisable.
The shares of each class or series of the Preferred Stock may vary from
the shares of any other class or series thereof in any or all of the foregoing
respects. The Board of Directors may increase the number of shares of Preferred
Stock designated for any existing class or series by a resolution adding to such
class or series authorized and unissued shares of the Preferred Stock not
designated for any other class or series. The Board of Directors may decrease
the number of shares of the Preferred Stock designated for any existing class or
series by a resolution, subtracting from such class or series unissued shares of
the Preferred Stock designated for such class or series and the shares so
subtracted shall become authorized, unissued and undesignated shares of the
Preferred Stock.
C. SHARE RECLASSIFICATION
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<PAGE>
On the date of filing of these Amended and Restated Articles of
Incorporation with the Department of State of the State of Florida, each issued
and outstanding share of the Corporation's previously authorized Class A Voting
Common Stock, par value $.01 per share ("Class A Stock"), shall thereby and
thereupon be classified and converted into one (1) validly issued, fully paid
and nonassessable share of Common Stock reflecting a conversion ratio of 1:1.
Each certificate that heretofore represented shares of Class A Stock shall now
represent the number of shares of Common Stock into which the shares of Class A
Stock represented by such certificate were reclassified and converted; PROVIDED,
HOWEVER, that each person holding of record a stock certificate or certificates
that represented shares of Class A Stock shall receive, upon surrender of each
such certificate or certificates, a new certificate or certificates evidencing
and representing the number of shares of Common Stock to which such person is
entitled.
ARTICLE IV
DIRECTORS
The Board of Directors of the Corporation shall consist of at least one
Director, with the exact number of Directors to be fixed from time to time in
the manner provided in the Company's Bylaws.
ARTICLE V
REGISTERED OFFICE AND REGISTERED AGENT
The street address of the Corporation's registered office in the State of
Florida is 2255 Glades Road, Suite 237 West, Boca Raton, Florida 33431, and the
name of its registered agent at such address is Mitchell Rubenstein.
ARTICLE VI
INDEMNIFICATION
This Corporation shall indemnify and shall advance expenses on behalf of
its officers and directors to the fullest extent not prohibited by law either
now or hereafter.
IN WITNESS WHEREOF, the undersigned has executed these Amended and
Restated Articles of Incorporation this ___ day of November, 1993.
BIG ENTERTAINMENT, INC.
By:/s/ LAURIE SILVERS
----------------------------
Laurie S. Silvers, President
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<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
FOR
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF SERIES A VARIABLE RATE CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation.
FIRST: DESIGNATION OF SERIES A VARIABLE RATE CONVERTIBLE PREFERRED STOCK
Of the 1,000,000 shares of Preferred Stock, par value $.01 per
share, authorized pursuant to Article III of the Company's Articles
of Incorporation, Two Hundred Seventeen Thousand Six Hundred
(217,600) of such shares are hereby designated as the Series A
Variable Rate Convertible Preferred Stock (the "Series A Preferred
Stock"). Shares of Series A Preferred Stock are sometimes referred to
below as "Series A Preferred Stock."
The powers, designations, preferences, and relative, participating,
optional or other special rights of the Series A Preferred Stock authorized
hereunder and the qualifications, limitations and restrictions of such
preferences and rights are as follows:
1. STATED VALUE. The Stated Value of each Series A Preferred Share is
$6.25.
2. DIVIDENDS.
(a) Each outstanding share of Series A Preferred Stock shall accrue
and cumulative dividends on the Stated Value thereof from and after the date of
issuance at a variable rate (the "Dividend Rate") equal to the prime rate (the
"Prime Rate") publicly disclosed and designated as such from time to time by
J.P. Morgan Bank, New York, New York (or Citibank, N.A., New York, New York if
no prime rate is designated by J.P. Morgan Bank), and such dividends shall be
paid only in shares of the Company's Common Stock, par value $.01 per share
("Common Stock"), except as provided in the following paragraph (b). Shares of
Common Stock are sometimes referred to herein as "Common Shares." The Dividend
Rate in effect upon the date of filing of these Articles of Amendment is 8 3/4%.
Once a Dividend Rate is established such rate shall remain in effect unchanged
until adjusted as provided herein. The Dividend Rate shall be adjusted quarterly
on, and effective as of, each January 1, April 1, July 1 and October 1, by
adjusting the Dividend Rate to the extent required so that the Dividend Rate
equals the prevailing Prime Rate in effect on such date. Cumulated dividends
shall be
<PAGE>
distributed quarterly in arrears, promptly after each March 31, June 30 and
December 31 (each such date being a "Distribution Date"), to the record
holder(s) of the Series A Preferred Shares on the applicable Distribution Date.
Dividends shall be paid in shares of the Company's Common Stock in an amount
having an aggregate "Market Value" (as defined in Section 8 below) on the
Distribution Date equal to the amount of the cumulated and unpaid dividends to
be distributed.
(b) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon the distribution of dividends on the Series
A Preferred Stock. Any fractional interest in a dividend share of Common Stock
to which a holder of Series A Preferred Shares would otherwise be entitled shall
be paid in cash (computed to the nearest cent) based on the Market Value of a
Common Share on the applicable Distribution Date.
3. CONVERSION.
(a) Each Series A Preferred Share shall be and is convertible at the
sole option of the holder thereof, into one (1.0) share of Common Stock at any
time during the two-year period (the "Conversion Period") commencing upon the
date of the Closing of the first Installment under that certain Preferred Stock
Purchase Agreement, dated as of October __, 1995, between Tekno Simon, LLC, an
Indiana limited liability company ("Tekno Simon"), and the Company. Upon a
holder's timely exercise of this conversion option in accordance with the
following paragraph (b) of this Section 3, such holder shall also be entitled to
receive all unpaid dividends that have cumulated or accrued on Series A
Preferred Shares being converted, with such dividends to be determined and paid
in accordance with Section 2 hereof as if the "Distribution Date" is the day on
which the shares are surrendered for conversion.
(b) In order to exercise this conversion option, the holder of any
Series A Preferred Shares to be converted shall surrender and deliver to the
Company, no later than the fifth day prior to the expiration of the Conversion
Period, the certificate(s) representing such shares, together with a notice of
election to convert in such form as the Company may reasonably require, duly
completed and signed by the holder. Upon the proper delivery of such documents,
the conversion to be effected thereby shall be effective as of the date of such
delivery.
(c) Promptly after the effective date of a holder's conversion of
Series A Preferred Shares in accordance with this Section 3, the Company shall
issue and deliver to such holder a certificate or certificates for the number of
full shares of Common Stock issuable to the holder (i) pursuant to the holder's
conversion of Series A Preferred Shares in accordance with the provisions of
this Section 3, and (ii) in payment of any unpaid dividends on the converted
shares as provided under paragraph (a) of this Section 3. The fractional
interest in one share of Common Stock arising upon the conversion, if any, shall
be settled as provided in paragraph (c) below.
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<PAGE>
(d) All shares of Common Stock delivered upon conversion of the
Series A Preferred Stock shall be duly and validly issued and fully paid and
nonassessable. Upon the effective date of a holder's conversion of Series A
Preferred Shares, such converted Series A Preferred Shares shall no longer be
deemed to be outstanding and all rights of the holder with respect to such
shares shall immediately terminate except the right to receive the shares of
Common Stock issuable upon such conversion.
(e) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon conversion of the Series A Preferred Stock.
Any fractional interest in one share of Common Stock resulting from a holder's
conversion of Series A Preferred Shares shall be paid in cash (computed to the
nearest cent) based on the Market Value (as defined in Section 8 below) of a
Common Share on the effective date of the conversion.
(f) In the event that, prior to the expiration of the Conversion
Period, the Company (1) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock, (2) subdivides (by "stock split" or
otherwise) its outstanding Common Stock into a greater number of shares, or (3)
combines (by "reverse stock split" or otherwise) its outstanding Common Stock
into a smaller number of shares, the number of Common Shares into which each
outstanding Series A Preferred Share is convertible under this Section 3 shall
be proportionately adjusted so that the holder of each Preferred Share
thereafter surrendered for conversion pursuant to this Section 3 shall be
entitled to receive the number of shares of Common Stock which he would have
been entitled to receive had the Series A Preferred Share been effectively
converted immediately prior to the happening of such event.
(g) In the event that, prior to the expiration of the Conversion
Period, there occurs any consolidation of the Company with, or merger of the
Company with or into, any other entity that results in a reclassification,
change, conversion, exchange or cancellation of outstanding shares of Common
Stock or any sale or transfer of all or substantially all of the assets of the
Company, each holder of shares of the Series A Preferred Stock then outstanding
shall have the right thereafter (and until the expiration of the Conversion
Period) to convert the Series A Preferred Shares held by the holder into the
kind and amount of securities, cash and other property which the holder would
have been entitled to receive upon such reclassification, change, consolidation,
merger, sale or transfer if the holder had held the Common Shares issuable upon
the conversion of the holder's Series A Preferred Shares immediately prior to
the reclassification, change, consolidation, merger, sale or transfer.
(h) The Company shall at all times reserve and keep available, free
from preemptive rights and other encumbrances, out of the aggregate of its
authorized but unissued shares of Common Stock, for the purpose of effecting
conversions of the Series A Preferred Shares, the full number of shares of
Common Stock deliverable upon the conversion of all outstanding Series A
Preferred Shares.
(i) The Company shall list the shares of Common Stock required to be
delivered upon conversion of the Series A Preferred Shares, prior to the
delivery thereof, upon
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<PAGE>
each national securities exchange or NASDAQ, if any, upon which the outstanding
Common Stock is listed at the time of delivery.
4. REDEMPTION.
(a) All of the outstanding Series A Preferred Shares shall be
redeemable by the Company at any time after the expiration of the Conversion
Period (except for Series A Preferred Shares as to which the holder or holders
thereof have timely exercised the conversion thereof in accordance with Section
3 hereof), upon not less than 30 nor more than 60 calendar days' prior written
notice by the Company to the holder or holders of Series A Preferred Shares, at
a redemption price per Series A Preferred Share of $7.1875. In addition to the
redemption price for each Series A Preferred Share redeemed from a holder
pursuant to this Section 4, upon such redemption the Company shall also pay such
holder $7.1875 for each share of Common Stock (or fraction thereof) constituting
cumulated and unpaid dividends on the shares redeemed. For purposes of this
paragraph, the number of Common Shares constituting unpaid dividends shall be
determined in accordance with Section 2 hereof as if the "Redemption Date" (as
defined in paragraph (b) below) is the "Distribution Date."
(b) Notice of any such redemption of the Series A Preferred Shares,
specifying the date fixed by the Board of Directors for the redemption (the
"Redemption Date"), the place of redemption and the redemption price, shall be
given by first-class mail to each holder of record of the shares to be redeemed,
at his address of record, not less than 30 nor more than 60 calendar days prior
to the Redemption Date.
(c) Upon the Redemption Date, all rights of the holders of the Series
A Preferred Shares to be redeemed shall cease with respect to such shares and
such shares shall not, after the Redemption Date, be deemed to be outstanding
and shall not have the status of Preferred Stock.
(d) The Series A Preferred Shares are not subject or entitled to the
benefit of a sinking fund.
5. PREEMPTIVE RIGHTS. Shares of the Series A Preferred Stock are not
entitled to any preemptive rights to acquire any unissued shares of any capital
stock of the Company, now or hereafter authorized, or any other securities of
the Company, whether or not convertible into shares of capital stock of the
Company or carrying a right to subscribe to or acquire any such shares of
capital stock.
6. VOTING. The holders of shares of Series A Preferred Stock will be
entitled to vote such shares (with each share having one vote) together with
holders of shares of Common Stock as a single class on all matters, including
the election of directors, except as otherwise required by law. Except as set
forth in the preceding sentence or as required by law, the shares of the Series
A Preferred Stock shall not have any voting powers, either general or special.
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<PAGE>
7. LIQUIDATION PREFERENCE.
(a) Upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the shares of the Series A Preferred
Stock shall be entitled to receive out of the assets of the Company available
for distribution to stockholders under applicable law, before and in priority to
any payment or distribution of assets by any means whatsoever that is made on
the Common Stock or on any other class or series of capital stock of the Company
ranking junior to the Series A Preferred Stock upon liquidation, the amount of
(i) $7.1825 per Series A Preferred Share, plus (ii) $7.1825 for each share of
Common Stock (or fraction thereof) constituting cumulated and unpaid dividends
on the outstanding Series A Preferred Shares (for purposes of this clause (ii),
the number of Common Shares constituting unpaid dividends shall be determined in
accordance with Section 2 hereof as if the "Distribution Date" is the date upon
which the first payment of any portion of the amount referenced in the foregoing
clause (i) is paid). The term "Liquidation Preference" as used herein means the
sum of the amounts referenced in the foregoing clauses (i) and (ii). The sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property and assets of the
Company shall not be deemed a dissolution, liquidation or winding up of the
Company for the purposes of this Section 7, nor shall the merger or
consolidation of the Company into or with any other corporation or association
or the merger or consolidation of any other corporation or association into or
with the Company, be deemed to be a dissolution, liquidation or winding up of
the Company for the purposes of this Section 7.
(b) After the payment in full of the Liquidation Preference in cash
to the holders of the Series A Preferred Shares, as provided in the foregoing
paragraph (a), the holders of the Series A Preferred Stock shall have no further
right or claim to any of the remaining assets of the Company, except as
otherwise provided herein or as otherwise required by law.
8. MARKET VALUE. The "Market Value" of a share of Common Stock as of any
specified date (the "Value Date") shall be the average of the last reported sale
prices per share on each of the twenty Trading Days (as defined below)
immediately preceding the second day prior to the Value Date. The last reported
sale price for any Trading Day shall be (1) the last reported sale price, or the
closing bid price if no sale occurred, of the Common Stock on the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"),
or any similar system of automated dissemination of quotations of securities
prices then in common uses, if so quoted, or (2) if Common Stock prices are not
quoted as described in clause (1), the mean between the high bid and low asked
quotations for the Common Stock as reported by the National Quotation Bureau
Incorporated if at least two securities dealers have inserted both bid and asked
quotations for the Common Stock on at least five of the ten preceding days, or
(3) if the Common Stock is listed or admitted for trading on any national
securities exchange, the last sale price, or the closing bid price if no sale
occurred, of the Common Stock on the principal securities exchange on which the
Common Stock is listed, or (4) if Common Stock prices are not quoted as
described in the foregoing clauses (1), (2) or (3) but are quoted on any
national securities or central market system other than as described above, the
last reported sale price shall be determined in the manner set forth in the
foregoing clause (2) if bid and asked
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<PAGE>
quotations are reported but actual transactions are not, and in the manner set
forth in clause (3) of the preceding sentence if actual transactions are
reported. If the Market Value of a share of Common Stock cannot be determined
under the foregoing provisions of this Section 8 because such provisions are
inapplicable by their terms, then the Market Value shall be determined by an
independent appraiser jointly selected by the Board of Directors and Tekno
Simon, provided, however, that if Tekno Simon is not a holder of Series A
Preferred Shares at such time, the appraiser shall be selected by the Board of
Directors subject to approval of the appraiser by the holders of a majority of
the outstanding Series A Preferred Shares. As used herein, the term "Trading
Days" means (a) if the Common Stock is quoted on NASDAQ or any similar system of
automated dissemination of quotations of securities prices, days on which trades
may be made on such system, or (b) if not quoted as described in clause (a),
days on which quotations are reported by the National Quotation Bureau
Incorporated, or (c) if the Common Stock is listed or admitted for trading on
any national securities exchange, days on which such national securities
exchange is open for business, or (d) if the Common Stock is quoted on any
national securities or central market system referenced in clause (4) above,
days on which trades may be made or prices are quoted on such system, as the
case may be.
9. RANK. The Series A Preferred Stock shall rank senior as to payment of
dividends and rights upon voluntary or involuntary liquidation, dissolution or
winding up of the Company as to all classes and series of capital stock of the
Company outstanding as of the date of these Articles of Amendment. The Company
shall not hereafter issue any shares of Preferred Stock or other capital stock
ranking senior to, or on parity with, the Series A Preferred Stock as to the
payment of dividends or rights upon voluntary or involuntary liquidation,
dissolution or winding up of the Company, without the prior consent of the
holders of at least 75% of the outstanding Series A Preferred Shares. Any shares
of Series A Preferred Stock which shall at any time have been converted or
redeemed or otherwise reacquired by the Company shall after such redemption,
reacquisition or conversion, have the status of authorized but unissued shares
of Preferred Stock, without designation as to the status of authorized but
unissued shares of Preferred Stock, without designation as to class or series
until such shares are once more designated as part of a particular class or
series of Preferred Stock by the Board of Directors.
10. REPORTS AND NOTICES. So long as any shares of the Series A Preferred
Stock shall be outstanding, the Company shall provide to the holder or holders
of such shares copies of all annual, quarterly and other reports of the Company
and copies of all stockholder notices of the Company when and as furnished to
the holders of the Common Stock.
11. WAIVER BY PREFERRED SHAREHOLDERS. Except as expressly provided for
herein or as otherwise required by law, any rights or benefits of the Series A
Preferred Stock and the holders thereof provided herein may be waived as to all
outstanding Series A Preferred Shares and the holders thereof by the consent of
the holders of at least seventy-five percent (75%) of the outstanding Series A
Preferred Shares.
12. HOLDER. The term "holder" as used in this Designation of Series A
Variable Rate Convertible Preferred Stock means a record holder of any shares of
Series A Preferred Stock.
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<PAGE>
SECOND: ADOPTION OF AMENDMENTS TO ARTICLES OF INCORPORATION
These Articles of Amendment to Articles of Incorporation and the
amendments to the Company's Articles of Incorporation set forth herein were
adopted and approved by the Company's Board of Directors without shareholder
action on November 8, 1995, pursuant to Section 607.0602 of the Florida Business
Corporation Act, and shareholder action was not required.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the 8th day of November, 1995.
BIG ENTERTAINMENT, INC., a corporation
organized and existing under the Florida
Business Corporation Act
By:/s/ MITCHELL RUBENSTEIN
------------------------------------
Mitchell Rubenstein, Chairman of the
Board, Director and Chief Executive
Officer
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<PAGE>
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
FOR
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF SERIES B VARIABLE RATE CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation.
FIRST: DESIGNATION OF SERIES B VARIABLE RATE CONVERTIBLE PREFERRED STOCK
Of the 1,000,000 shares of Preferred Stock, par value $.01 per share,
authorized pursuant to Article III of the Company's Articles of Incorporation,
One Hundred Forty-Two Thousand, Two Hundred Twenty Three (142,223) of such
shares are hereby designated as the Series B Variable Rate Convertible Preferred
Stock (the "Series B Preferred Stock"). Shares of Series B Preferred Stock are
sometimes referred to below as "Series B Preferred Shares."
The powers, designations, preferences, and relative, participating,
optional or other special rights of the Series B Preferred Stock authorized
hereunder and the qualifications, limitations and restrictions of such
preferences and rights are as follows:
1. STATED VALUE. The initial Stated Value of each Series B Preferred Share
is $5.375. On the earlier to occur of March 31, 1997 or the Closing of the 25th
Installment (the "Termination Date") under that certain Preferred Stock Purchase
Agreement, dated as of November 8, 1995 and amended as of October 15, 1996 (the
"Purchase Agreement") between Tekno Simon, LLC, an Indiana limited liability
company ("Tekno Simon") and the Company, the Stated Value of each Series B
Preferred Share shall be adjusted (the "Final Stated Value") so that it shall
equal the average of the Subsequent Stated Values determined at the time of
closing each Installment under the Purchase Agreement held subsequent to October
15, 1996, but in no event greater than $6.25 per share or less than $4.50 per
share. As used herein, the "Subsequent Stated Value" for a closing shall equal
the "Market Value" of the Common Stock as of the date of such closing.
PREPARED BY:
Nina S. Gordon, Esquire
Fla. Bar No. 0535309
Broad and Cassel
201 S. Biscayne Blvd., Ste. 3000
Miami, FL 33131
<PAGE>
2. DIVIDENDS.
(a) Each outstanding share of Series B Preferred Stock shall accrue
and cumulate dividends on the Stated Value thereof from and after the date of
issuance at a variable rate (the "Dividend Rate") equal to the prime rate (the
"Prime Rate") publicly disclosed and designated as such from time to time by
J.P. Morgan Bank, New York, New York (or Citibank, N.A., New York, New York if
no prime rate is designated by J.P. Morgan Bank), and such dividends shall be
paid only in shares of the Company's Common Stock, par value $.01 per share
("Common Stock"), except as provided in the following paragraph (b). Shares of
Common Stock are sometimes referred to herein as "Common Shares." The Dividend
Rate in effect upon the date of filing of these Articles of Amendment is 8-1/4%.
Once a Dividend Rate is established such rate shall remain in effect unchanged
until adjusted as provided herein. The Dividend Rate shall he adjusted quarterly
on, and effective as of each January 1, April 1, July 1 and October 1, by
adjusting the Dividend Rate to the extent required so that the Dividend Rate
equals the prevailing Prime Rate in effect on such date. Cumulated dividends
shall be distributed quarterly in arrears, promptly after each March 31, June
30, September 30 and December 31 (each such date being a "Distribution Date"),
to the record holder(s) of the Series B Preferred Shares on the applicable
Distribution Date. Dividends shall be paid in shares of the Company's Common
Stock in an amount having an aggregate "Market Value" (as defined in Section 8
below) on the Distribution Date equal to the amount of the cumulated and unpaid
dividends to be distributed.
(b) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon the distribution of dividends on the Series
B Preferred Stock. Any fractional interest in a dividend share of Common Stock
to which a holder of Series B Preferred Shares would otherwise be entitled shall
be paid in cash (computed to the nearest cent) based on the Market Value of a
Common Share on the applicable Distribution Date.
3. CONVERSION.
(a) Each Series B Preferred Share shall be and is convertible, at the
sole option of the holder thereof, into one share of Common Stock at any time
until the second anniversary of the date of the Closing of the first Installment
under the Purchase Agreement (the "Conversion Period"). Upon a holder's timely
exercise of this conversion option in accordance with the following paragraph
(b) of this Section 3, such holder shall also be entitled to receive all unpaid
dividends that have cumulated or accrued on the Series B Preferred Shares being
converted, with such dividends to be determined and paid in accordance with
Section 2 hereof as if the "Distribution Date" is the day on which the shares
are surrendered for conversion.
(b) In order to exercise this conversion option, the holder of any
Series B Preferred Shares to be converted shall surrender and deliver to the
Company, no later than the fifth day prior to the expiration of the Conversion
Period, the certificate(s) representing such shares, together with a notice of
election to convert in such form as the Company may reasonably require, duly
completed and signed by the holder. Upon the proper delivery of such
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<PAGE>
documents, the conversion to be effected thereby shall be effective as of the
date of such delivery.
(c) Promptly after the effective date of a holder's conversion of
Series B Preferred Shares in accordance with this Section 3, the Company shall
issue and deliver to such holder a certificate or certificates for the number of
full shares of Common Stock issuable to the holder (i) pursuant to the holder's
conversion of Series B Preferred Shares in accordance with the provisions of
this Section 3, and (ii) in payment of any unpaid dividends on the converted
shares as provided under paragraph (a) of this Section 3. The fractional
interest in one share of Common Stock arising upon the conversion, if any, shall
be settled as provided in paragraph (e) below.
(d) All shares of Common Stock delivered upon conversion of the Series
B Preferred Stock shall be duly and validly issued and fully paid and
nonassessable. Upon the effective date of a holder's conversion of Series B
Preferred Shares, such converted Series B Preferred Shares shall no longer be
deemed to be outstanding and all rights of the holder with respect to such
shares shall immediately terminate except the right to receive the shares of
Common Stock issuable upon such conversion.
(e) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon conversion of the Series B Preferred Stock.
Any fractional interest in one share of Common Stock resulting from a holder's
conversion of Series B Preferred Shares shall be paid in cash (computed to the
nearest cent) based on the Market Value (as defined in Section 8 below) of a
Common Share on the effective date of the conversion.
(f) In the event that, prior to the expiration of the Conversion
Period, the Company (1) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock, (2) subdivides (by "stock split" or
otherwise) its outstanding Common Stock into a greater number of shares, or (3)
combines (by "reverse stock split" or otherwise) its outstanding Common Stock
into a smaller number of shares, the number of Common Shares into which each
outstanding Series B Preferred Share is convertible under this Section 3 shall
be proportionately adjusted so that the holder of each Preferred Share
thereafter surrendered for conversion pursuant to this Section 3 shall be
entitled to receive the number of shares of Common Stock which he would have
been entitled to receive had the Series B Preferred Share been effectively
converted immediately prior to the happening of such event.
(g) In the event that, prior to the expiration of the Conversion
Period, there occurs any consolidation of the Company with, or merger of the
Company with or into, any other entity that results in a reclassification,
change, conversion, exchange or cancellation of outstanding shares of Common
Stock or any sale or transfer of all or substantially all of the assets of the
Company, each holder of shares of the Series B Preferred Stock then outstanding
shall have the right thereafter (and until the expiration of the Conversion
Period) to convert the Series B Preferred Shares held by the holder into the
kind and amount of securities, cash and other property which the holder would
have been entitled to receive upon such reclassification,
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change, consolidation, merger, sale or transfer if the holder had held the
Common Shares issuable upon the conversion of the holder's Series B Preferred
Shares immediately prior to the reclassification, change, consolidation, merger,
sale or transfer.
(h) The Company shall at all times reserve and keep available, free
from preemptive rights and other encumbrances, out of the aggregate of its
authorized but unissued shares of Common Stock, for the purpose of effecting
conversions of the Series B Preferred Shares, the full number of shares of
Common Stock deliverable upon the conversion of all outstanding Series B
Preferred Shares.
(i) The Company shall list the shares of Common Stock required to be
delivered upon conversion of the Series B Preferred Shares, prior to the
delivery thereof, upon each national securities exchange or NASDAQ, if any, upon
which the outstanding Common Stock is listed at the time of delivery.
4. REDEMPTION.
(a) All of the outstanding Series B Preferred Shares shall be
redeemable by the Company at any time after the expiration of the Conversion
Period (except for Series B Preferred Shares as to which the holder or holders
thereof have timely exercised the conversion thereof in accordance with Section
3 hereof), upon not less than 30 nor more than 60 calendar days' prior written
notice by the Company to the holder or holders of Series B Preferred Shares, at
a redemption price per Series B Preferred Share equal to 115% of the Final
Stated Value. In addition to the redemption price for each Series B Preferred
Share redeemed from a holder pursuant to this Section 4, upon such redemption
the Company shall also pay such holder an amount equal to 115% of the Final
Stated Value for each share of Common Stock (or fraction thereof) constituting
cumulated and unpaid dividends on the shares redeemed. For purposes of this
paragraph, the number of Common Shares constituting unpaid dividends shall be
determined in accordance with Section 2 hereof as if the "Redemption Date" (as
defined in paragraph (b) below) is the "Distribution Date."
(b) Notice of any such redemption of the Series B Preferred Shares,
specifying the date fixed by the Board of Directors for the redemption (the
"Redemption Date"), the place of redemption and the redemption price shall he
given by first class mail to each holder of record of the shares to be redeemed,
at his address of record, not less than 30 nor more than 60 calendar days prior
to the Redemption Date.
(c) Upon the Redemption Date, all rights of the holders of the Series B
Preferred Shares to be redeemed shall cease with respect to such shares, and
such shares shall not, after the Redemption Date, be deemed to be outstanding
and shall not have the status of Preferred Stock.
(d) The Series B Preferred Shares are not subject or entitled to the
benefit of a sinking fund.
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<PAGE>
5. PREEMPTIVE RIGHTS. Shares of the Series B Preferred Stock are not
entitled to any preemptive rights to acquire any unissued shares of any capital
stock of the Company, now or hereafter authorized, or any other securities of
the Company, whether or not convertible into shares of capital stock of the
Company or carrying a right to subscribe to or acquire any such shares of
capital stock.
6. VOTING. The holders of shares of Series B Preferred Stock will be
entitled to vote such shares (with each share having one vote) together with
holders of shares of Common Stock and shares of the Company's Series A Variable
Rate Preferred Stock (the "Series A Preferred Stock") as a single class on all
matters, including the election of directors, except as otherwise required by
law. Except as set forth in the preceding sentence or as required by law, the
shares of the Series B Preferred Stock shall not have any voting powers, either
general or special.
7. LIQUIDATION PREFERENCE.
(a) Upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the shares of the Series B Preferred
Stock shall be entitled to receive out of the assets of the Company available
for distribution to stockholders under applicable law, before and in priority to
any payment or distribution of assets by any means whatsoever that is made on
the Common Stock or on any other class or series of capital stock of the Company
ranking junior to the Series B Preferred Stock upon liquidation, the amount of
(i) the Final Stated Value per Series B Preferred Share, plus (ii) the Final
Stated Value for each share of Common Stock (or fraction thereof) constituting
cumulated and unpaid dividends on the outstanding Series B Preferred Shares (for
purposes of this clause (ii), the number of Common Shares constituting unpaid
dividends shall be determined in accordance with Section 2 hereof as if the
"Distribution Date" is the date upon which the first payment of any portion of
the amount referenced in the foregoing clause (i) is paid). The term
"Liquidation Preference" as used herein means the sum of the amounts referenced
in the foregoing clauses (i) and (ii). The sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all the property and assets of the Company shall not be deemed
a dissolution, liquidation or winding up of the Company for the purposes of this
Section 7, nor shall the merger or consolidation of the Company into or with any
other corporation or association or the merger or consolidation of any other
corporation or association into or with the Company, be deemed to be a
dissolution, liquidation or winding up of the Company for the purposes of this
Section 7.
(b) After the payment in full of the Liquidation Preference in cash to
the holders of the Series B Preferred Shares, as provided in the foregoing
paragraph (a), the holders of the Series B Preferred Stock shall have no further
right or claim to any of the remaining assets of the Company, except as
otherwise provided herein or as otherwise required by law.
8. MARKET VALUE. The "Market Value" of a share of Common Stock as of any
specified date (the "Value Date") shall be the average of the last reported sale
prices per share on each of the twenty Trading Days (as defined below)
immediately preceding the second day
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prior to the Value Date. The last reported sale price for any Trading Day shall
be (1) the last reported sale price, or the closing bid price if no sale
occurred, of the Common Stock on the National Association of Securities Dealers,
Inc. Automated Quotation System ("NASDAQ"), or any similar system of automated
dissemination of quotations of securities prices then in common uses, if so
quoted, or (2) if Common Stock prices are not quoted as described in clause (1),
the mean between the high bid and low asked quotations for the Common Stock as
reported by the National Quotation Bureau Incorporated if at least two
securities dealers have inserted both bid and asked quotations for the Common
Stock on at least five of the ten preceding days, or (3) if the Common Stock is
listed or admitted for trading on any national securities exchange, the last
sale price, or the closing bid price if no sale occurred, of the Common Stock on
the principal securities exchange on which the Common Stock is listed, or (4) if
Common Stock prices are not quoted as described in the foregoing clauses (1),
(2) or (3) but are quoted on any national securities or central market system
other than as described above, the last reported sale price shall be determined
in the manner set forth in the foregoing clause (2) if bid and asked quotations
are reported but actual transactions are not, and in the manner set forth in
clause (3) of the preceding sentence if actual transactions are reported. If the
Market Value of a share of Common Stock cannot be determined under the foregoing
provisions of this Section 8 because such provisions are inapplicable by their
terms, then the Market Value shall be determined by an independent appraiser
jointly selected by the Board of Directors and Tekno Simon, provided, however,
that if Tekno Simon is not a holder of Series B Preferred Shares at such time,
the appraiser shall be selected by the Board of Directors subject to approval of
the appraiser by the holders of a majority of the outstanding Series B Preferred
Shares. As used herein, the term "Trading Days" means (a) if the Common Stock is
quoted on NASDAQ or any similar system of automated dissemination of quotations
of securities prices, days on which trades may be made on such system, or (b) if
not quoted as described in clause (a), days on which quotations are reported by
the National Quotation Bureau Incorporated, or (c) if the Common Stock is listed
or admitted for trading on any national securities exchange, days on which such
national securities exchange is open for business, or (d) if the Common Stock is
quoted on any national securities or central market system referenced in clause
(4) above, days on which trades may be made or prices are quoted on such system,
as the case may be.
9. RANK. The Series B Preferred Stock shall rank PARI PASSU as to payment
of dividends and rights upon voluntary or involuntary liquidation, dissolution
or winding up of the Company with the Company's Series A Preferred Stock. The
Series B Preferred Stock shall rank senior as to payment of dividends and rights
upon voluntary or involuntary liquidation, dissolution or winding up of the
Company as to all classes and series of capital stock of the Company outstanding
as of the date of these Articles of Amendment. The Company shall not hereafter
issue any shares of Preferred Stock or other capital stock ranking senior to, or
on parity with, the Series B Preferred Stock as to the payment of dividends or
rights upon voluntary or involuntary liquidation, dissolution or winding up of
the Company, without the prior consent of the holders of at least 75% of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock. Any
shares of Series B Preferred Stock which shall at any time have been converted
or redeemed or otherwise reacquired by the Company shall, after such redemption,
reacquisition or conversion, have the status of authorized but unissued shares
of Preferred Stock,
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without designation as to class or series until such shares are once more
designated as part of a particular class or series of Preferred Stock by the
Board of Directors.
10. REPORTS AND NOTICES. So long as any shares of the Series B Preferred
Stock shall be outstanding, the Company shall provide to the holder or holders
of such shares copies of all annual, quarterly and other reports of the Company
and copies of all stockholder notices of the Company when and as furnished to
the holders of the Common Stock.
11. WAIVER BY PREFERRED SHAREHOLDERS. Except as expressly provided for
herein or as otherwise required by law, any rights or benefits of the Series B
Preferred Stock and the holders thereof provided herein may be waived as to all
outstanding Series B Preferred Shares and the holders thereof by the consent of
the holders of at least seventy-five percent (75%) of the outstanding Series B
Preferred Shares.
12. HOLDER. The term "holder" as used in this Designation of Series B
Variable Rate Convertible Preferred Stock means a record holder of any shares of
Series B Preferred Stock.
SECOND: ADOPTION OF AMENDMENTS TO ARTICLES OF INCORPORATION
These Articles of Amendment to Articles of Incorporation and the
amendments to the Company's Articles of Incorporation set forth herein were
adopted and approved by the Company's Board of Directors without shareholder
action on December 9, 1996, pursuant to Section 607.0602 of the Florida Business
Corporation Act, and shareholder action was not required.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized Officer of
the Company as of the 9th day of December, 1996.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
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<PAGE>
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
FOR
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF 4% $100 SERIES C CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation.
FIRST: DESIGNATION OF 4% $100 SERIES C CONVERTIBLE PREFERRED STOCK
Of the 1,000,000 shares of preferred stock, par value $.01 per share,
authorized pursuant to Article III of the Company's Articles of Incorporation,
100,000 of such shares are hereby designated as the 4% $100 Series C Convertible
Preferred Stock (the "Series C Preferred Stock"). Shares of Series C Preferred
Stock are sometimes referred to herein as "Series C Preferred Shares."
The powers, designations, preferences, and relative, participating,
optional or other special rights of the Series C Preferred Stock authorized
hereunder and the qualifications, limitations and restrictions of such
preferences and rights are as follows:
13. STATED VALUE. The Stated Value of each Series C Preferred Share is
$100.
14. DIVIDENDS.
(a) Each outstanding share of Series C Preferred Stock shall accrue and
cumulate dividends on the Stated Value thereof from and after the date of
issuance at the rate of 4% per annum (the "Dividend Rate"). Dividends, when
declared on the Series C Preferred Stock, shall have accrued from the date of
issuance or thereafter, from the most recent date on which dividends were
payable, and shall be payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year (each, a "Dividend Payment Date"),
commencing on March 31, 1997; PROVIDED, HOWEVER, that if any such day is a
non-business day, the Dividend Payment Date will be the next business day. Each
declared dividend shall be payable to holders of record as they appear at the
close of business on the stock books of the Company on such record dates, not
more than 30 calendar days and not less than 10 calendar days preceding the
Dividend Payment Date therefor, as determined by the Board of Directors (each of
such dates, a "Record Date"). Quarterly dividend periods (each a "Dividend
Period") shall commence on and include the first day of January, April, July and
October of each year and shall end on and include the day next preceding the
next following Dividend Payment Date.
(b) No full dividends shall be declared or paid or set apart for
payment on any series of preferred stock or other capital stock of any series
ranking, as to dividends or
PREPARED BY:
Nina S. Gordon, Esquire
Fla Bar No. 0435309
Broad and Cassel
201 S. Biscayne Blvd., Ste. 3000
Miami, FL 33131
<PAGE>
liquidation preference, junior to ("Junior Stock") the Series C Preferred Stock
during any calendar quarter unless full dividends on the Series C Preferred
Stock for the Dividend Period ending during such calendar quarter have been or
contemporaneously are declared and paid. If full dividends on the Series C
Preferred Stock have not been declared and paid for the then-current Dividend
Period, then, with respect to such then-current Dividend Period, the following
restrictions shall be applicable: (1) no dividend or distribution, other than in
Junior Stock, may be declared, set aside or paid on any shares of Junior Stock,
(2) the Company may not repurchase, redeem or otherwise acquire any shares of
its Junior Stock (except by conversion into or exchange for Junior Stock) and
(3) the Company may not, directly or indirectly, repurchase, redeem or otherwise
acquire (except by conversion into or exchange for Junior Stock) any shares of
any class or series of Junior Stock or warrants, calls, options or other rights
to acquire capital stock of the Company or other security exercisable or
exchangeable into capital stock of the Company, without the consent of the
holders of a majority of the then-outstanding shares of Series C Preferred
Stock. Holders of the Series C Preferred Stock shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of the
dividends as herein provided on the Series C Preferred Stock. No interest or sum
of money in lieu of interest shall be payable in respect of any declared
dividend payment or payments on the Series C Preferred Stock which may be in
arrears.
15. CONVERSION.
(a) Subject to and upon compliance with the provisions of this Section
3, the holders of the Series C Preferred Shares shall have the right, at his or
her option, at any time commencing on June 20, 1997, to convert the shares into
a number of fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100th of a share) of the Company's common stock,
$.01 par value (the "Common Stock"), equal to $100.00 for each Series C
Preferred Share surrendered for conversion divided by the Conversion Price (as
defined in Section 3(f) below); PROVIDED, HOWEVER, that if the Company shall
have called the Series C Preferred Stock for redemption, such right shall
terminate on the close of business on the third business day preceding the
Redemption Date (as defined below) unless the Company has defaulted in making
the payment due on the Redemption Date.
(b) In order to exercise this conversion option, the holder of any
Series C Preferred Shares to be converted shall surrender and deliver to the
Company the certificate(s) representing such shares, together with the Notice of
Election to Convert on the reverse side of said certificate(s), or otherwise in
such form as the Company may reasonably require, duly completed and signed by
the holder. Unless the shares issuable upon conversion are to be issued in the
same name as the name in which the shares of the Series C Preferred Stock are
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Company, duly executed by
the holder or his or her duly authorized attorney and by funds in an amount
sufficient to pay any transfer or similar tax. The holders of shares of the
Series C Preferred Stock at the close of business on a Record Date shall be
entitled to receive any dividend declared payable on those shares for the
corresponding Dividend Period on the applicable Dividend Payment Date,
notwithstanding the conversion of the shares after the
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Record Date. Upon the proper delivery of such documents, the conversion to be
effected thereby shall be effective as of the date of such delivery.
(c) Promptly after the effective date of a holder's conversion of
Series C Preferred Shares in accordance with this Section 3, the Company shall
issue and deliver to such holder a certificate or certificates for the number of
full shares of Common Stock issuable to the holder pursuant to the holder's
conversion of Series C Preferred Shares in accordance with the provisions of
this Section 3. The fractional interest in one share of Common Stock arising
upon the conversion, if any, shall be settled as provided in paragraph (e)
below.
(d) All shares of Common Stock delivered upon conversion of the Series
C Preferred Stock shall be duly and validly issued and fully paid and
nonassessable. Upon the effective date of a holder's conversion of Series C
Preferred Shares, such converted Series C Preferred Shares shall no longer be
deemed to be outstanding and all rights of the holder with respect to such
shares shall immediately terminate except the right to receive the shares of
Common Stock issuable upon such conversion.
(e) No fractional shares or securities representing fractional shares
of Common Stock shall be issued upon conversion of the Series C Preferred Stock.
Any fractional interest in one share of Common Stock resulting from a holder's
conversion of Series C Preferred Shares shall be paid in cash (computed to the
nearest cent) based on the Current Market Price (as defined in Section (f)(vi)
below) of a Common Share on the effective date of the conversion. If more than
one share shall be surrendered for conversion at one time by the same holder,
the number of whole shares of Common Stock issuable upon the conversion shall be
computed on the basis of the aggregate Liquidation Preference (as such term is
defined in Section 8 below) of the Series C Preferred Shares so surrendered.
(f) The "Conversion Price" per share of the Series C Preferred Stock
shall be $6.325, subject to adjustment from time to time as follows:
a. For purposes of this Section 3, the following definitions shall
apply:
(1) "Convertible Securities" shall mean any evidences of
indebtedness, shares or securities convertible into or exchangeable for shares
of Common Stock.
(2) "Common Stock Outstanding" shall include all Common Stock
issued and outstanding and issuable upon exercise of all outstanding options and
conversion of all outstanding Convertible Securities.
(3) "Effective Price" of additional shares of Common Stock
shall mean the quotient determined by dividing the total number of additional
shares of Common Stock issued or sold, or deemed to have been issued or sold by
the Company under Section 3(f)(ii), into the aggregate consideration received or
deemed to have been received by the Company for such issue.
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(4) "Issuance Date" shall mean the actual initial date of
issuance of the Series C Preferred Stock.
(5) "Private Placement" shall mean the issuance of securities
by the Company pursuant to an exemption from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act").
b.
(1) In case at any time or from time to time after the Issuance
Date, the Company issues or sells, or is deemed by the express provisions of
this Section 3(f)(ii) to have issued or sold additional shares of Common Stock,
for an Effective Price less than the Conversion Price in effect on the date of
and immediately prior to such issue or, in the case of the issuance of
additional shares of Common Stock in a Private Placement at less than 90% of
such Conversion Price, or the Company issues or sells, or is deemed by the
express provisions of this Section 3(f)(ii) to have issued or sold Additional
Shares of Common Stock for an Effective Price less than the Current Market Price
in effect on the date of and immediately prior to such issue, then and in each
such case the then-existing Conversion Price for the Series C Preferred Stock
shall be reduced, as of the opening of business on the date of such issue or
sale, to the lower of the prices determined as follows:
(a) by multiplying the Conversion Price for the Series C
Preferred Stock in effect immediately prior to the time of such issue or sale by
a fraction (a) the numerator of which shall be the sum of (i) the number of
shares of Common Stock Outstanding immediately prior to such issue or sale plus
(ii) the number of shares of Common Stock which the aggregate consideration
received (or by express provision hereof deemed to have been received) by the
Company for the total number of additional shares of Common Stock so issued
would purchase at such Conversion Price for the Series C Preferred Stock and (b)
the denominator of which shall be the number of shares of Common Stock
Outstanding at the close of business on the date of such issue after giving
effect to such issue of additional shares of Common Stock; and
(b) by multiplying the Conversion Price for the Series C
Preferred Stock in effect immediately prior to the time of such issue or sale by
a fraction (a) the numerator or which shall be the sum of (i) the number of
shares of Common Stock Outstanding immediately prior to such issue or sale
multiplied by the Current Market Price immediately prior to such issue or sale
plus (ii) the aggregate consideration received (or by express provision hereof
deemed to have been received) by the Company for the total number of additional
shares of Common Stock so issued, and (b) the denominator of which shall be the
product of (iii) the number of shares of Common Stock Outstanding at the close
of business on the date of such issue after giving effect to such issue of
additional shares of Common Stock, multiplied by (iv) the Current Market Price
immediately prior to such issue or sale.
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<PAGE>
(2) For the purpose of making any adjustment required under
Section 3(f)(ii), the consideration received by the Company for any issue or
sale of securities shall (1) to the extent it consists of cash, be computed at
the net amount of cash received by the Company prior to deduction of any
expenses payable by the Company and any underwriting or similar commissions,
compensation or concessions paid or allowed by the Company in connection with
such issue or sale, (2) to the extent it consists of property other than cash,
be computed at the fair market value of that property as determined in good
faith by the Board of Directors, and (3) if additional shares of Common Stock,
Convertible Securities or options to purchase either additional shares or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration that covers both,
be computed (as provided in clauses (1) and (2) above) as the portion of the
consideration so received that may be reasonably determined in good faith by the
Board of Directors to be allocable to such additional shares of Common Stock,
Convertible Securities or options.
(3) For purpose of the adjustment required under Section
3(f)(ii), if at any time or from time to time after the Issuance Date for the
Series C Preferred Stock, the Company issues or sells any options or Convertible
Securities, then in each case the Company shall be deemed to have issued at the
time of the issuance of such options or Convertible Securities the maximum
number of additional shares of Common Stock (as set forth in the instruments
relating thereto, giving effect to any provision contained therein for a
subsequent upward adjustment of such number) issuable upon exercise or
conversion thereof and to have received as consideration for the issuance of
such shares an amount equal to the total amount of the consideration, if any,
received by the Company for the issuance of such options or Convertible
Securities plus, in the case of such options, the minimum amounts of
consideration, if any (as set forth in the instruments relating thereto, giving
effect to any provision contained therein for a subsequent downward adjustment
of such consideration), payable to the Company upon the exercise of such options
and, in the case of Convertible Securities, the minimum amounts of
consideration, if any, payable to the Company (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities). No further
adjustment of the Conversion Price for the Series C Preferred Stock, adjusted
upon the issuance of such options or Convertible Securities, shall be made as a
result of the actual issuance of additional shares of Common Stock on the
exercise of any such options or the conversion of any such Convertible
Securities. If any such options or the conversion privilege represented by any
such Convertible Securities shall expire without having been exercised and fewer
than the maximum number of additional shares of Common Stock deemed issued
thereunder upon issuance thereof shall have actually been issued thereunder, or
more than the minimum consideration deemed to have been received by the Company
upon issuance thereof shall have been actually received by the Company, then the
Conversion Price for the Series C Preferred Stock adjusted upon the issuance of
such options or Convertible Securities shall be readjusted to the Conversion
Price for the Series C Preferred Stock that would have been in effect had an
adjustment been made on the basis that the only additional shares of Common
Stock so issued were the additional shares of Common Stock, if any, actually
issued or sold on the exercise of such options or rights of conversion of such
Convertible Securities, and such additional shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company upon such
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<PAGE>
exercise, plus the consideration received by the Company for the granting of all
such options plus the consideration received for issuing or selling the
Convertible Securities actually converted plus the consideration, if any,
actually received by the Company (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) on the conversion of such
Convertible Securities.
(4) Except as expressly provided herein, no adjustment in the
Conversion Price of any share of Series C Preferred Stock shall be made in
respect of the issue of additional shares of Common Stock unless the
consideration per share for such additional shares of Common Stock issued or
deemed to be issued by the Company is less than the Conversion Price or 90% of
the Conversion Price in the case of additional shares of Common Stock issued in
a Private Placement, or Current Market Price, as the case may be, in each case
in effect on the date of, and immediately prior to, such issue.
c.
(1) In case the Company shall (1) pay a dividend or make a
distribution on its Common Stock in shares of its Common Stock, (2) subdivide
its outstanding Common Stock into a greater number of shares, or (3) combine its
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect immediately prior to such event shall be proportionately adjusted so
that the holder of any share of the Series C Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the number and kind of
shares of Common Stock of the Company that he would have been entitled to
receive had the share been converted immediately prior to the happening of such
event. An adjustment made pursuant to this Section 3(f)(i) shall become
effective immediately after the Record Date in the case of a dividend or
distribution except as provided in Section 3(f)(ix) below, and shall become
effective immediately after the effective date in the case of a subdivision or
combination. If any dividend or distribution is not paid or made, the Conversion
Price then in effect shall be appropriately readjusted.
(2) If at any time or from time to time there is a capital
reorganization of the Common Stock (other than a recapitalization provided for
in Section 3(f)(iii)(A)) or a merger or consolidation of the Company with or
into another corporation, or the sale of all of the Company's properties and
assets to any other person, then, as a part of such reorganization, merger,
consolidation or sale, provision shall be made so that the holders of Series C
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series C Preferred Stock the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from such
merger or consolidation or sale, to which a holder of Common Stock deliverable
upon conversion would have been entitled upon such capital reorganization,
merger, consolidation or sale. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Section 3 with respect to the
rights of holders of the Series C Preferred Stock after the reorganization,
merger, consolidation or sale to the end that the provisions of this Section 3
(including adjustment of the Conversion Price for the Series C Preferred Stock
then in effect and number of shares of Common Stock purchasable
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<PAGE>
upon conversion of the Series C Preferred Stock) shall be applicable after that
event and be as nearly equivalent to the provisions hereof as may be
practicable.
(3) In the event that the Company at any time or from time to
time after the Issuance Date makes, or fixes a record date for the determination
of holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Company other than shares of Common Stock, then in
each such event provision shall be made so that the holders of Series C
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Company that they would have received had their Series C Preferred Stock been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the date of
conversion, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this Section 3 with respect to the rights of the holders of the Series C
Preferred Stock.
d. In case the Company shall issue rights or warrants to all
holders of its Common Stock entitling them (for a period expiring within 45 days
after the record date mentioned below) to subscribe for or purchase Common Stock
at a price per share less than the Current Market Price of the Common Stock at
the record date for the determination of shareholders entitled to receive the
rights or warrants, the Conversion Price in effect immediately prior to the
issuance of such rights or warrants shall be adjusted so that it shall equal the
price determined by multiplying the Conversion Price in effect immediately prior
to the date of issuance of the rights or warrants by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding on the date
of the issuance of the rights or warrants plus the number of shares of Common
Stock that the aggregate offering price of the total number of shares of Common
Stock so offered for subscription or purchase would purchase at the Current
Market Price at that record date, and of which the denominator shall be the
number of shares of Common Stock outstanding on the date of issuance of the
rights or warrants plus the number of additional shares of Common Stock for
subscription or purchase. The adjustment provided for in this Section 3(f)(iv)
shall be made successively whenever any such rights or warrants are issued, and
shall become effective immediately, except as provided in Section 3(f)(ix)
below, after such record date. In determining whether any rights or warrants
entitle the holder of the Common Stock to subscribe for or purchase shares of
Common Stock at less than the Current Market Price, and in determining the
aggregate offering price of the shares of Common Stock so offered, there shall
be taken into account any consideration received by the Company for such rights
or warrants, the value of such consideration, if other than cash, to be
determined by the Board of Directors of the Company (whose determination, if
made in good faith, shall be conclusive). If any or all of such rights or
warrants are not so issued or expire or terminate without having been exercised,
the Conversion Price then in effect shall be appropriately readjusted.
e. In case the Company shall distribute to all holders of its
Common Stock any shares of capital stock of the Company (other than Common
Stock) or evidences of
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indebtedness or assets (excluding cash dividends or distributions paid from
retained earnings of the Company) or rights or warrants to subscribe for or
purchase any of its securities (excluding those referred to in Section 3(f)(iv)
above), then, in each such case, the Conversion Price shall be adjusted so that
it shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of the distribution by a fraction, the
numerator of which shall be the Current Market Price of the Common Stock on the
record date mentioned below less the then fair market value (as determined by
the Board of Directors of the Company, whose determination, if made in good
faith, shall be conclusive) of that portion of the capital stock or assets or
evidences of indebtedness so distributed, or of the rights or warrants so
distributed, applicable to one share of Common Stock, and the denominator of
which shall be the Current Market Price of the Common Stock on the record date.
Such adjustment shall become effective immediately, except as provided in
Section 3(f)(ix) below, after the record date for the determination of
shareholders entitled to receive such distribution. If any such distribution is
not made or if any or all of such rights or warrants expire or terminate without
having been exercised, the Conversion Price then in effect shall be
appropriately readjusted. Notwithstanding the foregoing, in the event that the
Company shall distribute rights or warrants, other than those referred to in
Section 3(f)(iv) above ("Rights") pro rata to holders of Common Stock, the
Company may, in lieu of making any adjustment pursuant to this Section 3(f)(v),
make proper provision so that each holder of the Series C Preferred Stock who
converts such Series C Preferred Stock (or any portion thereof) after the record
date for such distribution and prior to the expiration or redemption of the
Rights shall be entitled to receive upon such conversion, in addition to the
shares of Common Stock issuable upon such conversion (the "Conversion Shares"),
a number of Rights to be determined as follows: (1) if such conversion occurs on
or prior to the date for the distribution to the holders of Rights of separate
certificates evidencing such Rights (the "Distribution Date"), the same number
of Rights to which a holder of a number of shares of Common Stock equal to the
number of Conversion Shares is entitled at the time of such conversion in
accordance with the terms and provisions of and applicable to the Rights; and
(2) if such conversion occurs after the Distribution Date, the same number of
shares of Common Stock into which the number of Series C Preferred Shares so
converted was convertible immediately prior to the Distribution Date would have
been entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights.
f. For the purpose of any computation under this Section 3, the
"Current Market Price" of the Common Stock at any date shall be the average of
the last reported sale prices per share for the 10 consecutive Trading Days (as
defined below) preceding the date of such computation. The last reported sale
price for each day shall be (1) the last reported sale price of the Common Stock
on the Nasdaq National Market or SmallCap Market, as the case may be, or any
similar system of automated dissemination of quotations of securities prices
then in common use, if so quoted, or (2) if not quoted as described in clause
(1), the mean between the high bid and low asked quotations for the Common Stock
as reported by the National Quotation Bureau Incorporated if at least two
securities dealers have inserted both bid and asked quotations for the Common
Stock on at least five of the 10 preceding days, or (3) if the Common Stock is
listed or admitted for trading on any national securities exchange, the last
sale price, or the closing bid price if no sale occurred, of the Common Stock on
the principal
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securities exchange on which the Common Stock is listed. If the Common Stock is
quoted on a national securities or central market system, in lieu of a market or
quotation system described above, the last reported sale price shall be
determined in the manner set forth in clause (2) of the preceding sentence if
bid and asked quotations are reported but actual transactions are not, and in
the manner set forth in clause (3) of the preceding sentence if actual
transactions are reported. If none of the conditions set forth above is met, the
last reported sale price of the Common Stock on any day or the average of such
last reported sale prices for any period shall be the fair market value of such
class of stock as determined by a member firm of the New York Stock Exchange,
Inc. selected by the Company. As used herein, the term "Trading Days" means (A)
if the Common Stock is quoted on the Nasdaq National Market, Nasdaq SmallCap
Market or any similar system of automated dissemination of quotations of
securities prices, days on which trades may be made on such system, or (B) if
not quoted as described in clause (A), days on which quotations are reported by
the National Quotation Bureau Incorporated, or (C) if the Common Stock is listed
or admitted for trading on any national securities exchange, days on which such
national securities exchange is open for business. Notwithstanding the
foregoing, if Common Stock is issued by the Company in a Private Placement, then
"Current Market Price" shall be 90% of the price computed pursuant to this
Section 3(f)(vi).
g. In the event that the Company shall fail to declare and timely
pay a dividend on the Series C Preferred Stock for a Dividend Period (a
"Dividend Default"), then the Conversion Price shall be reduced by $0.25 for
each such Dividend Default. Notwithstanding the foregoing, if at any time
subsequent to an adjustment in the Conversion Price pursuant to this Section
3(f)(vii), the Company declares and pays all cumulated dividends on the Series C
Preferred Stock through the then-current Dividend Period, then no further
adjustment in the Conversion Price pursuant to this Section 3(f)(vii) shall be
made until a new Dividend Default shall have occurred.
h. In the event the Company shall have failed to file and have
declared effective a registration statement on Form S-3 filed with the
Securities and Exchange Commission pursuant to the Securities Act for the shares
of Common Stock into which the Series C Preferred Stock is convertible by
September 1, 1997, then the existing Conversion Price for the Series C Preferred
Stock shall be reduced, as of the close of business on September 1, 1997, to a
price that is 75% of the Conversion Price for the Series C Preferred Stock in
effect immediately prior to the close of business on September 1, 1997, and if
such registration shall not have been filed and declared effective by March 31,
1998, the Conversion Price for the Series C Preferred Stock shall be reduced, as
of the close of business on March 31, 1998, to a price that is 50% of the
Conversion Price for the Series C Preferred Stock in effect immediately prior to
the close of business on September 1, 1997.
i. No adjustment in the Conversion Price shall be required unless
such adjustment would require a change of at least 1% in the Conversion Price;
PROVIDED, HOWEVER, that any adjustments which by reason of this Section 3(f)(ix)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment; and PROVIDED, FURTHER, that adjustment shall be
required and made in accordance with the provisions of this Section 3(f)
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(other than this Section 3(f)(ix)) not later than three years of the date of the
event requiring the adjustment. All calculations under this Section 3(f) shall
be made to the nearest cent or the nearest one hundredth of a share, as the case
may be. Notwithstanding anything in this Section 3(f) to the contrary, the
Company shall be entitled to make such reductions in the Conversion Price, in
addition to those required by this Section 3(f), as it, in its discretion, shall
determine to be advisable in order that any stock dividend, subdivision or
combination of shares, distribution of capital stock or rights or warrants to
purchase stock or securities, or distribution of evidence of indebtedness or
assets (other than cash dividends or distributions paid from retained earnings)
hereinafter made by the Company to its shareholders shall be a tax-free
distribution for federal income tax purposes.
j. In each case of an adjustment or readjustment of the Conversion
Price for the Series C Preferred Stock or the number of shares of Common Stock
or other securities issuable upon conversion of the Series C Preferred Stock,
the Company, at its expense, shall cause the Chief Financial Officer of the
Company to compute such adjustment or readjustment in accordance with the
provisions hereof (and cause its regularly retained independent public
accountants to verify such computation) and prepare a certificate showing such
adjustment or readjustment and shall mail such certificate, by first class mail,
postage prepaid, to each registered holder of the Series C Preferred Stock at
the holder's address as shown in the Company's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (1) the
consideration received or deemed to have been received by the Company for any
additional shares of Common Stock issued or sold or deemed to have been issued
or sold, (2) the Conversion Price for the Series C Preferred Stock at the time
in effect, (3) the number of additional shares of Common Stock, and (4) the type
and amount, if any, of other property that at the time would be received upon
conversion of the Series C Preferred Stock.
k. The provision of this Section 3(f) shall not apply to or as
result of any shares, rights, options, warrants or Convertible Securities
outstanding on the date hereof or issuable as a result of any transaction
occurring, plan adopted, or agreement entered into prior to the date hereof.
(g) a. The Company covenants that it will at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued shares of Common Stock or its issued shares of Common
Stock held by its treasury, or both, for the purpose of effective conversions of
the Series C Preferred Stock, the full number of shares of Common Stock
deliverable upon the conversion of all outstanding shares of the Series C
Preferred Stock not theretofore converted. For purposes of this Section 3(g),
the number of shares of Common Stock that shall be deliverable upon the
conversion of all outstanding shares of the Series C Preferred Stock shall be
computed as if at the time of computation all the outstanding shares were held
by a single holder.
b. Before taking any action that would cause an adjustment
reducing the Conversion Price below the then par value (if any) of the shares of
Common Stock
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deliverable upon conversion of the Series C Preferred Stock, the Company will
take any corporate action that may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock at the adjusted Conversion Price.
(h) The Company will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock or other securities on conversion of the Series C Preferred Stock
pursuant hereto; PROVIDED, HOWEVER, that the Company shall not be required to
pay any tax or fee that may be payable in respect of any transfer involved in
the issue or delivery of shares of Common Stock or other securities in a name
other than that of the holder of the Series C Preferred Stock to be converted
and no such issue or delivery shall be made unless and until the person
requesting the issue or delivery has paid to the Company the amount of any such
tax or fee or has established, to the satisfaction of the Company, that the tax
or fee has been paid.
(i) The Company shall list the shares of Common Stock required to be
delivered upon conversion of the Series C Preferred Shares, prior to the
delivery thereof, for trading upon each national securities exchange or Nasdaq,
if any, upon which the outstanding Common Stock is listed at the time of
delivery.
16. REDEMPTION.
(a) The shares of Series C Preferred Stock shall be redeemable by the
Company, in whole or in part, at any time and from time to time, from and after
the later of (i) December 20, 1999 or (ii) the date on which the Company's
Common Stock shall have an average closing bid price that is at least 200% of
the Conversion Price for any 10 consecutive trading days, at a price of $100.00
per share, plus, in each case, an amount equal to all accrued but unpaid
dividends for the then-current Dividend Period immediately preceding the date
fixed for redemption (the "Redemption Date").
(b) In the event that fewer than all the outstanding shares of the
Series C Preferred Stock are to be redeemed as permitted by this Section 4, the
number of shares to be redeemed shall be determined by the Board of Directors
and the shares to be redeemed shall be determined by lot or pro rata as may be
determined by the Board of Directors or by such other method as may be approved
by the Board of Directors that is required to conform to any rule or regulation
of any stock exchange or automated quotation system upon which the shares of the
Series C Preferred Stock may at the time be listed.
(c) Notice of redemption of the Series C Preferred Stock, specifying
the Redemption Date and place of redemption, shall be given by certified mail to
each holder of record of the shares to be redeemed, at his or her address of
record, not less than 60 calendar days prior to the Redemption Date. Each such
notice shall also specify the redemption price applicable to the shares to be
redeemed. If less than all the shares owned by such holder are then to be
redeemed, the notice shall also specify the number of shares thereof that are to
be
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redeemed and the fact that a new certificate or certificates representing any
unredeemed shares shall be issued without cost to such holder.
(d) Notice of redemption of shares of the Series C Preferred Stock
having been given as provided in Section 4(c), then unless the Company shall
have defaulted in providing for the payment of the redemption price and all
accrued and unpaid dividends for the then-current Dividend Period immediately
preceding the Redemption Date, all rights of the holders thereof (except the
right to receive the redemption price and all accrued and unpaid dividends for
the then-current Dividend Period immediately preceding the Redemption Date)
shall cease with respect to such shares and such shares shall not, after the
Redemption Date, be deemed to be outstanding and shall not have the status of
Series C Preferred Stock.
(e) Any shares of Series C Preferred Stock which shall at any time
have been redeemed or converted shall, after such redemption or conversion, have
the status of authorized but unissued shares of Preferred Stock, without
designation as to series until such shares are once more designated as part of a
particular series by the Board of Directors.
(f) The Company, directly or indirectly, shall not purchase or
otherwise acquire any shares of the Series C Preferred Stock; PROVIDED, HOWEVER,
that the foregoing shall not prevent the purchase or acquisition of shares of
the Series C Preferred Stock pursuant to a purchase or exchange offer made on
the same terms to all holders of all outstanding shares of the Series C
Preferred Stock or pursuant to the exercise of the conversion right provided in
Section 3 hereof.
(g) Shares of the Series C Preferred Stock are not subject or
entitled to the benefit of a sinking fund.
(h) Notwithstanding the foregoing, if notice of redemption shall have
been given pursuant to this Section 4 and any holder of the Series C Preferred
Stock shall, prior to the close of business on the date three business days next
preceding the Redemption Date, give written notice to the Corporation pursuant
to Section 3 hereof of the conversion of any or all of the shares held by the
holder (accompanied by a certificate or certificates for such shares, duly
endorsed or assigned to the Company), then the redemption shall not become
effective as to such shares and the conversion shall become effective as
provided in Section 3 hereof.
17. REDEMPTION FOLLOWING DEFAULT.
(a) In the event of a default under the terms of the Series C
Preferred Stock as set forth herein (excluding a Dividend Default resulting in
an adjustment to the Conversion Price pursuant to Section 3(f)(vii) hereof), or
under the Preferred Stock Purchase Agreement, each holder of Series C Preferred
Stock shall have the right, at such holder's sole option, to require the Company
to repurchase all or a portion of such holder's shares at the price of $100 per
share plus accrued but unpaid dividends for the then-current Dividend Period.
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(b) In order to exercise this option to require redemption of Series
C Preferred Shares by the Company, the holder of any such Series C Preferred
Shares shall surrender and deliver to the Company the certificate(s)
representing such shares, together with a notice of election to require
redemption, duly completed and signed by the holder. Holders of shares of the
Series C Preferred Stock at the close of business on a Record Date shall be
entitled to receive any dividend declared payable on those shares for the
corresponding Dividend Period on the applicable Dividend Payment Date,
notwithstanding the redemption of the shares after the Record Date pursuant to
this Section 5.
18. PREEMPTIVE RIGHTS. Shares of the Series C Preferred Stock are not
entitled to any preemptive rights to acquire any unissued shares of any capital
stock of the Company, now or hereafter authorized, or any other securities of
the Company, whether or not convertible into shares of capital stock of the
Company or carrying a right to subscribe to or acquire any such shares of
capital stock.
19. VOTING. The holders of shares of the Series C Preferred Stock will be
entitled to vote such shares (with each share having one vote) together with the
holders of shares of the Company's Common Stock, Series A Variable Rate
Convertible Preferred Stock and Series B Variable Rate Preferred Stock as a
single class on all matters, including the election of directors, except as
otherwise expressly required by law. Except as set forth in the foregoing
sentence or as required by law, the shares of Series C Preferred Stock shall not
have any voting powers, either general or special.
20. LIQUIDATION PREFERENCE.
(a) Upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the shares of the Series C Preferred
Stock shall be entitled to receive out of the assets of the Company available
for distribution to shareholders under applicable law, before and in priority to
any payment or distribution of assets by any means whatsoever that is made on
the Common Stock or on any other class or series of capital stock of the Company
ranking junior to the Series C Preferred Stock upon liquidation, the amount of
$100 per Series C Preferred Share, in the event of an involuntary or voluntary
liquidation (the "Liquidation Preference"), plus a sum equal to all dividends
accrued on such shares for and unpaid for the then-current Dividend Period. The
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all the property and assets of the
Company shall not be deemed a dissolution, liquidation or winding up of the
Company for the purposes of this Section 8, nor shall the merger or
consolidation of the Company into or with any other corporation or association
or the merger or consolidation of any other corporation or association into or
with the Company, be deemed to be a dissolution, liquidation or winding up of
the Company for the purposes of this Section 8.
(b) After the payment in full in cash of the Liquidation Preference
plus accrued dividends to the holders of the Series C Preferred Shares, as
provided in the foregoing paragraph (a), the holders of the Series C Preferred
Shares shall have no further right or claim
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to any of the remaining assets of the Company, except as otherwise provided
herein or as otherwise required by law.
(c) In the event the assets of the Company available for distribution
to the holders of the Series C Preferred Shares upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company shall be
insufficient to pay in full all amounts to which such holders are entitled
pursuant to Section 8(a) above, no distribution shall be made on account of any
shares of any other series of Preferred Stock or any other class of capital
stock of the Company ranking on a parity with the Series C Preferred Stock upon
such liquidation, dissolution or winding up unless proportionate amounts shall
be paid on account of the Series C Preferred Stock, ratably, in proportion to
the full amounts to which holders of all such shares which are on a parity with
the Series C Preferred Stock are respectively entitled upon such dissolution,
liquidation or winding up.
21. RANK. The Series C Preferred Stock shall rank junior as to payment of
dividends and rights upon voluntary or involuntary liquidation, dissolution or
winding up of the Company with the Company's Series A Variable Rate Convertible
Preferred Stock and Series B Variable Rate Convertible Preferred Stock. The
Series C Preferred Stock shall rank senior as to payment of dividends and rights
upon voluntary or involuntary liquidation, dissolution or winding up of the
Company as to all other classes and series of capital stock of the Company
outstanding as of the date of these Articles of Amendment or issued subsequent
hereto, unless consented to by the holders of at least a majority of the
then-outstanding shares of Series C Preferred Stock. The Company shall not
hereafter issue any shares of Preferred Stock or other capital stock ranking
senior to the Series C Preferred Stock as to the payment of dividends or rights
upon voluntary or involuntary liquidation, dissolution or winding up of the
Company, without the prior consent of the holders of at least a majority of the
then-outstanding shares of Series C Preferred Stock. Any shares of Series C
Preferred Stock that shall at any time have been converted or redeemed or
otherwise reacquired by the Company shall, after such conversion, redemption or
reacquisition, have the status of authorized but unissued shares of Preferred
Stock, without designation as to class or series until such shares are once more
designated as part of a particular class or series of Preferred Stock by the
Board of Directors.
22. REPORTS AND NOTICES. So long as any shares of the Series C Preferred
Stock shall be outstanding, the Company shall provide to the holder or holders
of such shares copies of all annual, quarterly and other reports of the Company
and copies of all shareholder notices of the Company promptly after filing with
the Securities and Exchange Commission.
23. WAIVER BY SERIES C PREFERRED SHAREHOLDERS. Except as expressly
provided for herein or as otherwise required by law, any rights or benefits for
the Series C Preferred Shares and the holders thereof provided herein may be
waived as to all outstanding Series C Preferred Shares and the holders thereof
by the consent of the holders of a majority of the then-outstanding Series C
Preferred Shares.
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24. HOLDER. The term "holder" as used in this Designation of Preferences,
Rights and Limitations of 4% $100 Series C Convertible Preferred Stock means a
record holder of any shares of Series C Preferred Stock.
25. ADDITIONAL ISSUANCES OF SERIES C PREFERRED SHARES. If after the
initial issuance of Series C Preferred Shares as provided herein, the Company
desires to issue additional Series C Preferred Shares with a different
Conversion Price, the Company shall file such amendments to its Articles of
Incorporation as may be necessary to effect such change in the Conversion Price
and, thereafter, the Series C Preferred Shares as initially issued shall be
designated "Series C-1" and such subsequently issued Series C Preferred Shares
shall bear similar consecutively numbered designations.
SECOND: ADOPTION OF AMENDMENTS TO ARTICLES OF INCORPORATION
These Articles of Amendment to Articles of Incorporation and the
amendments to the Company's Articles of Incorporation set forth herein were
adopted and approved by the Company's Board of Directors without shareholder
action on December 9, 1996, pursuant to Section 607.0602 of the Florida Business
Corporation Act, and shareholder action was not required.
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IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the 17th day of December, 1996.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
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<PAGE>
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
FOR
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF 7% SERIES D CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation. The amendment was adopted by unanimous written consent of the
Board of Directors on September 30, 1998.
FIRST: DESIGNATION OF 7% SERIES D CONVERTIBLE PREFERRED STOCK
Of the 1,000,000 shares of Preferred Stock, par value $.01 per share,
authorized pursuant to Article III of the Company's Articles of Incorporation,
1,000 of such shares are hereby designated as the 7% Series D Convertible
Preferred Stock (the "Preferred Stock").
The powers, designations, preferences, and relative, participating,
optional or other special rights of the Preferred Stock authorized hereunder and
the qualifications, limitations and restrictions of such preferences and rights
are as set forth on Exhibit A hereto.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the 6th day of October, 1998.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
--------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
THIS DOCUMENT PREPARED BY:
NINA S. GORDON, P.A.
BROAD AND CASSEL
FLORIDA BAR NO. 435309
201 S. BISCAYNE BOULEVARD
SUITE 3000
MIAMI, FLORIDA 33131
(305) 373-9437
<PAGE>
EXHIBIT A
TO
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF 7% SERIES D CONVERTIBLE PREFERRED STOCK
Terms of Preferred Stock
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of preferred
stock shall be designated as 7% Series D Convertible Preferred Stock (the
"PREFERRED STOCK") and the number of shares so designated shall be 200 (which
shall not be subject to increase without the consent of the holders of the
Preferred Stock (each, a "HOLDER" and collectively, the "HOLDERS"). Each share
of Preferred Stock shall have a par value of $.01 and a stated value of $10,000
(the "STATED VALUE").
Section 2. DIVIDENDS.
(a) Holders shall be entitled to receive, when and as declared by the
Board of Directors out of funds legally available therefor, and the Company
shall pay, cumulative dividends at the rate per share (as a percentage of the
Stated Value per share) equal to 7% per annum, payable on each Conversion Date
(as defined in Section 5(a)(i)), in cash or shares of Common Stock (as defined
in Section 9) at, subject to the terms and conditions set forth herein, the
option of the Company. Dividends on the Preferred Stock shall be calculated on
the basis of a 360-day year, shall accrue daily commencing on the Original Issue
Date (as defined in Section 9), and shall be deemed to accrue from such date
whether or not earned or declared and whether or not there are profits, surplus
or other funds of the Company legally available for the payment of dividends. A
party that holds shares of Preferred Stock on a Conversion Date will be entitled
to receive such dividend payment and any other accrued and unpaid dividends
which accrued prior to such Conversion Date, without regard to any sale or
disposition of such Preferred Stock subsequent to the applicable record date.
All overdue accrued and unpaid dividends and other amounts due herewith shall
entail a late fee at the rate of 18% per annum (to accrue daily, from the date
such dividend is due hereunder through and including the date of payment).
Except as otherwise provided herein, if at any time the Company pays less than
the total amount of dividends then accrued on account of the Preferred Stock,
such payment shall be distributed ratably among the Holders based upon the
number of shares held by each Holder. If dividends are paid in shares of Common
Stock, the number of shares of Common Stock issuable on account of such dividend
shall equal the cash amount of such dividend on such Conversion Date divided by
the Conversion Price (as defined below) on such date. Payment of dividends
hereunder in shares of Common Stock is subject to the provisions of Section
5(a)(iii)(D).
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends on the
Preferred Stock (and must deliver cash in respect thereof) if:
<PAGE>
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such dividends
in shares of Common Stock;
(ii) such shares of Common Stock are not either registered for resale
pursuant to an effective Underlying Securities Registration Statement (as
defined in Section 9) or may not be sold without volume restrictions pursuant to
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), As determined by counsel to the Company pursuant to a written
opinion letter, addressed to the Company's transfer agent in the form and
substance acceptable to the Holders and such transfer agent;
(iii) the Common Stock is not then listed for trading on the Nasdaq
SmallCap Market ("NASDAQ") or on the New York Stock Exchange, American Stock
Exchange or the Nasdaq National Market (each a "SUBSEQUENT MARKET");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of such shares of Common Stock would result in the
recipient thereof beneficially owning, as determined in accordance with Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), more than 4.999% of the then issued and outstanding shares of
Common Stock.
(c) Except for the Company's stock purchase program announced in
September, 1998, so long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities, nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities
(as defined in Section 9), nor shall any monies be set aside for or applied to
the purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock.
Section 2. VOTING RIGHTS. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not and shall cause its subsidiaries not to, without the affirmative vote
of the Holders of all of the shares of the Preferred Stock then outstanding, (a)
alter or change adversely the powers, preferences or rights given to the
Preferred Stock, (b) alter or amend these Articles of Amendment, (c) authorize
or create any class of stock ranking as to dividends or distribution of assets
upon a Liquidation (as defined in Section 4) senior to or otherwise pari passu
with or senior to the Preferred Stock, (d) amend its Articles of Incorporation,
bylaws or other charter documents so as to affect adversely any rights of any
Holders, (e) increase the authorized number of shares of Preferred Stock, or (f)
enter into any agreement with respect to the foregoing.
Section 3. LIQUIDATION. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "LIQUIDATION"), the Holders
shall be entitled to receive out of the assets of the Company, whether such
assets are capital or surplus, for each
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share of Preferred Stock an amount equal to the Stated Value plus all due but
unpaid dividends per share, whether declared or not, before any distribution or
payment shall be made to the holders of any Junior Securities, and if the assets
of the Company shall be insufficient to pay in full such amounts, then the
entire assets to be distributed to the Holders shall be distributed among the
Holders ratably in accordance with the respective amounts that would be payable
on such shares if all amounts payable thereon were paid in full. A sale,
conveyance or disposition of all or substantially all of the assets of the
Company or the effectuation by the Company of a transaction or series of related
transactions in which more than 33% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any other
company or companies shall not be treated as a Liquidation, but instead shall be
subject to the provisions of Section 5. The Company shall mail written notice of
any such Liquidation, not less than 45 days prior to the payment date stated
therein, to each record Holder.
Section 4. CONVERSION.
(a) (i) CONVERSIONS AT OPTION OF HOLDER. Each share of Preferred Stock
shall be convertible into shares of Common Stock (subject to the limitations set
forth in Section 5(a)(iii) hereof) at the Conversion Ratio (as defined in
Section 9), at the option of the Holder, at any time and from time to time, from
and after the 90th day following the Original Issue Date, PROVIDED, the Company
may, upon notice to the Holders given prior to the 80th day following the
Original Issue Date, delay the date on which the Holders may commence converting
shares of Preferred Stock to the 120th day following the Original Issue Date
(such 90th or 120th day after the Original Issue Date, the "INITIAL CONVERSION
DATE"). Holders shall effect conversions by surrendering the certificate or
certificates representing the shares of Preferred Stock to be converted to the
Company, together with the form of conversion notice attached hereto as Exhibit
A (a "CONVERSION NOTICE"). Each Conversion Notice shall specify the number of
shares of Preferred Stock to be converted and the date on which such conversion
is to be effected, which date may not be prior to the date the Holder delivers
such Conversion Notice by facsimile (the "CONVERSION DATE"). If no Conversion
Date is specified in a Conversion Notice, the Conversion Date shall be the date
that the Conversion Notice is deemed delivered hereunder. If the Holder is
converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by the Holder with the Conversion Notice,
or if a conversion hereunder cannot be effected in full for any reason, the
Company shall promptly deliver to such Holder (in the manner and within the time
set forth in Section 5(b)) a certificate for such number of shares as have not
been converted.
(ii) AUTOMATIC CONVERSION. Subject to the provisions in this paragraph,
all outstanding shares of Preferred Stock for which conversion notices have not
previously been received or for which redemption has not been made or required
hereunder shall be automatically converted on the earlier to occur of (i)
September 30, 2001, (ii) the third (3rd) Trading Day immediately preceding the
closing of the first sale under a bona fide underwritten initial public offering
of the common stock of Huge Entertainment, Inc. (or any successor thereto) with
net proceeds to Huge Entertainment, Inc. (or any successor thereto) of at least
$10,000,000 or (iii) the tenth (10th) Trading Day immediately preceding the
closing of a Change of Control Transaction (such date the "AUTOMATIC CONVERSION
DATE"), at the Conversion Price on the Automatic Conversion Date. The conversion
contemplated by this paragraph shall not occur if (a) either (1) an Underlying
Securities Registration Statement is not then effective or (2) the
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Holder is not permitted to resell Underlying Shares pursuant to Rule 144(k)
promulgated under the Securities Act, without volume restrictions, as evidenced
by an opinion letter of counsel acceptable to the Holder and the transfer agent
for the Common Stock; (b) there are not sufficient shares of Common Stock
authorized and reserved for issuance upon such conversion; or (c) the Company
shall have defaulted on its covenants and obligations hereunder or under the
Purchase Agreement or Registration Rights Agreement. Notwithstanding the
foregoing, the period for conversion under this Section shall be extended (on a
day-for-day basis) and therefore the Automatic Conversion Date shall be deemed
to be the date which is the number of Trading Days that the Purchaser is unable
to resell Underlying Shares under an Underlying Securities Registration
Statement due to (a) the Common Stock not being listed for trading on the NASDAQ
or any Subsequent Market, (b) the failure of an Underlying Securities
Registration Statement to be declared effective by the Securities and Exchange
Commission (the "COMMISSION") by the Filing Date (as defined in the Registration
Rights Agreement), or (c) if an Underlying Securities Registration Statement
shall have been declared effective by the Commission, (x) the failure of such
Underlying Securities Registration Statement to remain effective at all times
thereafter as to all Underlying Shares, or (y) the suspension of the Holder's
ability to resell Underlying Shares thereunder after the Automatic Conversion
Date originally noted above.
(iii) Certain Conversion Restrictions.
(A) The Holder agrees not to convert shares of Preferred Stock to the
extent such conversion would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the rules
thereunder) in excess of 4.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of the shares of
Preferred Stock held by such Holder after application of this Section. To the
extent that the limitation contained in this Section applies, the determination
of whether shares of Preferred Stock are convertible (in relation to other
securities owned by a Holder) and of which shares of Preferred Stock are
convertible shall be in the sole discretion of the Holder, and the submission of
shares of Preferred Stock for conversion shall be deemed to be the Holder's
determination of whether such shares of Preferred Stock are convertible (in
relation to other securities owned by the Holder) and of which portion of such
shares of Preferred Stock are convertible, in each case subject to such
aggregate percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. Nothing contained herein
shall be deemed to restrict the right of the Holder to convert shares of
Preferred Stock at such time as such conversion will not violate the provisions
of this Section. The provisions of this Section will not apply to any conversion
pursuant to Section 5 (a)(ii) hereof, and may be waived by a Holder (but only as
to itself and not to any other Holder) upon not less than 75 days prior notice
to the Company (in which case, the Holder shall make such filings with the
Commission as are required by applicable law), and the provisions of this
Section shall continue to apply until such 75th day (or later, if stated in the
notice of waiver). Other Holders shall be unaffected by any such waiver.
(B) The Holder agrees not to convert shares of Preferred Stock to the
extent such conversion would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the rules
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable
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upon conversion of the shares of Preferred Stock held by such Holder after
application of this Section. To the extent that the limitation contained in this
Section applies, the determination of whether shares of Preferred Stock are
convertible (in relation to other securities owned by a Holder) and of which
shares of Preferred Stock are convertible shall be in the sole discretion of the
Holder, and the submission of shares of Preferred Stock for conversion shall be
deemed to be the Holder's determination of whether such shares of Preferred
Stock are convertible (in relation to other securities owned by the Holder) and
of which portion of such shares of Preferred Stock are convertible, in each case
subject to such aggregate percentage limitation, and the Company shall have no
obligation to verify or confirm the accuracy of such determination. Nothing
contained herein shall be deemed to restrict the right of the Holder to convert
shares of Preferred Stock at such time as such conversion will not violate the
provisions of this Section. The provisions of this Section will not apply to any
conversion pursuant to Section 5 (a)(ii) hereof, and may be waived by a Holder
(but only as to itself and not to any other Holder) upon not less than 75 days
prior notice to the Company (in which case, the Holder shall make such filings
with the Commission as are required by applicable law), and the provisions of
this Section shall continue to apply until such 75th day (or later, if stated in
the notice of waiver). Other Holders shall be unaffected by any such waiver.
(C) Conversions of shares of Preferred Stock shall be limited as
follows: (1) from the Initial Conversion Date through the 30th day thereafter,
the Holder may convert up to 10% of shares of Preferred Stock issued to it on
the Original Issue Date; (2) between the 31st and 60th day after the Initial
Conversion Date, the Holder may convert such number of shares of Preferred Stock
as equals, when aggregated with all prior conversions of its shares of Preferred
Stock, up to 20% of the shares of Preferred Stock issued to it on the Original
Issue Date; (3) between the 61st and 90th day after the Initial Conversion Date,
the Holder may convert such number of shares of Preferred Stock as equals, when
aggregated with all prior conversions of shares of its Preferred Stock, up to
45% of the shares of Preferred Stock issued to it on the Original Issue Date;
(4) between the 91st and 120th day after the Initial Conversion Date, the Holder
may convert such number of shares of Preferred Stock, when aggregated with all
prior conversions of its shares of Preferred Stock, up to 70% of the shares of
Preferred Stock issued to it on the Original Issue Date; (5) between the 121st
and 150th day after the Initial Conversion Date, the Holder may convert such
number of shares of Preferred Stock as equals, when aggregated with all prior
conversions of its shares of Preferred Stock, up to 95% of the shares of
Preferred Stock issued to it on the Original Issue Date; and (6) from and after
the 150th day after the Initial Conversion Date, no restrictions under this
Section 5(a)(iii)(C) shall apply to the shares of Preferred Stock which may be
converted by a Holder.
(D) If on any Conversion Date (A) the Common Stock is listed for
trading on NASDAQ or the Nasdaq National Market, (B) the Conversion Price then
in effect is such that the aggregate number of shares of Common Stock that would
then be issuable upon conversion in full of all then outstanding shares of
Preferred Stock and as payment of dividends thereon in shares of Common Stock,
together with any shares of Common Stock previously issued upon conversion of
shares of Preferred Stock and as payment of dividends thereon, would equal or
exceed 20% of the number of shares of Common Stock outstanding on the Original
Issue Date (such number of shares as would not equal or exceed such 20% limit,
the "ISSUABLE MAXIMUM"), and (C) the Company shall not have previously obtained
the vote of shareholders (the "SHAREHOLDER APPROVAL"), if any, as may be
required by the applicable rules and regulations
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of The Nasdaq Stock Market (or any successor entity) applicable to approve the
issuance of shares of Common Stock in excess of the Issuable Maximum in a
private placement whereby shares of Common Stock are deemed to have been issued
at a price that is less than the greater of book or fair market value of the
Common Stock, then the Company shall issue to the Holder so requesting a
conversion a number of shares of Common Stock equals such Holder's pro rata
portion of the Issuable Maximum and, with respect to the remainder of the shares
of Preferred Stock then held by such Holder for which a conversion in accordance
with the Conversion Price would result in an issuance of Common Stock in excess
of such Holder's pro rata portion of the Issuable Maximum (the "EXCESS
PRINCIPAL"), the converting Holder shall have the option to require the Company
to either (1) use its best efforts to obtain the Shareholder Approval applicable
to such issuance as soon as is possible, but in any event not later than the
60th day after such request, or (2)(i) issue and deliver to such Holder a number
of shares of Common Stock as equals (x) the Excess Principal, plus accrued
dividends on all shares of Preferred Stock being converted, divided by (y) the
Conversion Price, and (ii) cash in an amount equal to the product of (x) the Per
Share Market Value on the Conversion Date and (y) a number of shares of Common
Stock as equals the Excess Principal divided by the Conversion Price (such
amount of cash being hereinafter referred to as the "DISCOUNT EQUIVALENT"), or
(3) pay cash to the converting Holder in an amount equal to the Mandatory
Redemption Amount for the shares of Common Stock otherwise issuable on account
of the Excess Principal. If the Company fails to pay the Discount Equivalent or
the Mandatory Redemption Amount, as the case may be, in full pursuant to this
Section within seven (7) days after the date payable, the Company will pay
interest thereon at a rate of 18% per annum to the converting Holder, accruing
daily from the Conversion Date until such amount, plus all such interest
thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of shares of
Preferred Stock (subject to the limitations set forth in Section 5(a)(iii)
hereof), (ii) one or more certificates representing the number of shares of
Preferred Stock not converted, (iii) a bank check in the amount of accrued and
unpaid dividends (if the Company has elected to pay accrued dividends in cash),
and (iv) if the Company has elected and is permitted hereunder to pay accrued
dividends in shares of Common Stock, certificates, which shall be free of
restrictive legends and trading restrictions (other than those required by
Section 3.1 (b) of the Purchase Agreement), representing such shares of Common
Stock; PROVIDED, HOWEVER, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon conversion of
any shares of Preferred Stock until certificates evidencing such shares of
Preferred Stock are either delivered for conversion to the Company or any
transfer agent for the Preferred Stock or Common Stock, or the Holder of such
Preferred Stock notifies the Company that such certificates have been lost,
stolen or destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the Holder, if
available, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates, including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid dividends
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hereunder, are not delivered to or as directed by the applicable Holder by the
third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled
by written notice to the Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which
event the Company shall immediately return the certificates representing the
shares of Preferred Stock tendered for conversion.
(ii) If the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid dividends hereunder, by the third (3rd) Trading Day after the
Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, $2,500 for each day after such third (3rd) Trading
Day until such certificates are delivered. Nothing herein shall limit a Holder's
right to pursue actual damages for the Company's failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holders from seeking to enforce damages pursuant to any other
Section hereof or under applicable law. Further, if the Company shall not have
delivered any cash due in respect of conversions of Preferred Stock or as
payment of dividends thereon by the third (3rd) Trading Day after the Conversion
Date, the Holder may, by notice to the Company, require the Company to issue
Underlying Shares pursuant to Section 5(c), except that for such purpose the
Conversion Price applicable thereto shall be the lesser of the Conversion Price
on the Conversion Date and the Conversion Price on the date of such Holder
demand. Any such Underlying Shares will be subject to the provision of this
Section.
(iii) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder such certificate or certificates pursuant
to Section 5(b)(i), including for purposes hereof, any shares of Common Stock to
be issued on the Conversion Date on account of accrued but unpaid dividends
hereunder, by the third (3rd) Trading Day after the Conversion Date, and if
after such third (3rd) Trading Day the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a
sale by such Holder of the Underlying Shares which the Holder anticipated
receiving upon such conversion (a "BUY-IN"), then the Company shall pay in cash
to the Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (y) the aggregate stated value of the shares of Preferred Stock for
which such conversion was not timely honored. For example, if the Holder
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of $10,000 aggregate
stated value of the shares of Preferred Stock, the Company shall be required to
pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
(c) (i) (A) The conversion price (the "CONVERSION PRICE") in effect on
any Conversion Date shall be $3.4978; provided, that if on the Trading Day prior
to a Conversion Date the Per Share Market Value shall be less than $6.1212, the
Conversion Price applicable to such conversion shall equal $3.3312.
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(B) If: (a) an Underlying Securities Registration Statement is not
filed on or prior to the Filing Date (as defined in the Registration Rights
Agreement) (if the Company files such Underlying Securities Registration
Statement without affording the Holder the opportunity to review and comment on
the same as required by Section 3(a) of the Registration Rights Agreement, the
Company shall not be deemed to have satisfied this clause (a)), or (b) the
Company fails to file with the Commission a request for acceleration in
accordance with Rule 12d1-2 promulgated under the Exchange Act, within five (5)
days of the date that the Company is notified (orally or in writing, whichever
is earlier) by the Commission that an Underlying Securities Registration
Statement will not be "reviewed," or not subject to further review, or (c) the
Underlying Securities Registration Statement is not declared effective by the
Commission on or prior to the Effectiveness Date (as defined in the Registration
Rights Agreement), or (d) such Underlying Securities Registration Statement is
filed with and declared effective by the Commission but thereafter ceases to be
effective as to all Registrable Securities (as defined in the Registration
Rights Agreement) at any time prior to the expiration of the "Effectiveness
Period" (as defined in the Registration Rights Agreement), without being
succeeded within 15 days by an amendment to such Underlying Securities
Registration Statement or a subsequent Underlying Securities Registration
Statement filed with and declared effective by the Commission, or (e) trading in
the Common Stock shall be suspended from the NASDAQ or a Subsequent Market for
more than three (3) Trading Days (which need not be consecutive Trading Days),
(f) the conversion rights of the Holders are suspended for any reason or (g) an
amendment to the Underlying Securities Registration Statement is not filed by
the Company with the Commission within 15 days of the Commission's notifying the
Company that such amendment is required in order for the Underlying Securities
Registration Statement to be declared effective (any such failure or breach
being referred to as an "EVENT," and for purposes of clauses (a), (c), (f) the
date on which such Event occurs, or for purposes of clause (b) the date on which
such five (5) day period is exceeded, or for purposes of clauses (d) and (g) the
date which such 15 day-period is exceeded, or for purposes of clause (e) the
date on which such three (3) Trading Day-period is exceeded, being referred to
as "EVENT DATE"), then the Company shall, on the first day of each monthly
anniversary of the Event Date and until such time as the applicable Event is
cured, pay to the Holder 2.0% of the aggregate Stated Value of the shares of
Preferred Stock then held by such Holder, in cash, as liquidated damages and not
as a penalty. The provisions of this Section are not exclusive and shall in no
way limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall (a) pay a stock dividend or otherwise make a distribution
or distributions on shares of its Junior Securities or pari passu securities
payable in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine outstanding shares of Common
Stock into a smaller number of shares, or (d) issue by reclassification of
shares of Common Stock any shares of capital stock of the Company, the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding before such event and of
which the denominator shall be the number of shares of Common Stock outstanding
after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
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(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights, warrants or options to all holders of
Common Stock entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Per Share Market Value at the record date
mentioned below, then the Conversion Price shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, warrants or options, plus the
number of shares of Common Stock which the aggregate offering price of the total
number of shares so offered would purchase at such Per Share Market Value, and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of shares
of Common Stock offered for subscription or purchase. Such adjustment shall be
made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants. However, upon the expiration of any right,
warrant or option to purchase shares of Common Stock the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this Section
5(c)(iii), if any such right, warrant or option shall expire and shall not have
been exercised, the Conversion Price shall immediately upon such expiration
shall be recomputed and effective immediately upon such expiration shall be
increased to the price which it would have been (but reflecting any other
adjustments in the Conversion Price made pursuant to the provisions of this
Section 5 upon the issuance of other rights or warrants) had the adjustment of
the Conversion Price made upon the issuance of such rights, warrants, or options
been made on the basis of offering for subscription or purchase only that number
of shares of Common Stock actually purchased upon the exercise of such rights,
warrants or options actually exercised.
(iv) Except as contemplated by Schedule 2.1(c) to the Purchase
Agreement, if the Company or any subsidiary thereof, as applicable with respect
to Common Stock Equivalents (as defined below), at any time while any shares of
Preferred Stock are outstanding, shall, issue shares of Common Stock or rights,
warrants, options or other securities or debt that is convertible into or
exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS") entitling
any Person to acquire shares of Common Stock at a price per share less than the
Per Share Market Value on the Original Issue Date, then the Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of shares
of Common Stock or such Common Stock Equivalents plus the number of shares of
Common Stock which the offering price for such shares of Common Stock or Common
Stock Equivalents would purchase at the Conversion Price, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock so
issued or issuable, provided, that for purposes hereof, all shares of Common
Stock that are issuable upon exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common Stock
or Common Stock Equivalents are issued.
(v) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
5(c)(ii)-(iv) above), then in each such case the Conversion Price at which each
share of Preferred Stock shall thereafter be convertible shall be determined by
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multiplying the Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of Common Stock determined as of the record date mentioned above,
and of which the numerator shall be such Per Share Market Value of the Common
Stock on such record date less the then fair market value at such record date of
the portion of such assets or evidence of indebtedness so distributed applicable
to one outstanding share of Common Stock as determined by the Board of Directors
in good faith; PROVIDED, HOWEVER, that in the event of a distribution exceeding
ten percent (10%) of the net assets of the Company, if the Holders of a majority
in interest of the Preferred Stock dispute such valuation, such fair market
value shall be determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Company) (an "APPRAISER") selected in good faith by the
Company, subject to approval by the Holders of a majority in interest of the
shares of Preferred Stock then outstanding whose approval shall not be
unreasonably withheld or delayed. The adjustments shall be described in a
statement provided to the Holders of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
(vi) All calculations under this Section 5 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(ii),(iii),(iv), or (v) the Company shall promptly mail to each Holder, a
notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock, or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property (other than compulsory share exchanges which
constitute Change of Control Transactions), the Holders of the Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities, cash and property receivable upon
or deemed to be held by holders of Common Stock following such reclassification
or share exchange, and the Holders of the Preferred Stock shall be entitled upon
such event to receive such amount of securities, cash or property as a holder of
the number of shares of the Common Stock of the Company into which such shares
of Preferred Stock could have been converted immediately prior to such
reclassification or share exchange would have been entitled. This provision
shall similarly apply to successive reclassifications or share exchanges.
(ix) If (a) the Company shall declare a dividend (or any other
distribution) on its Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock, (c) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights, (d) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock of
the Company,
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any consolidation or merger to which the Company is a party, any sale
or transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into other
securities, cash or property, or (e) the Company shall authorize the voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company; then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Preferred Stock, and shall cause to
be mailed to the Holders at their last addresses as they shall appear upon the
stock books of the Company, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange; PROVIDED, HOWEVER, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. Holders are entitled
to convert shares of Preferred Stock during the 20-day period commencing the
date of such notice to the effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock and payment of dividends on
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holders, not
less than such number of shares of Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of dividends
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and freely tradeable, subject to the legend requirements of
Section 3.1 (b) of the Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the Holder of a share of
Preferred Stock shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted and the
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<PAGE>
Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled. The Company may not reissue any shares of Preferred Stock.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Executive Officer of the Company at the
facsimile telephone number or address of the principal place of business of the
Company as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
8:00 p.m. (Minnetonka, Minnesota time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 8:00 p.m.
(Minnetonka, Minnesota time) on any date and earlier than 11:59 p.m.
(Minnetonka, Minnesota time) on such date, (iii) upon receipt, if sent by a
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given.
Section 5. REDEMPTION UPON TRIGGERING EVENTS.
(a) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law), has
the right, exercisable at the sole option of such Holder, to require the Company
to redeem all or a portion of the Preferred Stock then held by such Holder for a
redemption price, in cash, equal to the sum of (i) the Mandatory Redemption
Amount plus (ii) the product of (A) the number of Underlying Shares issued in
respect of conversions or as payment of dividends hereunder and then held by the
Holder and (B) the Per Share Market Value on the date such redemption is
demanded or the date the redemption price hereunder is paid in full, whichever
is greater. If the Company fails to pay the redemption price hereunder in full
pursuant to this Section within seven (7) days after the date of a demand
therefor, the Company will pay interest thereon at a rate of 18% per annum,
accruing daily from such seventh day until the redemption price, plus all such
interest thereon, is paid in full. For purposes of this Section, a share of
Preferred Stock is outstanding until such date as the Holder shall have received
Underlying Shares upon a conversion (or attempted conversion) thereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law
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<PAGE>
or pursuant to any judgement, decree or order of any court, or any
order, rule or regulation of any administrative or governmental body):
(i) the failure of an Underlying Securities Registration Statement to
be declared effective by the Commission on or prior to the 180th day after the
Original Issue Date;
(ii) if, during the Effectiveness Period, the effectiveness of the
Underlying Securities Registration Statement lapses for any reason, or the
Holder shall not be permitted to resell Registrable Securities under the
Underlying Securities Registration Statement;
(iii) the failure of the Common Stock to be listed for trading on the
NASDAQ or on a Subsequent Market or the suspension of the Common Stock from
trading on the NASDAQ or on a Subsequent Market, in either case, for more than
three (3) Trading Days (which need not be consecutive Trading Days);
(iv) the Company shall fail for any reason to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that comply
with the provisions hereof prior to the 12th day after the Conversion Date or
the Company shall provide notice to any Holder, including by way of public
announcement, at any time, of its intention not to comply with requests for
conversion of any Preferred Stock in accordance with the terms hereof;
(v) an Event shall not have been cured to the satisfaction of the
Holder prior to the expiration of thirty (30) days from the Event Date relating
thereto (other than an Event resulting from a failure of an Underlying
Securities Registration Statement to be declared effective by the Commission on
or prior to the Effectiveness Date;
(vi) the Company shall fail for any reason to deliver the certificate
or certificates required pursuant to Section 5(b)(iii) or the cash pursuant to a
Buy-In within ten (10) days after notice is deemed delivered hereunder; or
(vii) subject to the provisions set forth in the Purchase Agreement,
the Company shall fail to have available a sufficient number of authorized and
unreserved shares of Common Stock to issue to such Holder upon a conversion
hereunder.
Section 6. OPTIONAL REDEMPTION.
(a) The Company shall have the right, exercisable at any time upon 10
Trading Days' notice (an "OPTIONAL REDEMPTION NOTICE") to the Holders of the
Preferred Stock given at any time after the Original Issue Date to redeem all or
any portion of the shares of Preferred Stock which have not previously been
converted or redeemed, at a price equal to the Optional Redemption Price (as
defined below), PROVIDED, that the Company shall not be entitled to deliver an
Optional Redemption Notice to the Holders if: (i) the number of shares of Common
Stock at the time authorized, unissued and unreserved for all purposes is
insufficient to satisfy the Company's conversion obligations of all shares of
Preferred Stock then outstanding, or (ii) the Underlying Shares then outstanding
are not registered for resale pursuant to an effective Underlying Securities
Registration Statement and may not be sold without volume restrictions
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<PAGE>
pursuant to Rule 144 promulgated under the Securities Act, as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the Holders and
such transfer agent, or (iii) the Common Stock is not then listed for trading on
the NASDAQ or a Subsequent Market. The entire Optional Redemption Price shall be
paid in cash. Holders may convert (and the Company shall honor such conversions
in accordance with the terms hereof) any shares of Preferred Stock, including
shares subject to an Optional Redemption Notice, during the period from the date
thereof through the 10th Trading Day after the receipt of an Optional Redemption
Notice.
(b) If any portion of the Optional Redemption Price shall not be paid
by the Company by the 10th Trading Day after the delivery of an Optional
Redemption Notice, interest shall accrue thereon at the rate of 18% per annum
until the Optional Redemption Price plus all such interest is paid in full. In
addition, if any portion of the Optional Redemption Price remains unpaid after
the date due, the Holder of the Preferred Stock subject to such redemption may
elect, by written notice to the Company given at any time thereafter, to either
(i) demand conversion of all or any portion of the shares of Preferred Stock for
which such Optional Redemption Price, plus interest thereof, has not been paid
in full (the "UNPAID REDEMPTION SHARES"), in which event the Per Share Market
Value for such shares shall be the lower of the Per Share Market Value
calculated on the date the Optional Redemption Price was originally due and the
Per Share Market Value as of the Holder's written demand for conversion, or (ii)
invalidate AB INITIO such redemption, notwithstanding anything herein contained
to the contrary. If the Holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares
subject to such Holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option (ii) above, the
Company shall promptly, and in any event not later than three (3) Trading Days
from receipt of Holder's notice of such election, return to the Holder all of
the Unpaid Redemption Shares.
(c) The "OPTIONAL REDEMPTION PRICE" shall equal the sum of (i) the
product of (A) the number of shares of Preferred Stock to be redeemed and (B)
the product of (1) 120% of the average Per Share Market Value for the five (5)
Trading Days immediately preceding (x) the date of the Optional Redemption
Notice or (y) the date of payment in full by the Company of the Optional
Redemption Price, whichever is greater, and (2) the Conversion Ratio calculated
on the date of the Optional Redemption Notice, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.
Section 7. CERTAIN RESALE LIMITATIONS.
For so long as the Holder owns shares of Preferred Stock, it
shall use its best practicable efforts not to sell a number of Underlying Shares
during a Trading Day in excess of the greater of (i) 25% of the average daily
trading volume of the Common Stock for the five (5) Trading Days immediately
preceding such date and (ii) 25% of the average daily trading volume of the
Common Stock on such date (in either case of (i) or (ii), as reported by NASDAQ
or any successor entity succeeding to its function of reporting stock prices).
Section 8. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
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<PAGE>
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act), other
than an acquisition after the date hereof by any existing shareholder of the
Company who owns more than 7% of the voting securities of the Company as of the
Original Issue Date, of in excess of 33% of the voting securities of the
Company, (ii) a replacement of more than one-half of the members of the
Company's board of directors which is not approved by those individuals who are
members of the board of directors on the date hereof in one or a series of
related transactions, (iii) the merger of the Company with or into another
entity, consolidation or sale of all or substantially all of the assets of the
Company in one or a series of related transactions, unless following such
transaction, the holders of the Company's securities continue to hold at least
66% of such securities following such transaction or (iv) the execution by the
Company of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i), (ii) or (iii).
"COMMON STOCK" means the Company's common stock, par value $.01 per
share, and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"CONVERSION RATIO" means, at any time, a fraction, the numerator of
which is Stated Value plus accrued but unpaid dividends (including any accrued
but unpaid late fees thereon) but only to the extent not paid in shares of
Common Stock in accordance with the terms hereof, and the denominator of which
is the Conversion Price at such time.
"JUNIOR SECURITIES" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Preferred Stock.
"MANDATORY REDEMPTION AMOUNT" for each share of Preferred Stock means
the sum of (i) the greater of (A) 115% of the Stated Value and all accrued
dividends with respect to such share, and (B) the product of (a) the Per Share
Market Value on the Trading Day immediately preceding (x) the date of the
Triggering Event or the Conversion Date, as the case may be, or (y) the date of
payment in full by the Company of the applicable redemption price, whichever is
greater, and (b) the Conversion Ratio calculated on the date of the Triggering
Event, or the Conversion Date, as the case may be, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"PER SHARE MARKET VALUE" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the NASDAQ or on such
Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on which the Common Stock is then listed or quoted on
the date nearest preceding such date, or (b) if the Common Stock is not then
listed or quoted on the NASDAQ or on a Subsequent Market, the closing bid
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<PAGE>
price for a share of Common Stock in the over-the-counter market, as reported by
the National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to
its functions of reporting prices), then the average of the "Pink Sheet" quotes
for the relevant conversion period, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market value of
a share of Common Stock as determined by an Appraiser selected in good faith by
the Holders of a majority of the shares of the Preferred Stock.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Convertible Preferred Stock Purchase
Agreement, dated as of September 30, 1998, between the Company and the original
Holder of the Preferred Stock.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of September 30, 1998, between the Company and the original
Holder of the Preferred Stock.
"TRADING DAY" means (a) a day on which the Common Stock is traded on
the NASDAQ or on such Subsequent Market on which the Common Stock is then listed
or quoted, or (b) if the Common Stock is not listed on the NASDAQ or on a
Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); PROVIDED, HOWEVER, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"UNDERLYING SECURITIES REGISTRATION STATEMENT" means a registration
statement that meets the requirement of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the recipient thereof, who
shall be named as a "selling stockholder" thereunder.
"UNDERLYING SHARES" means, collectively, the shares of Common Stock
into which the shares of Preferred Stock are convertible and the shares of
Common Stock issuable upon payment of dividends thereon in accordance with the
terms hereof.
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<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of 7% Series D
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.01 per share (the "COMMON STOCK"), of Big Entertainment, Inc. (the
"COMPANY") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the Holder for
any conversion, except for such transfer taxes, if any.
Conversion calculations:
______________________________________________________
Date to Effect Conversion
______________________________________________________
Number of shares of Preferrred Stock to be Converted
______________________________________________________
Number of shares of Common Stock to be Issued
______________________________________________________
Applicable Conversion Price
______________________________________________________
Signature
______________________________________________________
Name
______________________________________________________
Address
<PAGE>
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
Amendment to
Designation of Preferences, Rights and Limitations
of
7% Series D Convertible Preferred Stock
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation. The amendment was adopted by unanimous written consent of the
Board of Directors dated as of September 30, 1998.
FIRST: Amendment to Section 1 of Designation of 7% Series D Convertible
Preferred Stock
Section 1 of Exhibit A to Designation of Preferences, Rights and
Limitations of 7% Series D Convertible Preferred dated as of October 6, 1998
(the "Series D Designation") is amended to read in its entirety as follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of preferred
stock shall be designated as 7% Series D Convertible Preferred Stock (the
"PREFERRED STOCK") and the number of shares so designated shall be 1,000
(which shall not be subject to increase without the consent of the holders
of the Preferred Stock (each, a "HOLDER" and collectively, the "HOLDERS")).
Each share of Preferred Stock shall have a par value of $.01 and a stated
value of $10,000 (the "STATED VALUE").
SECOND: Section 5(c)(i)(A) of the Series D Designation is amended to
read in its entirety as follows:
(c)(i)(A) For shares of Preferred Stock issued on or before October 30,
1998, the conversion price (the "CONVERSION PRICE") in effect on any
Conversion Date shall be $3.4978; provided, that if on the Trading Day prior
to a Conversion Date the Per Share Market Value shall be less than $6.1212,
the Conversion Price applicable to such conversion shall equal $3.3312.
For shares of Preferred Stock issued after October 30, 1998, the
Conversion Price in effect on any Conversion Date shall equal 105% of the
average of the Per Share Market Values for the five Trading Days ending on
the Trading Day immediately preceding the Original Issue Date.
<PAGE>
THIRD: The definitions of "Original Issue Date," "Purchase Agreement"
and "Registration Rights Agreement" contained in Section 9 of
the Series D Designation are each amended to read in their
entireties as follows:
"ORIGINAL ISSUE DATE" shall mean, as to any particular share
of Preferred Stock, the date of first issuance of any such share of
Preferred Stock, regardless of the number of subsequent transfers of
such share and regardless of the number of certificates that may be
issued to evidence such share of Preferred Stock.
"PURCHASE AGREEMENT" means the particular Convertible
Preferred Stock Purchase Agreement between the Company and the
particular Holder of the Preferred Stock.
"REGISTRATION RIGHTS AGREEMENT" means the particular
Registration Rights Agreement between the Company and the particular
Holder of the Preferred Stock.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the 6th day of November, 1998.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
THIS DOCUMENT PREPARED BY:
NINA S. GORDON, P.A.
BROAD AND CASSEL
FLORIDA BAR NO. 435309
201 S. BISCAYNE BOULEVARD
SUITE 3000
MIAMI, FLORIDA 33131
(305) 373-9437
EXHIBIT 4.1
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
FOR
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF 7% SERIES D CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation. The amendment was adopted by unanimous written consent of the
Board of Directors on September 30, 1998.
FIRST: DESIGNATION OF 7% SERIES D CONVERTIBLE PREFERRED STOCK
Of the 1,000,000 shares of Preferred Stock, par value $.01 per share,
authorized pursuant to Article III of the Company's Articles of Incorporation,
1,000 of such shares are hereby designated as the 7% Series D Convertible
Preferred Stock (the "Preferred Stock").
The powers, designations, preferences, and relative, participating,
optional or other special rights of the Preferred Stock authorized hereunder and
the qualifications, limitations and restrictions of such preferences and rights
are as set forth on Exhibit A hereto.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the 6th day of October, 1998.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
--------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
THIS DOCUMENT PREPARED BY:
NINA S. GORDON, P.A.
BROAD AND CASSEL
FLORIDA BAR NO. 435309
201 S. BISCAYNE BOULEVARD
SUITE 3000
MIAMI, FLORIDA 33131
(305) 373-9437
<PAGE>
EXHIBIT A
TO
DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS
OF 7% SERIES D CONVERTIBLE PREFERRED STOCK
Terms of Preferred Stock
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of preferred
stock shall be designated as 7% Series D Convertible Preferred Stock (the
"PREFERRED STOCK") and the number of shares so designated shall be 200 (which
shall not be subject to increase without the consent of the holders of the
Preferred Stock (each, a "HOLDER" and collectively, the "HOLDERS")); Each share
of Preferred Stock shall have a par value of $.01 and a stated value of $10,000
(the "STATED VALUE").
Section 2. DIVIDENDS.
(a) Holders shall be entitled to receive, when and as declared by the
Board of Directors out of funds legally available therefor, and the Company
shall pay, cumulative dividends at the rate per share (as a percentage of the
Stated Value per share) equal to 7% per annum, payable on each Conversion Date
(as defined in Section 5(a)(i)), in cash or shares of Common Stock (as defined
in Section 9) at, subject to the terms and conditions set forth herein, the
option of the Company. Dividends on the Preferred Stock shall be calculated on
the basis of a 360-day year, shall accrue daily commencing on the Original Issue
Date (as defined in Section 9), and shall be deemed to accrue from such date
whether or not earned or declared and whether or not there are profits, surplus
or other funds of the Company legally available for the payment of dividends. A
party that holds shares of Preferred Stock on a Conversion Date will be entitled
to receive such dividend payment and any other accrued and unpaid dividends
which accrued prior to such Conversion Date, without regard to any sale or
disposition of such Preferred Stock subsequent to the applicable record date.
All overdue accrued and unpaid dividends and other amounts due herewith shall
entail a late fee at the rate of 18% per annum (to accrue daily, from the date
such dividend is due hereunder through and including the date of payment).
Except as otherwise provided herein, if at any time the Company pays less than
the total amount of dividends then accrued on account of the Preferred Stock,
such payment shall be distributed ratably among the Holders based upon the
number of shares held by each Holder. If dividends are paid in shares of Common
Stock, the number of shares of Common Stock issuable on account of such dividend
shall equal the cash amount of such dividend on such Conversion Date divided by
the Conversion Price (as defined below) on such date. Payment of dividends
hereunder in shares of Common Stock is subject to the provisions of Section
5(a)(iii)(D).
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends on the
Preferred Stock (and must deliver cash in respect thereof) if:
<PAGE>
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such dividends
in shares of Common Stock;
(ii) such shares of Common Stock are not either registered for resale
pursuant to an effective Underlying Securities Registration Statement (as
defined in Section 9) or may not be sold without volume restrictions pursuant to
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), As determined by counsel to the Company pursuant to a written
opinion letter, addressed to the Company's transfer agent in the form and
substance acceptable to the Holders and such transfer agent;
(iii) the Common Stock is not then listed for trading on the Nasdaq
SmallCap Market ("NASDAQ") or on the New York Stock Exchange, American Stock
Exchange or the Nasdaq National Market (each a "SUBSEQUENT MARKET");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of such shares of Common Stock would result in the
recipient thereof beneficially owning, as determined in accordance with Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), more than 4.999% of the then issued and outstanding shares of
Common Stock.
(c) Except for the Company's stock purchase program announced in
September, 1998, so long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities, nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities
(as defined in Section 9), nor shall any monies be set aside for or applied to
the purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock.
Section 2. VOTING RIGHTS. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not and shall cause its subsidiaries not to, without the affirmative vote
of the Holders of all of the shares of the Preferred Stock then outstanding, (a)
alter or change adversely the powers, preferences or rights given to the
Preferred Stock, (b) alter or amend these Articles of Amendment, (c) authorize
or create any class of stock ranking as to dividends or distribution of assets
upon a Liquidation (as defined in Section 4) senior to or otherwise pari passu
with or senior to the Preferred Stock, (d) amend its Articles of Incorporation,
bylaws or other charter documents so as to affect adversely any rights of any
Holders, (e) increase the authorized number of shares of Preferred Stock, or (f)
enter into any agreement with respect to the foregoing.
Section 3. LIQUIDATION. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "LIQUIDATION"), the Holders
shall be entitled to receive out of the assets of the Company, whether such
assets are capital or surplus, for each
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<PAGE>
share of Preferred Stock an amount equal to the Stated Value plus all due but
unpaid dividends per share, whether declared or not, before any distribution or
payment shall be made to the holders of any Junior Securities, and if the assets
of the Company shall be insufficient to pay in full such amounts, then the
entire assets to be distributed to the Holders shall be distributed among the
Holders ratably in accordance with the respective amounts that would be payable
on such shares if all amounts payable thereon were paid in full. A sale,
conveyance or disposition of all or substantially all of the assets of the
Company or the effectuation by the Company of a transaction or series of related
transactions in which more than 33% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any other
company or companies shall not be treated as a Liquidation, but instead shall be
subject to the provisions of Section 5. The Company shall mail written notice of
any such Liquidation, not less than 45 days prior to the payment date stated
therein, to each record Holder.
Section 4. CONVERSION.
(a) (i) CONVERSIONS AT OPTION OF HOLDER. Each share of Preferred Stock
shall be convertible into shares of Common Stock (subject to the limitations set
forth in Section 5(a)(iii) hereof) at the Conversion Ratio (as defined in
Section 9), at the option of the Holder, at any time and from time to time, from
and after the 90th day following the Original Issue Date, PROVIDED, the Company
may, upon notice to the Holders given prior to the 80th day following the
Original Issue Date, delay the date on which the Holders may commence converting
shares of Preferred Stock to the 120th day following the Original Issue Date
(such 90th or 120th day after the Original Issue Date, the "INITIAL CONVERSION
DATE"). Holders shall effect conversions by surrendering the certificate or
certificates representing the shares of Preferred Stock to be converted to the
Company, together with the form of conversion notice attached hereto as Exhibit
A (a "CONVERSION NOTICE"). Each Conversion Notice shall specify the number of
shares of Preferred Stock to be converted and the date on which such conversion
is to be effected, which date may not be prior to the date the Holder delivers
such Conversion Notice by facsimile (the "CONVERSION DATE"). If no Conversion
Date is specified in a Conversion Notice, the Conversion Date shall be the date
that the Conversion Notice is deemed delivered hereunder. If the Holder is
converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by the Holder with the Conversion Notice,
or if a conversion hereunder cannot be effected in full for any reason, the
Company shall promptly deliver to such Holder (in the manner and within the time
set forth in Section 5(b)) a certificate for such number of shares as have not
been converted.
(ii) AUTOMATIC CONVERSION. Subject to the provisions in this paragraph,
all outstanding shares of Preferred Stock for which conversion notices have not
previously been received or for which redemption has not been made or required
hereunder shall be automatically converted on the earlier to occur of (i)
September 30, 2001, (ii) the third (3rd) Trading Day immediately preceding the
closing of the first sale under a bona fide underwritten initial public offering
of the common stock of Huge Entertainment, Inc. (or any successor thereto) with
net proceeds to Huge Entertainment, Inc. (or any successor thereto) of at least
$10,000,000 or (iii) the tenth (10th) Trading Day immediately preceding the
closing of a Change of Control Transaction (such date the "AUTOMATIC CONVERSION
DATE"), at the Conversion Price on the Automatic Conversion Date. The conversion
contemplated by this paragraph shall not occur if (a) either (1) an Underlying
Securities Registration Statement is not then effective or (2) the
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Holder is not permitted to resell Underlying Shares pursuant to Rule 144(k)
promulgated under the Securities Act, without volume restrictions, as evidenced
by an opinion letter of counsel acceptable to the Holder and the transfer agent
for the Common Stock; (b) there are not sufficient shares of Common Stock
authorized and reserved for issuance upon such conversion; or (c) the Company
shall have defaulted on its covenants and obligations hereunder or under the
Purchase Agreement or Registration Rights Agreement. Notwithstanding the
foregoing, the period for conversion under this Section shall be extended (on a
day-for-day basis) and therefore the Automatic Conversion Date shall be deemed
to be the date which is the number of Trading Days that the Purchaser is unable
to resell Underlying Shares under an Underlying Securities Registration
Statement due to (a) the Common Stock not being listed for trading on the NASDAQ
or any Subsequent Market, (b) the failure of an Underlying Securities
Registration Statement to be declared effective by the Securities and Exchange
Commission (the "COMMISSION") by the Filing Date (as defined in the Registration
Rights Agreement), or (c) if an Underlying Securities Registration Statement
shall have been declared effective by the Commission, (x) the failure of such
Underlying Securities Registration Statement to remain effective at all times
thereafter as to all Underlying Shares, or (y) the suspension of the Holder's
ability to resell Underlying Shares thereunder after the Automatic Conversion
Date originally noted above.
(iii) Certain Conversion Restrictions.
(A) The Holder agrees not to convert shares of Preferred Stock to the
extent such conversion would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the rules
thereunder) in excess of 4.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of the shares of
Preferred Stock held by such Holder after application of this Section. To the
extent that the limitation contained in this Section applies, the determination
of whether shares of Preferred Stock are convertible (in relation to other
securities owned by a Holder) and of which shares of Preferred Stock are
convertible shall be in the sole discretion of the Holder, and the submission of
shares of Preferred Stock for conversion shall be deemed to be the Holder's
determination of whether such shares of Preferred Stock are convertible (in
relation to other securities owned by the Holder) and of which portion of such
shares of Preferred Stock are convertible, in each case subject to such
aggregate percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. Nothing contained herein
shall be deemed to restrict the right of the Holder to convert shares of
Preferred Stock at such time as such conversion will not violate the provisions
of this Section. The provisions of this Section will not apply to any conversion
pursuant to Section 5 (a)(ii) hereof, and may be waived by a Holder (but only as
to itself and not to any other Holder) upon not less than 75 days prior notice
to the Company (in which case, the Holder shall make such filings with the
Commission as are required by applicable law), and the provisions of this
Section shall continue to apply until such 75th day (or later, if stated in the
notice of waiver). Other Holders shall be unaffected by any such waiver.
(B) The Holder agrees not to convert shares of Preferred Stock to the
extent such conversion would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the rules
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable
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upon conversion of the shares of Preferred Stock held by such Holder after
application of this Section. To the extent that the limitation contained in this
Section applies, the determination of whether shares of Preferred Stock are
convertible (in relation to other securities owned by a Holder) and of which
shares of Preferred Stock are convertible shall be in the sole discretion of the
Holder, and the submission of shares of Preferred Stock for conversion shall be
deemed to be the Holder's determination of whether such shares of Preferred
Stock are convertible (in relation to other securities owned by the Holder) and
of which portion of such shares of Preferred Stock are convertible, in each case
subject to such aggregate percentage limitation, and the Company shall have no
obligation to verify or confirm the accuracy of such determination. Nothing
contained herein shall be deemed to restrict the right of the Holder to convert
shares of Preferred Stock at such time as such conversion will not violate the
provisions of this Section. The provisions of this Section will not apply to any
conversion pursuant to Section 5 (a)(ii) hereof, and may be waived by a Holder
(but only as to itself and not to any other Holder) upon not less than 75 days
prior notice to the Company (in which case, the Holder shall make such filings
with the Commission as are required by applicable law), and the provisions of
this Section shall continue to apply until such 75th day (or later, if stated in
the notice of waiver). Other Holders shall be unaffected by any such waiver.
(C) Conversions of shares of Preferred Stock shall be limited as
follows: (1) from the Initial Conversion Date through the 30th day thereafter,
the Holder may convert up to 10% of shares of Preferred Stock issued to it on
the Original Issue Date; (2) between the 31st and 60th day after the Initial
Conversion Date, the Holder may convert such number of shares of Preferred Stock
as equals, when aggregated with all prior conversions of its shares of Preferred
Stock, up to 20% of the shares of Preferred Stock issued to it on the Original
Issue Date; (3) between the 61st and 90th day after the Initial Conversion Date,
the Holder may convert such number of shares of Preferred Stock as equals, when
aggregated with all prior conversions of shares of its Preferred Stock, up to
45% of the shares of Preferred Stock issued to it on the Original Issue Date;
(4) between the 91st and 120th day after the Initial Conversion Date, the Holder
may convert such number of shares of Preferred Stock, when aggregated with all
prior conversions of its shares of Preferred Stock, up to 70% of the shares of
Preferred Stock issued to it on the Original Issue Date; (5) between the 121st
and 150th day after the Initial Conversion Date, the Holder may convert such
number of shares of Preferred Stock as equals, when aggregated with all prior
conversions of its shares of Preferred Stock, up to 95% of the shares of
Preferred Stock issued to it on the Original Issue Date; and (6) from and after
the 150th day after the Initial Conversion Date, no restrictions under this
Section 5(a)(iii)(C) shall apply to the shares of Preferred Stock which may be
converted by a Holder.
(D) If on any Conversion Date (A) the Common Stock is listed for
trading on NASDAQ or the Nasdaq National Market, (B) the Conversion Price then
in effect is such that the aggregate number of shares of Common Stock that would
then be issuable upon conversion in full of all then outstanding shares of
Preferred Stock and as payment of dividends thereon in shares of Common Stock,
together with any shares of Common Stock previously issued upon conversion of
shares of Preferred Stock and as payment of dividends thereon, would equal or
exceed 20% of the number of shares of Common Stock outstanding on the Original
Issue Date (such number of shares as would not equal or exceed such 20% limit,
the "ISSUABLE MAXIMUM"), and (C) the Company shall not have previously obtained
the vote of shareholders (the "SHAREHOLDER APPROVAL"), if any, as may be
required by the applicable rules and regulations
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of The Nasdaq Stock Market (or any successor entity) applicable to approve the
issuance of shares of Common Stock in excess of the Issuable Maximum in a
private placement whereby shares of Common Stock are deemed to have been issued
at a price that is less than the greater of book or fair market value of the
Common Stock, then the Company shall issue to the Holder so requesting a
conversion a number of shares of Common Stock equals such Holder's pro rata
portion of the Issuable Maximum and, with respect to the remainder of the shares
of Preferred Stock then held by such Holder for which a conversion in accordance
with the Conversion Price would result in an issuance of Common Stock in excess
of such Holder's pro rata portion of the Issuable Maximum (the "EXCESS
PRINCIPAL"), the converting Holder shall have the option to require the Company
to either (1) use its best efforts to obtain the Shareholder Approval applicable
to such issuance as soon as is possible, but in any event not later than the
60th day after such request, or (2)(i) issue and deliver to such Holder a number
of shares of Common Stock as equals (x) the Excess Principal, plus accrued
dividends on all shares of Preferred Stock being converted, divided by (y) the
Conversion Price, and (ii) cash in an amount equal to the product of (x) the Per
Share Market Value on the Conversion Date and (y) a number of shares of Common
Stock as equals the Excess Principal divided by the Conversion Price (such
amount of cash being hereinafter referred to as the "DISCOUNT EQUIVALENT"), or
(3) pay cash to the converting Holder in an amount equal to the Mandatory
Redemption Amount for the shares of Common Stock otherwise issuable on account
of the Excess Principal. If the Company fails to pay the Discount Equivalent or
the Mandatory Redemption Amount, as the case may be, in full pursuant to this
Section within seven (7) days after the date payable, the Company will pay
interest thereon at a rate of 18% per annum to the converting Holder, accruing
daily from the Conversion Date until such amount, plus all such interest
thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of shares of
Preferred Stock (subject to the limitations set forth in Section 5(a)(iii)
hereof), (ii) one or more certificates representing the number of shares of
Preferred Stock not converted, (iii) a bank check in the amount of accrued and
unpaid dividends (if the Company has elected to pay accrued dividends in cash),
and (iv) if the Company has elected and is permitted hereunder to pay accrued
dividends in shares of Common Stock, certificates, which shall be free of
restrictive legends and trading restrictions (other than those required by
Section 3.1 (b) of the Purchase Agreement), representing such shares of Common
Stock; PROVIDED, HOWEVER, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon conversion of
any shares of Preferred Stock until certificates evidencing such shares of
Preferred Stock are either delivered for conversion to the Company or any
transfer agent for the Preferred Stock or Common Stock, or the Holder of such
Preferred Stock notifies the Company that such certificates have been lost,
stolen or destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the Holder, if
available, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates, including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid dividends
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hereunder, are not delivered to or as directed by the applicable Holder by the
third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled
by written notice to the Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which
event the Company shall immediately return the certificates representing the
shares of Preferred Stock tendered for conversion.
(ii) If the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid dividends hereunder, by the third (3rd) Trading Day after the
Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, $2,500 for each day after such third (3rd) Trading
Day until such certificates are delivered. Nothing herein shall limit a Holder's
right to pursue actual damages for the Company's failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holders from seeking to enforce damages pursuant to any other
Section hereof or under applicable law. Further, if the Company shall not have
delivered any cash due in respect of conversions of Preferred Stock or as
payment of dividends thereon by the third (3rd) Trading Day after the Conversion
Date, the Holder may, by notice to the Company, require the Company to issue
Underlying Shares pursuant to Section 5(c), except that for such purpose the
Conversion Price applicable thereto shall be the lesser of the Conversion Price
on the Conversion Date and the Conversion Price on the date of such Holder
demand. Any such Underlying Shares will be subject to the provision of this
Section.
(iii) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder such certificate or certificates pursuant
to Section 5(b)(i), including for purposes hereof, any shares of Common Stock to
be issued on the Conversion Date on account of accrued but unpaid dividends
hereunder, by the third (3rd) Trading Day after the Conversion Date, and if
after such third (3rd) Trading Day the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a
sale by such Holder of the Underlying Shares which the Holder anticipated
receiving upon such conversion (a "BUY-IN"), then the Company shall pay in cash
to the Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (y) the aggregate stated value of the shares of Preferred Stock for
which such conversion was not timely honored. For example, if the Holder
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of $10,000 aggregate
stated value of the shares of Preferred Stock, the Company shall be required to
pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
(c) (i) (A) The conversion price (the "CONVERSION PRICE") in effect on
any Conversion Date shall be $3.4978; provided, that if on the Trading Day prior
to a Conversion Date the Per Share Market Value shall be less than $6.1212, the
Conversion Price applicable to such conversion shall equal $3.3312.
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(B) If: (a) an Underlying Securities Registration Statement is not
filed on or prior to the Filing Date (as defined in the Registration Rights
Agreement) (if the Company files such Underlying Securities Registration
Statement without affording the Holder the opportunity to review and comment on
the same as required by Section 3(a) of the Registration Rights Agreement, the
Company shall not be deemed to have satisfied this clause (a)), or (b) the
Company fails to file with the Commission a request for acceleration in
accordance with Rule 12d1-2 promulgated under the Exchange Act, within five (5)
days of the date that the Company is notified (orally or in writing, whichever
is earlier) by the Commission that an Underlying Securities Registration
Statement will not be "reviewed," or not subject to further review, or (c) the
Underlying Securities Registration Statement is not declared effective by the
Commission on or prior to the Effectiveness Date (as defined in the Registration
Rights Agreement), or (d) such Underlying Securities Registration Statement is
filed with and declared effective by the Commission but thereafter ceases to be
effective as to all Registrable Securities (as defined in the Registration
Rights Agreement) at any time prior to the expiration of the "Effectiveness
Period" (as defined in the Registration Rights Agreement), without being
succeeded within 15 days by an amendment to such Underlying Securities
Registration Statement or a subsequent Underlying Securities Registration
Statement filed with and declared effective by the Commission, or (e) trading in
the Common Stock shall be suspended from the NASDAQ or a Subsequent Market for
more than three (3) Trading Days (which need not be consecutive Trading Days),
(f) the conversion rights of the Holders are suspended for any reason or (g) an
amendment to the Underlying Securities Registration Statement is not filed by
the Company with the Commission within 15 days of the Commission's notifying the
Company that such amendment is required in order for the Underlying Securities
Registration Statement to be declared effective (any such failure or breach
being referred to as an "EVENT," and for purposes of clauses (a), (c), (f) the
date on which such Event occurs, or for purposes of clause (b) the date on which
such five (5) day period is exceeded, or for purposes of clauses (d) and (g) the
date which such 15 day-period is exceeded, or for purposes of clause (e) the
date on which such three (3) Trading Day-period is exceeded, being referred to
as "EVENT DATE"), then the Company shall, on the first day of each monthly
anniversary of the Event Date and until such time as the applicable Event is
cured, pay to the Holder 2.0% of the aggregate Stated Value of the shares of
Preferred Stock then held by such Holder, in cash, as liquidated damages and not
as a penalty. The provisions of this Section are not exclusive and shall in no
way limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall (a) pay a stock dividend or otherwise make a distribution
or distributions on shares of its Junior Securities or pari passu securities
payable in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine outstanding shares of Common
Stock into a smaller number of shares, or (d) issue by reclassification of
shares of Common Stock any shares of capital stock of the Company, the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding before such event and of
which the denominator shall be the number of shares of Common Stock outstanding
after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
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<PAGE>
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights, warrants or options to all holders of
Common Stock entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Per Share Market Value at the record date
mentioned below, then the Conversion Price shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, warrants or options, plus the
number of shares of Common Stock which the aggregate offering price of the total
number of shares so offered would purchase at such Per Share Market Value, and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of shares
of Common Stock offered for subscription or purchase. Such adjustment shall be
made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants. However, upon the expiration of any right,
warrant or option to purchase shares of Common Stock the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this Section
5(c)(iii), if any such right, warrant or option shall expire and shall not have
been exercised, the Conversion Price shall immediately upon such expiration
shall be recomputed and effective immediately upon such expiration shall be
increased to the price which it would have been (but reflecting any other
adjustments in the Conversion Price made pursuant to the provisions of this
Section 5 upon the issuance of other rights or warrants) had the adjustment of
the Conversion Price made upon the issuance of such rights, warrants, or options
been made on the basis of offering for subscription or purchase only that number
of shares of Common Stock actually purchased upon the exercise of such rights,
warrants or options actually exercised.
(iv) Except as contemplated by Schedule 2.1(c) to the Purchase
Agreement, if the Company or any subsidiary thereof, as applicable with respect
to Common Stock Equivalents (as defined below), at any time while any shares of
Preferred Stock are outstanding, shall, issue shares of Common Stock or rights,
warrants, options or other securities or debt that is convertible into or
exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS") entitling
any Person to acquire shares of Common Stock at a price per share less than the
Per Share Market Value on the Original Issue Date, then the Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of shares
of Common Stock or such Common Stock Equivalents plus the number of shares of
Common Stock which the offering price for such shares of Common Stock or Common
Stock Equivalents would purchase at the Conversion Price, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock so
issued or issuable, provided, that for purposes hereof, all shares of Common
Stock that are issuable upon exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common Stock
or Common Stock Equivalents are issued.
(v) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
5(c)(ii)-(iv) above), then in each such case the Conversion Price at which each
share of Preferred Stock shall thereafter be convertible shall be determined by
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multiplying the Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of Common Stock determined as of the record date mentioned above,
and of which the numerator shall be such Per Share Market Value of the Common
Stock on such record date less the then fair market value at such record date of
the portion of such assets or evidence of indebtedness so distributed applicable
to one outstanding share of Common Stock as determined by the Board of Directors
in good faith; PROVIDED, HOWEVER, that in the event of a distribution exceeding
ten percent (10%) of the net assets of the Company, if the Holders of a majority
in interest of the Preferred Stock dispute such valuation, such fair market
value shall be determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Company) (an "APPRAISER") selected in good faith by the
Company, subject to approval by the Holders of a majority in interest of the
shares of Preferred Stock then outstanding whose approval shall not be
unreasonably withheld or delayed. The adjustments shall be described in a
statement provided to the Holders of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
(vi) All calculations under this Section 5 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(ii),(iii),(iv), or (v) the Company shall promptly mail to each Holder, a
notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock, or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property (other than compulsory share exchanges which
constitute Change of Control Transactions), the Holders of the Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities, cash and property receivable upon
or deemed to be held by holders of Common Stock following such reclassification
or share exchange, and the Holders of the Preferred Stock shall be entitled upon
such event to receive such amount of securities, cash or property as a holder of
the number of shares of the Common Stock of the Company into which such shares
of Preferred Stock could have been converted immediately prior to such
reclassification or share exchange would have been entitled. This provision
shall similarly apply to successive reclassifications or share exchanges.
(ix) If (a) the Company shall declare a dividend (or any other
distribution) on its Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock, (c) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights, (d) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock of
the Company,
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any consolidation or merger to which the Company is a party, any sale
or transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into other
securities, cash or property, or (e) the Company shall authorize the voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company; then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Preferred Stock, and shall cause to
be mailed to the Holders at their last addresses as they shall appear upon the
stock books of the Company, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange; PROVIDED, HOWEVER, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. Holders are entitled
to convert shares of Preferred Stock during the 20-day period commencing the
date of such notice to the effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock and payment of dividends on
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holders, not
less than such number of shares of Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of dividends
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and freely tradeable, subject to the legend requirements of
Section 3.1 (b) of the Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the Holder of a share of
Preferred Stock shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted and the
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Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled. The Company may not reissue any shares of Preferred Stock.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Executive Officer of the Company at the
facsimile telephone number or address of the principal place of business of the
Company as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
8:00 p.m. (Minnetonka, Minnesota time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 8:00 p.m.
(Minnetonka, Minnesota time) on any date and earlier than 11:59 p.m.
(Minnetonka, Minnesota time) on such date, (iii) upon receipt, if sent by a
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given.
Section 5. REDEMPTION UPON TRIGGERING EVENTS.
(a) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law), has
the right, exercisable at the sole option of such Holder, to require the Company
to redeem all or a portion of the Preferred Stock then held by such Holder for a
redemption price, in cash, equal to the sum of (i) the Mandatory Redemption
Amount plus (ii) the product of (A) the number of Underlying Shares issued in
respect of conversions or as payment of dividends hereunder and then held by the
Holder and (B) the Per Share Market Value on the date such redemption is
demanded or the date the redemption price hereunder is paid in full, whichever
is greater. If the Company fails to pay the redemption price hereunder in full
pursuant to this Section within seven (7) days after the date of a demand
therefor, the Company will pay interest thereon at a rate of 18% per annum,
accruing daily from such seventh day until the redemption price, plus all such
interest thereon, is paid in full. For purposes of this Section, a share of
Preferred Stock is outstanding until such date as the Holder shall have received
Underlying Shares upon a conversion (or attempted conversion) thereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law
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<PAGE>
or pursuant to any judgement, decree or order of any court, or any
order, rule or regulation of any administrative or governmental body):
(i) the failure of an Underlying Securities Registration Statement to
be declared effective by the Commission on or prior to the 180th day after the
Original Issue Date;
(ii) if, during the Effectiveness Period, the effectiveness of the
Underlying Securities Registration Statement lapses for any reason, or the
Holder shall not be permitted to resell Registrable Securities under the
Underlying Securities Registration Statement;
(iii) the failure of the Common Stock to be listed for trading on the
NASDAQ or on a Subsequent Market or the suspension of the Common Stock from
trading on the NASDAQ or on a Subsequent Market, in either case, for more than
three (3) Trading Days (which need not be consecutive Trading Days);
(iv) the Company shall fail for any reason to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that comply
with the provisions hereof prior to the 12th day after the Conversion Date or
the Company shall provide notice to any Holder, including by way of public
announcement, at any time, of its intention not to comply with requests for
conversion of any Preferred Stock in accordance with the terms hereof;
(v) an Event shall not have been cured to the satisfaction of the
Holder prior to the expiration of thirty (30) days from the Event Date relating
thereto (other than an Event resulting from a failure of an Underlying
Securities Registration Statement to be declared effective by the Commission on
or prior to the Effectiveness Date;
(vi) the Company shall fail for any reason to deliver the certificate
or certificates required pursuant to Section 5(b)(iii) or the cash pursuant to a
Buy-In within ten (10) days after notice is deemed delivered hereunder; or
(vii) subject to the provisions set forth in the Purchase Agreement,
the Company shall fail to have available a sufficient number of authorized and
unreserved shares of Common Stock to issue to such Holder upon a conversion
hereunder.
Section 6. OPTIONAL REDEMPTION.
(a) The Company shall have the right, exercisable at any time upon 10
Trading Days' notice (an "OPTIONAL REDEMPTION NOTICE") to the Holders of the
Preferred Stock given at any time after the Original Issue Date to redeem all or
any portion of the shares of Preferred Stock which have not previously been
converted or redeemed, at a price equal to the Optional Redemption Price (as
defined below), PROVIDED, that the Company shall not be entitled to deliver an
Optional Redemption Notice to the Holders if: (i) the number of shares of Common
Stock at the time authorized, unissued and unreserved for all purposes is
insufficient to satisfy the Company's conversion obligations of all shares of
Preferred Stock then outstanding, or (ii) the Underlying Shares then outstanding
are not registered for resale pursuant to an effective Underlying Securities
Registration Statement and may not be sold without volume restrictions
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<PAGE>
pursuant to Rule 144 promulgated under the Securities Act, as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the Holders and
such transfer agent, or (iii) the Common Stock is not then listed for trading on
the NASDAQ or a Subsequent Market. The entire Optional Redemption Price shall be
paid in cash. Holders may convert (and the Company shall honor such conversions
in accordance with the terms hereof) any shares of Preferred Stock, including
shares subject to an Optional Redemption Notice, during the period from the date
thereof through the 10th Trading Day after the receipt of an Optional Redemption
Notice.
(b) If any portion of the Optional Redemption Price shall not be paid
by the Company by the 10th Trading Day after the delivery of an Optional
Redemption Notice, interest shall accrue thereon at the rate of 18% per annum
until the Optional Redemption Price plus all such interest is paid in full. In
addition, if any portion of the Optional Redemption Price remains unpaid after
the date due, the Holder of the Preferred Stock subject to such redemption may
elect, by written notice to the Company given at any time thereafter, to either
(i) demand conversion of all or any portion of the shares of Preferred Stock for
which such Optional Redemption Price, plus interest thereof, has not been paid
in full (the "UNPAID REDEMPTION SHARES"), in which event the Per Share Market
Value for such shares shall be the lower of the Per Share Market Value
calculated on the date the Optional Redemption Price was originally due and the
Per Share Market Value as of the Holder's written demand for conversion, or (ii)
invalidate AB INITIO such redemption, notwithstanding anything herein contained
to the contrary. If the Holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares
subject to such Holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option (ii) above, the
Company shall promptly, and in any event not later than three (3) Trading Days
from receipt of Holder's notice of such election, return to the Holder all of
the Unpaid Redemption Shares.
(c) The "OPTIONAL REDEMPTION PRICE" shall equal the sum of (i) the
product of (A) the number of shares of Preferred Stock to be redeemed and (B)
the product of (1) 120% of the average Per Share Market Value for the five (5)
Trading Days immediately preceding (x) the date of the Optional Redemption
Notice or (y) the date of payment in full by the Company of the Optional
Redemption Price, whichever is greater, and (2) the Conversion Ratio calculated
on the date of the Optional Redemption Notice, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.
Section 7. CERTAIN RESALE LIMITATIONS.
For so long as the Holder owns shares of Preferred Stock, it
shall use its best practicable efforts not to sell a number of Underlying Shares
during a Trading Day in excess of the greater of (i) 25% of the average daily
trading volume of the Common Stock for the five (5) Trading Days immediately
preceding such date and (ii) 25% of the average daily trading volume of the
Common Stock on such date (in either case of (i) or (ii), as reported by NASDAQ
or any successor entity succeeding to its function of reporting stock prices).
Section 8. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
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"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act), other
than an acquisition after the date hereof by any existing shareholder of the
Company who owns more than 7% of the voting securities of the Company as of the
Original Issue Date, of in excess of 33% of the voting securities of the
Company, (ii) a replacement of more than one-half of the members of the
Company's board of directors which is not approved by those individuals who are
members of the board of directors on the date hereof in one or a series of
related transactions, (iii) the merger of the Company with or into another
entity, consolidation or sale of all or substantially all of the assets of the
Company in one or a series of related transactions, unless following such
transaction, the holders of the Company's securities continue to hold at least
66% of such securities following such transaction or (iv) the execution by the
Company of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i), (ii) or (iii).
"COMMON STOCK" means the Company's common stock, par value $.01 per
share, and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"CONVERSION RATIO" means, at any time, a fraction, the numerator of
which is Stated Value plus accrued but unpaid dividends (including any accrued
but unpaid late fees thereon) but only to the extent not paid in shares of
Common Stock in accordance with the terms hereof, and the denominator of which
is the Conversion Price at such time.
"JUNIOR SECURITIES" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Preferred Stock.
"MANDATORY REDEMPTION AMOUNT" for each share of Preferred Stock means
the sum of (i) the greater of (A) 115% of the Stated Value and all accrued
dividends with respect to such share, and (B) the product of (a) the Per Share
Market Value on the Trading Day immediately preceding (x) the date of the
Triggering Event or the Conversion Date, as the case may be, or (y) the date of
payment in full by the Company of the applicable redemption price, whichever is
greater, and (b) the Conversion Ratio calculated on the date of the Triggering
Event, or the Conversion Date, as the case may be, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"PER SHARE MARKET VALUE" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the NASDAQ or on such
Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on which the Common Stock is then listed or quoted on
the date nearest preceding such date, or (b) if the Common Stock is not then
listed or quoted on the NASDAQ or on a Subsequent Market, the closing bid
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<PAGE>
price for a share of Common Stock in the over-the-counter market, as reported by
the National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to
its functions of reporting prices), then the average of the "Pink Sheet" quotes
for the relevant conversion period, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market value of
a share of Common Stock as determined by an Appraiser selected in good faith by
the Holders of a majority of the shares of the Preferred Stock.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENt" means the Convertible Preferred Stock Purchase
Agreement, dated as of September 30, 1998, between the Company and the original
Holder of the Preferred Stock.
"REGISTRATION RIGHTS AGREEMENt" means the Registration Rights
Agreement, dated as of September 30, 1998, between the Company and the original
Holder of the Preferred Stock.
"TRADING DAY" means (a) a day on which the Common Stock is traded on
the NASDAQ or on such Subsequent Market on which the Common Stock is then listed
or quoted, or (b) if the Common Stock is not listed on the NASDAQ or on a
Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); PROVIDED, HOWEVER, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"UNDERLYING SECURITIES REGISTRATION STATEMENT" means a registration
statement that meets the requirement of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the recipient thereof, who
shall be named as a "selling stockholder" thereunder.
"UNDERLYING SHARES" means, collectively, the shares of Common Stock
into which the shares of Preferred Stock are convertible and the shares of
Common Stock issuable upon payment of dividends thereon in accordance with the
terms hereof.
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<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of 7% Series D
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.01 per share (the "COMMON STOCK"), of Big Entertainment, Inc. (the
"COMPANY") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the Holder for
any conversion, except for such transfer taxes, if any.
Conversion calculations:
______________________________________________________
Date to Effect Conversion
______________________________________________________
Number of shares of Preferrred Stock to be Converted
______________________________________________________
Number of shares of Common Stock to be Issued
______________________________________________________
Applicable Conversion Price
______________________________________________________
Signature
______________________________________________________
Name
______________________________________________________
Address
<PAGE>
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
BIG ENTERTAINMENT, INC.
Amendment to
Designation of Preferences, Rights and Limitations
of
7% Series D Convertible Preferred Stock
Pursuant to the provisions of Sections 607.0602 and 607.1006 of the
Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a
corporation organized and existing under the Florida Business Corporation Act,
hereby adopts the following Articles of Amendment to its Articles of
Incorporation. The amendment was adopted by unanimous written consent of the
Board of Directors dated as of September 30, 1998.
FIRST: Amendment to Section 1 of Designation of 7% Series D Convertible
Preferred Stock
Section 1 of Exhibit A to Designation of Preferences, Rights and
Limitations of 7% Series D Convertible Preferred dated as of October 6, 1998
(the "Series D Designation") is amended to read in its entirety as follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of preferred
stock shall be designated as 7% Series D Convertible Preferred Stock (the
"PREFERRED STOCK") and the number of shares so designated shall be 1,000
(which shall not be subject to increase without the consent of the holders
of the Preferred Stock (each, a "HOLDER" and collectively, the "HOLDERS")).
Each share of Preferred Stock shall have a par value of $.01 and a stated
value of $10,000 (the "STATED VALUE").
SECOND: Section 5(c)(i)(A) of the Series D Designation is amended to
read in its entirety as follows:
(c)(i)(A) For shares of Preferred Stock issued on or before October 30,
1998, the conversion price (the "CONVERSION PRICE") in effect on any
Conversion Date shall be $3.4978; provided, that if on the Trading Day prior
to a Conversion Date the Per Share Market Value shall be less than $6.1212,
the Conversion Price applicable to such conversion shall equal $3.3312.
For shares of Preferred Stock issued after October 30, 1998, the
Conversion Price in effect on any Conversion Date shall equal 105% of the
average of the Per Share Market Values for the five Trading Days ending on
the Trading Day immediately preceding the Original Issue Date.
<PAGE>
THIRD: The definitions of "Original Issue Date," "Purchase Agreement"
and "Registration Rights Agreement" contained in Section 9 of
the Series D Designation are each amended to read in their
entireties as follows:
"ORIGINAL ISSUE DATE" shall mean, as to any particular share
of Preferred Stock, the date of first issuance of any such share of
Preferred Stock, regardless of the number of subsequent transfers of
such share and regardless of the number of certificates that may be
issued to evidence such share of Preferred Stock.
"PURCHASE AGREEMENT" means the particular Convertible
Preferred Stock Purchase Agreement between the Company and the
particular Holder of the Preferred Stock.
"REGISTRATION RIGHTS AGREEMENT" means the particular
Registration Rights Agreement between the Company and the particular
Holder of the Preferred Stock.
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the 6th day of November, 1998.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
THIS DOCUMENT PREPARED BY:
NINA S. GORDON, P.A.
BROAD AND CASSEL
FLORIDA BAR NO. 435309
201 S. BISCAYNE BOULEVARD
SUITE 3000
MIAMI, FLORIDA 33131
(305) 373-9437
EXHIBIT 10.1
_______________________________________________________________________________
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Between
BIG ENTERTAINMENT, INC.
and
KA INVESTMENTS LDC
Dated as of September 30, 1998
_______________________________________________________________________________
<PAGE>
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT"),
dated as of September 30, 1998, between Big Entertainment, Inc., a Florida
corporation (the "COMPANY"), and KA Investments LDC, a Cayman Islands
corporation (the "PURCHASER").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desires to purchase from the Company shares of the Company's Series D
Convertible Preferred Stock, par value $.01 per share (the "PREFERRED STOCK"),
which are convertible into shares of the Company's common stock, $.01 par value
per share (the "COMMON STOCK").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy are
hereby acknowledged, the Company and Purchaser agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK
1.1 THE CLOSING.
(a) THE CLOSING. (i) Subject to the terms and conditions set forth
in this Agreement, the Company shall issue and sell to the Purchaser and the
Purchaser shall purchase 200 shares of Preferred Stock (the "SHARES") for an
aggregate purchase price of $2,000,000. The purchase price per Share shall be
$10,000. The closing of the purchase and sale of the Preferred Stock (the
"CLOSING") shall take place at the offices of Robinson Silverman Pearce Aronsohn
& Berman LLP ("ROBINSON SILVERMAN"), 1290 Avenue of the Americas, New York, New
York 10104, immediately following the execution hereof or such later date as the
parties shall agree. The date of the Closing is hereinafter referred to as the
"CLOSING DATE."
(ii) At the Closing, the parties shall deliver or shall cause
to be delivered to the following: (A) the Company shall deliver (1) stock
certificates representing the Shares, registered in the name of the Purchaser,
(2) a common stock purchase warrant, in the form of Exhibit D, registered in the
name of the Purchaser, pursuant to which the Purchaser shall have the right at
any time and from time to time thereafter through the fifth anniversary date of
the issuance thereof to acquire 165,517 shares of Common Stock at an exercise
price per share of $4.35, subject to adjustment (the "FIRST WARRANT"), (3) a
common stock purchase warrant, in the form of EXHIBIT D, registered in the name
of the Purchaser, pursuant to which the Purchaser shall have the right at any
time and from time to time thereafter through the fifth anniversary date of the
issuance thereof to acquire 110,345 shares of Common Stock at an exercise price
per share of $5.25625, subject to adjustment (the "SECOND WARRANT" and, together
with the First Warrant, the "WARRANTS"), (4) the legal opinion of Broad and
Cassel, outside counsel to the Company, substantially in the form of EXHIBIT C,
and (5) all other documents, instruments and writings required to have been
delivered at or prior to the Closing by the Company pursuant to this Agreement,
including an executed Registration Rights
<PAGE>
Agreement, dated the date hereof, between the Company and the Purchaser, in the
form of EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT"), and the Irrevocable
Transfer Agent Instructions, in the form of EXHIBIT E, delivered
to and acknowledged by the Company's transfer agent (the "TRANSFER AGENT
INSTRUCTIONS"); and (B) the Purchaser shall deliver (1) $2,000,000 in United
States dollars in immediately available funds by wire transfer to an account
designated in writing by the Company for such purpose, and (2) all documents,
instruments and writings required to have been delivered at or prior to the
Closing by the Purchaser pursuant to this Agreement, including, without
limitation, an executed Registration Rights Agreement.
1.2 TERMS OF PREFERRED STOCK. The Preferred Stock shall have the
rights preferences and privileges set forth in EXHIBIT A, and shall be
incorporated into the Articles of Amendment ("ARTICLES OF AMENDMENT") which
shall be filed on or prior to the Closing Date by the Company with the
Department of State of Florida, in form and substance mutually agreed to by the
parties.
1.3 CERTAIN DEFINED TERMS. For purposes of this Agreement,
"CONVERSION PRICE," "INITIAL CONVERSION DATE," "ORIGINAL ISSUE DATE," "STATED
VALUE" AND "TRADING DAY" shall have the meanings set forth in Exhibit A;
"BUSINESS DAY" shall mean any day except Saturday, Sunday and any day which
shall be a federal legal holiday in the United States of America or a day on
which banking institutions in the State of New York are authorized or required
by law or other governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby makes the following representations and warranties to the Purchaser:
(a) ORGANIZATION AND QUALIFICATION. The Company is a
corporation, duly incorporated, validly existing and in good standing under the
laws of the State of Florida, with the requisite corporate power and authority
to own and use its properties and assets and to carry on its business as
currently conducted. The Company has no subsidiaries other than as set forth in
SCHEDULE 2.1(A) (collectively the "SUBSIDIARIES"). Each of the Subsidiaries is
an entity, duly incorporated or otherwise organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the full power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
Each of the Company and the Subsidiaries is duly qualified to do business and is
in good standing as a foreign corporation or other entity in each jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of the Securities (as
defined below) or any of this Agreement, the Articles of Amendment, the
Registration Rights Agreement or the Warrants (collectively, the "TRANSACTION
DOCUMENTS"), (y) have or result in a material adverse effect on the
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<PAGE>
results of operations, assets, prospects, or condition (financial or otherwise)
of the Company and the Subsidiaries, taken as a whole, or (z) adversely impair
the Company's ability to perform fully on a timely basis its obligations under
any of the Transaction Documents (any of (x), (y) or (z), a "MATERIAL ADVERSE
EFFECT").
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents, and otherwise to carry out
its obligations thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, except for any of the Required Approvals (as hereinafter defined). Each
of the Transaction Documents has been duly executed by the Company and, when
delivered in accordance with the terms hereof, will constitute the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms. Neither the Company nor any Subsidiary is in violation of any of
the provisions of its respective articles of incorporation, by-laws or other
charter documents.
(c) CAPITALIZATION. The number of authorized, issued and outstanding
capital stock of the Company is set forth in SCHEDULE 2.1(C). No shares of
Common Stock are entitled to preemptive or similar rights, nor is any holder of
the Common Stock entitled to statutory preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as disclosed in SCHEDULE 2.1(C) or as a result of
the purchase and sale of the Shares and the Warrants and the issuance of
Adjustment Shares (as defined in Section 3.16), if any, there are no outstanding
options, warrants, script rights to subscribe to, calls or commitments of any
character whatsoever relating to securities, rights or obligations convertible
into or exchangeable for, or giving any Person any right to subscribe for or
acquire any shares of Common Stock, or contracts, commitments, understandings,
or arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company,
except as specifically disclosed in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997, Quarterly Reports on Form 10-QSB for the
quarters ended March 31, 1998 and June 30, 1998 and Proxy Statement for the July
1998 Annual Meeting of Shareholders (collectively, the "Current SEC Reports") or
SCHEDULE 2.1(C), no Person or group of related Persons beneficially owns (as
determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT")) or has the right to acquire by
agreement with or by obligation binding upon the Company beneficial ownership of
in excess of 5% of the Common Stock. A "PERSON" means an individual or
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.
(d) ISSUANCE OF THE SHARES, THE WARRANTS AND THE ADJUSTMENT SHARES.
The Shares and the Warrants are duly authorized, and, when issued and paid for
in accordance with the terms hereof, shall have been duly and validly issued,
and, in the case of the Shares, fully paid and nonassessable, free and clear of
all liens, encumbrances and rights of first refusal of any kind
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<PAGE>
(collectively, "LIENS"). The Company has on the date hereof an adequate reserve
of duly authorized shares of Common Stock, reserved for issuance to the
Purchaser and the holders of the Shares and the Warrants, to enable it to
perform its conversion, exercise and other obligations under this Agreement, the
Articles of Amendment and the Warrants. Such initial number of reserved and
available shares of Common Stock is not less than the sum of the number of
shares of Common Stock which would be issuable on the Closing Date (i) upon
conversion in full of the Shares and payment of dividends thereunder, assuming
the Shares are outstanding for three years, all dividends for such three year
period is paid in shares of Common Stock and that such conversion occurred at
the lowest possible Conversion Price pursuant to Section 5(c)(i) of the Articles
of Amendment, (ii) upon exercise of the Warrants, assuming the Warrants are
exercised at the lowest possible Exercise Price (as defined in the Warrants),
and (iii) as Adjustment Shares, assuming that the Adjustment Price (as defined
in Section 3.16) is equal to one half of the lowest possible Conversion Price
pursuant to Section 5(c)(i) of the Articles of Amendment (such number of shares
of Common Stock, the "INITIAL MINIMUM"). All such authorized shares of Common
Stock have been duly reserved for issuance to the Purchaser and the holders of
such Shares and Warrants. The Adjustment Shares and the shares of Common Stock
issuable upon conversion of the Shares, as payment of dividends thereon and upon
exercise of the Warrants are collectively referred to herein as the "UNDERLYING
SHARES." The Shares, the Warrants and the Underlying Shares are, collectively,
the "SECURITIES." When issued in accordance with this Agreement, the Articles of
Amendment and the Warrants, in accordance with their respective terms, the
Underlying Shares will be duly authorized, validly issued, fully paid and
nonassessable, free and clear of all Liens.
(e) NO CONFLICTS. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its articles of incorporation, bylaws or other charter
documents (each as amended through the date hereof), or (ii) subject to
obtaining the Required Approvals (as defined below), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, indenture or instrument (evidencing
a Company debt or otherwise) to which the Company or any Subsidiary is a party
or by which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company is subject (including federal and state
securities laws and regulations), or by which any property or asset of the
Company is bound or affected, except in the case of each of clauses (ii) and
(iii), as could not, individually or in the aggregate, reasonably be expected to
have or result in a Material Adverse Effect. The business of the Company is not
being conducted in violation of any law, ordinance or regulation of any
governmental authority, except for violations which, individually or in the
aggregate, could reasonably be expected to not have or result in a Material
Adverse Effect.
(f) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
Federal, state, local or other governmental authority or
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other Person in connection with the execution, delivery and performance by the
Company of the Transaction Documents, other than (i) the filing of the Articles
of Amendment with the Secretary of State of Florida, (ii) the filings required
pursuant to Section 3.12, (iii) the filing of the Underlying Securities
Registration Statement with the Securities and Exchange Commission (the
"COMMISSION") meeting the requirements set forth in the Registration Rights
Agreement and covering the resale of the Underlying Shares by the Purchaser,
(iv) the application(s) to the Nasdaq Stock Market, Inc for the listing of the
Underlying Shares for trading on the Nasdaq SmallCap Market ("NASDAQ") (and
with any other national securities exchange or market on which the Common Stock
is then listed), (v) applicable Blue Sky filings as required by the Registration
Rights Agreement and, and (vi) in all other cases where the failure to obtain
such consent, waiver, authorization or order, or to give such notice or make
such filing or registration could not reasonably be expected to have or result
in, individually or in the aggregate, a Material Adverse Effect (the consents,
waivers, authorizations, orders, notices and filings referred to in (i)-(vi) of
this Section are collectively, the "REQUIRED APPROVALS").
(g) LITIGATION; PROCEEDINGS. Except as specifically disclosed in the
SEC Documents, there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency or
regulatory authority (federal, state, county, local or foreign) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, individually or in
the aggregate, reasonably be expected to have or result in a Material Adverse
Effect.
(h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred which has
not been waived which, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound, (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is in violation of any statute, rule or regulation
of any governmental authority, except as could not individually or in the
aggregate, have or result in a Material Adverse Effect.
(i) PRIVATE OFFERING. Assuming the accuracy of the representations
and warranties of the Purchaser set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchaser as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"). Neither the Company nor any Person acting on its
behalf has taken any action that could subject the offering, issuance or sale of
the Securities to the registration requirements of the Securities Act.
(j) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company has filed all
reports required to be filed by it under the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the three years preceding the date hereof
(or such shorter period as the Company was
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required by law to file such material) (the foregoing materials being
collectively referred to herein as the "SEC DOCUMENTS" and, together with
the Schedules to this Agreement the "DISCLOSURE MATERIALS") on a timely basis or
has received a valid extension of such time of filing and has filed any such SEC
Documents prior to the expiration of any such extension. As of their respective
dates, the SEC Documents complied in all material respects with the requirements
of the Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. All material agreements to which the Company is a party or to which
the property or assets of the Company are subject and which were required to
have been filed as exhibits to the SEC Documents have been so filed. The
financial statements of the Company included in the SEC Documents comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time of
filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis ("GAAP")
during the periods involved, except as may be otherwise specified in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company and its consolidated subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. Since December 31, 1997 except as
specifically disclosed in the Current SEC Reports or as set forth on Schedule
2.1(j), (a) there has been no event, occurrence or development that has had or
that could have or result in a Material Adverse Effect, (b) the Company has not
incurred any liabilities (contingent or otherwise) other than (x) liabilities
incurred in the ordinary course of business consistent with past practice and
(y) liabilities not required to be reflected in the Company's financial
statements pursuant to GAAP or required to be disclosed in filings made with the
Commission, (c) the Company has not altered its method of accounting or the
identity of its auditors and (d) the Company has not declared or made any
payment or distribution of cash or other property to its stockholders or
officers or directors (other than in compliance with existing Company stock
option plans or salary paid in accordance with existing employment agreements or
otherwise made in the ordinary course consistent with prior practice) with
respect to its capital stock, or purchased, redeemed (or made any agreements to
purchase or redeem) any shares of its capital stock. The Company last filed
audited financial statements with the Commission for the year ended December 31,
1997, and has not received any comments from the Commission in respect thereof.
(k) INVESTMENT COMPANY. The Company is not, and is not an Affiliate
(as defined in Rule 405 under the Securities Act) ) of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(l) CERTAIN FEES. Except for certain fees payable by the Company to
the parties set forth on SCHEDULE 2.1(1), no fees or commissions will be payable
by the Company to any broker, financial advisor or consultant, finder, placement
agent, investment banker, or bank with respect to the transactions contemplated
by this Agreement. The Purchaser shall have no obligation with respect to any
fees or with respect to any claims made by or on behalf of other Persons for
fees of
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a type contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement. The Company shall indemnify and
hold harmless the Purchaser, its employees, officers, directors, agents, and
partners, and their respective Affiliates, from and against all claims, losses,
damages, costs (including the costs of preparation and attorney's fees) and
expenses suffered in respect of any such claimed or existing fees, as such fees
and expenses are incurred.
(m) SOLICITATION MATERIALS. Neither the Company nor any Person
acting on the Company's behalf has solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) FORM S-3 ELIGIBILITY. The Company is eligible to register
securities for resale with the Commission under Form S-3 promulgated under the
Securities Act.
(o) EXCLUSIVITY. The Company shall not issue and sell the Shares to
any Person other than the Purchaser other than with the specific prior written
consent of the Purchaser.
(p) SENIORITY. Except as set forth on Schedule 2.1(p), no
class of equity securities of the Company is senior to the Shares in right of
payment, whether upon liquidation, dissolution, or otherwise.
(q) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. The
Company has not, in the two years preceding the date hereof, received notice
(written or oral) from the NASDAQ or any other stock exchange, market or trading
facility on which the Common Stock is or has been listed (or on which it has
been quoted) to the effect that the Company is not in compliance with the
listing or maintenance requirements of such exchange or market. The Company is,
and has no reason to believe that it will not in the foreseeable future continue
to be, in compliance with all such maintenance requirements.
(r) Patents and Trademarks. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and rights (collectively, the
"Intellectual Property Rights") which are necessary or material for use in
connection with its business, and which the failure to so have could reasonably
be expected to have a Material Adverse Effect. To the best knowledge of the
Company, all such Intellectual Property Rights are enforceable and there is no
existing infringement by another Person of any of the Intellectual Property
Rights.
(s) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as set
forth on SCHEDULE 6(B) to the Registration Rights Agreement, (i) the Company has
not granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied and
(ii) no Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
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(t) REGULATORY PERMITS. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Documents, except where the failure to
possess such permits, individually or in the aggregate could reasonably be
expected to have or result in a Material Adverse Effect ("MATERIAL PERMITS"),
and neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.
(u) TITLE. Neither the Company nor any of its Subsidiaries own any
real property. The Company and the Subsidiaries have good and marketable title
to all personal property owned by them which is material to the business of the
Company and its Subsidiaries, in each case free and clear of all Liens, except
for liens, claims or encumbrances as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of such
property by the Company and its Subsidiaries. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.
(v) DISCLOSURE. The Company confirms that it has not provided the
Purchaser or its agents or counsel with any information that constitutes or
might constitute material non-public information. The Company understands and
confirms that the Purchaser shall be relying on the foregoing representations in
effecting transactions in securities of the Company. All disclosure provided to
the Purchaser regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser
hereby represents and warrants to the Company as follows:
(a) ORGANIZATION; AUTHORITY. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with the requisite corporate power and
authority, to enter into and to consummate the transactions contemplated by the
Transaction Documents and otherwise to carry out its obligations thereunder. The
purchase by the Purchaser of the Securities hereunder has been duly authorized
by all necessary action on the part of the Purchaser. Each of this Agreement and
the Registration Rights Agreement has been duly executed and delivered by the
Purchaser and constitutes the valid and legally binding obligation of the
Purchaser, enforceable against it in accordance with its terms.
(b) INVESTMENT INTENT. The Purchaser is acquiring the Securities for
its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof or interest
therein, without prejudice, however, to the Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all times
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to sell or otherwise dispose of all or any part of such Securities pursuant to
an effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration.
(c) PURCHASER STATUS. At the time the Purchaser was offered the
Shares, the Warrants and the Adjustment Shares, it was, and at the date hereof
it is, and at each exercise date under the Warrants, it will be, an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
(d) EXPERIENCE OF THE PURCHASER. The Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) ABILITY OF THE PURCHASER TO BEAR RISK OF INVESTMENT. The
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) ACCESS TO INFORMATION. The Purchaser acknowledges receipt of the
Disclosure Materials and further acknowledges that it has reviewed the
Disclosure Materials and has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or on
behalf of such Purchaser or its representatives or counsel shall modify, amend
or affect such Purchaser's right to rely on the truth, accuracy and completeness
of the Disclosure Materials and the Company's representations and warranties
contained in the Transaction Documents.
(g) GENERAL SOLICITATION. The Purchaser is not purchasing the Shares
as a result of or subsequent to any advertisement, article, notice or other
communication regarding the Shares published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar.
(h) RELIANCE. The Purchaser understands and acknowledges that (i)
the Securities are being offered and sold to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and the Purchaser hereby consents to such
reliance.
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The Company acknowledges and agrees that the Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 TRANSFER RESTRICTIONS. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred securities under the
Securities Act. Notwithstanding the foregoing, the Company hereby consents to
and agrees to register on the books of the Company and with any transfer agent
for the securities of the Company any transfer of Securities by the Purchaser to
an Affiliate of the Purchaser or to a fund under common management with the
Purchaser, and any transfer among any such Affiliates or funds, provided that
transferee certifies to the Company that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act and that it is acquiring the
Securities solely for investment purposes. Any such transferee shall agree in
writing to be bound by the terms of this Agreement and shall have the rights of
the Purchaser under this Agreement and the Registration Rights Agreement.
(b) The Purchaser agrees to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above nor
any other legend if the conversion of Shares, the payment of dividends thereon,
the exercise of Warrants, the issuance of Adjustment Shares or other issuances
of Underlying Shares as contemplated hereby, by the Articles of Amendment or the
Warrants occurs at any time while an Underlying Securities
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Registration Statement is effective under the Securities Act or, in the event
there is not an effective Underlying Securities Registration Statement at such
time, if in the opinion of counsel to the Company such legend is not required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue the legal opinion included in the
Transfer Agent Instructions to the Company's transfer agent on the day that the
Underlying Securities Registration Statement is declared effective by the
Commission. The Company agrees that, in the event any Underlying Shares are
issued with a legend in accordance with this Section 3.1(b), it will provide the
Purchaser, upon request, with a certificate or certificates representing such
Underlying Shares, free from such legend at such time as such legend would not
have been required under this Section 3.1(b) had such issuance occurred on the
date of such request. The Company may not make any notation on its records or
give instructions to any transfer agent of the Company which enlarge the
restrictions of transfer set forth in this Section.
3.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Adjustment Shares and the Underlying Shares issuable upon
conversion of the Shares and payment of dividends thereon in accordance with the
terms of the Articles of Amendment, and upon exercise of the Warrants in
accordance with their terms, may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligation to issue Underlying Shares
pursuant to Section 3.16 and upon (x) conversion of the Shares and payment of
dividends thereon in accordance with the terms of the Articles of Amendment, and
(y) exercise of the Warrants in accordance with their terms, is unconditional
and absolute, subject to the limitations set forth herein, in the Articles of
Amendment or pursuant to the Warrants, regardless of the effect of any such
dilution.
3.3 FURNISHING OF INFORMATION. As long as the Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. As long as the Purchaser owns Securities, if
the Company is not required to file reports pursuant to such sections, it will
prepare and furnish to the Purchaser and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act such information as is
required for the Purchaser to sell the Securities under Rule 144 promulgated
under the Securities Act. The Company further covenants that it will take such
further action as any holder of Securities may reasonably request, all to the
extent required from time to time to enable such Person to sell Underlying
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144 promulgated under the Securities Act,
including the legal opinion referenced above in this Section. Upon the request
of any such Person, the Company shall deliver to such Person a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
3.4 BLUE SKY LAWS. In accordance with the Registration Rights
Agreement, the Company shall qualify or exempt the issuance and sale of the
Underlying Shares under the securities or Blue Sky laws of such jurisdictions as
the Purchaser may reasonably request and shall continue such qualification or
exemption at all times until the Purchaser notifies the Company in writing that
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it no longer owns Securities; PROVIDED, HOWEVER, that neither the Company nor
its Subsidiaries shall be required in connection therewith to qualify as a
foreign corporation where they are not now so qualified or to take any action
that would subject the Company to general service of process in any such
jurisdiction where it is not then subject.
3.5 INTEGRATION. The Company shall not, and shall use its best efforts
to ensure that, no Affiliate shall, sell, offer for sale or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchaser.
3.6 INCREASE IN AUTHORIZED SHARES. If on any date the Company would be
precluded from issuing the full number of Underlying Shares as would then be
issuable (a) upon a conversion in full of the then outstanding Shares and as
payment of all accrued and then unpaid dividends thereon in shares of Common
Stock, (b) upon exercise in full of the then unexercised portion of the
Warrants, and (c) as Adjustment Shares, assuming that the applicable Adjustment
Price is one half of the lowest possible Conversion Price pursuant to Section
5(c)(i) of the Articles of Amendment (the "CURRENT REQUIRED MINIMUM"), due to
the unavailability of a sufficient number of authorized but unissued or reserved
shares of Common Stock, then the Board of Directors of the Company shall
promptly (and in any case, subject to clearance of the Company's proxy materials
by the Commission, within 30 Business Days from such date) prepare and mail to
the stockholders of the Company proxy materials requesting authorization to
amend the Company's Articles of Incorporation to increase the number of shares
of Common Stock which the Company is authorized to issue to at least such number
of shares as reasonably requested by the Purchaser in order to provide for such
number of authorized and unissued shares of Common Stock to enable the Company
to comply with its issuance, conversion, exercise and reservation of shares
obligations as set forth in this Agreement, the Articles of Amendment and the
Warrants (the sum of (x) the number of shares of Common Stock then authorized,
(y) the number of shares of Common Stock then outstanding plus all shares of
Common Stock issuable upon exercise of all outstanding options, warrants and
convertible instruments, and (z) the Current Required Minimum (provided that,
for purposes of such calculation, the number of Adjustment Shares to be issued
shall equal the greater of the number provided in clause (c) above in this
Section and the number of Adjustment Shares as would be issuable based upon the
formula set forth in Section 3.16 assuming that such issuance would occur on
each determination date), shall be a reasonable number). In connection
therewith, the Board of Directors shall (a) adopt proper resolutions authorizing
such increase, (b) recommend to and otherwise use its best efforts to promptly
and duly obtain stockholder approval to carry out such resolutions (and hold a
special meeting of the stockholders no later than the 60th day after mailing of
the proxy materials relating to such meeting) and (c) within five (5) Business
Days of obtaining such stockholder authorization, file an appropriate amendment
to the Company's Articles of Incorporation to evidence such increase.
3.7 LISTING AND RESERVATION OF UNDERLYING SHARES. (a) The Company shall
(i) not later than the fifth Business Day following the Original Issue Date
prepare and file with the NASDAQ (and such other national securities exchange or
market or trading or quotation facility on which the
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Common Stock is then listed) an additional shares listing application covering a
number of shares of Common Stock which is not less than the Initial Minimum,
(ii) take all steps necessary to cause such shares to be approved for listing in
the NASDAQ (as well as on any such other national securities exchange or market
or trading or quotation facility on which the Common Stock is then listed) as
soon as possible thereafter, and (iii) provide to the Purchaser evidence of such
listing, and the Company shall maintain the listing of its Common Stock thereon.
If the number of Adjustment Shares issuable pursuant to Section 3.16 and upon
conversion in full of the then outstanding Shares, as payment of dividends
thereon, and upon exercise of the then unexercised portion of the Warrants
exceeds 85% of the number of Underlying Shares previously listed on account
thereof with NASDAQ (and such other required exchanges), then the Company shall
take the necessary actions to immediately list a number of Underlying Shares as
equals no less than the Current Required Minimum (provided that, for purposes of
such calculation, the number of Adjustment Shares to be issued shall equal the
greater of the number provided in clause (c) of Section 3.6 and the number of
Adjustment Shares as would be issuable based upon the formula set forth in
Section 3.16 assuming that such issuance would occur on each determination
date), shall be a reasonable number).
(b) The Company shall maintain a reserve of Common Stock for
issuance pursuant to Section 3.16, and upon conversion of the Shares and for
payment of dividends thereupon in shares of Common Stock and upon exercise of
the Warrants in accordance with this Agreement, the Articles of Amendment and
the Warrants, respectively, in such amount as may be required to fulfill its
obligations in full under the Transaction Documents, which reserve shall equal
no less than the Current Required Minimum (provided that, for purposes of such
calculation, the number of Adjustment Shares to be issued shall equal the
greater of the number provided in clause (c) of Section 3.6 and the number of
Adjustment Shares as would be issuable based upon the formula set forth in
Section 3.16 assuming that such issuance would occur on each determination
date).
3.8 CONVERSION AND EXERCISE PROCEDURES. The Transfer Agent
Instructions, Conversion Notice (as defined in Exhibit A) and Notice of Exercise
under the Warrants set forth the totality of the procedures with respect to the
conversion of the Shares and exercise of the Warrants, including the form of
legal opinion, if necessary, that shall be rendered to the Company's transfer
agent and such other information and instructions as may be necessary to enable
the Purchaser to convert its Shares and exercise the Warrants as contemplated in
the Articles of Amendment and the Warrants (as applicable).
3.9 NOTICE OF BREACHES. (a) Each of the Company and the Purchaser shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained therein to be
incorrect or breached as of the Closing Date. However, no disclosure by either
party pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in any Transaction
Document.
(b) Notwithstanding the generality of Section 3.9(a), the Company
shall promptly notify the Purchaser of any notice or claim (written or oral)
that it receives from any lender of the
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<PAGE>
Company to the effect that the consummation of the transactions contemplated by
the Transaction Documents violates or would violate any written agreement or
understanding between such lender and the Company, and the Company shall
promptly furnish by facsimile to the holders of the Securities a copy of any
written statement in support of or relating to such claim or notice.
3.10 CONVERSION AND EXERCISE OBLIGATIONS OF THE COMPANY. The Company
shall honor conversions of the Shares and exercises of the Warrants and shall
deliver Underlying Shares in accordance with the respective terms, conditions
and time periods set forth in the Articles of Amendment and the Warrants,
respectively.
3.11 RIGHT OF FIRST REFUSAL; SUBSEQUENT REGISTRATIONS. (a) The Company
shall not, directly or indirectly, without the prior written consent of the
Purchaser, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities or a transaction intended to be exempt or not subject to registration
under the Securities Act (a "SUBSEQUENT PLACEMENT") for a period of 180 days
after the Closing Date, except (i) the granting of options or warrants to
employees, officers and directors, and the issuance of shares upon exercise of
options granted, under any stock option plan heretofore or hereinafter duly
adopted by the Company, (ii) shares of Common Stock issued upon exercise of any
currently outstanding warrants and upon conversion of any currently outstanding
convertible securities of the Company, in each case disclosed in SCHEDULE
2.1(c), (iii) Underlying Shares issued pursuant to Section 3.16, upon conversion
of Shares, as payment of dividends thereon, and upon exercise of the Warrants in
accordance with the Articles of Amendment or the Warrants, respectively, or (iv)
any securities issued in connection with a strategic alliance or license
agreement or marketing or similar joint venture agreement, unless (A) the
Company delivers to the Purchaser a written notice (the "SUBSEQUENT PLACEMENT
NOTICE") of its intention to effect such Subsequent Placement, which Subsequent
Placement Notice shall describe in reasonable detail the proposed terms of such
Subsequent Placement, the amount of proceeds intended to be raised thereunder,
the Person with whom such Subsequent Placement shall be affected, and attached
to which shall be a term sheet or similar document relating thereto and (B) the
Purchaser shall not have notified the Company by 5:00 p.m. (New York City time)
on the tenth (10th) Trading Day after its receipt of the Subsequent Placement
Notice of its willingness to cause the Purchaser to provide (or to cause its
sole designee to provide), subject to completion of mutually acceptable
documentation, financing to the Company on substantially the terms set forth in
the Subsequent Placement Notice. If the Purchaser shall fail to notify the
Company of its intention to enter into such negotiations within such time
period, the Company may effect the Subsequent Placement substantially upon the
terms and to the Persons (or Affiliates of such Persons) set forth in the
Subsequent Placement Notice; PROVIDED, that the Company shall provide the
Purchaser with a second Subsequent Placement Notice, and the Purchaser shall
again have the right of first refusal set forth above in this paragraph (a), if
the Subsequent Placement subject to the initial Subsequent Placement Notice
shall not have been consummated for any reason on the terms set forth in such
Subsequent Placement Notice within thirty (30) Trading Days after the date of
the initial Subsequent Placement Notice with the Person (or an Affiliate of such
Person) identified in the Subsequent Placement Notice.
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<PAGE>
(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement)
required pursuant to the Registration Rights Agreement to be registered, and
securities of the Company permitted pursuant to Schedule 6(b) of the
Registration's Rights Agreement to be registered in the Underlying Securities
Registration Statement, and (z) Common Stock permitted to be issued pursuant to
paragraph (a)(i), (ii) and (iv) of Section 3.11, the Company shall not, without
the prior written consent of the Purchaser (i) issue or sell any of its or any
of its Affiliates' equity or equity-equivalent securities pursuant to Regulation
S promulgated under the Securities Act, or (ii) register for resale any
securities of the Company for a period of not less than 90 Trading Days after
the date that the Underlying Securities Registration Statement is declared
effective by the Commission. Any days that a Purchaser is unable to sell
Underlying Shares under the Underlying Securities Registration Statement shall
be added to such 90 Trading Day period for the purposes of (i) and (ii) above.
3.12 [INTENTIONALLY OMITTED]
3.13 USE OF PROCEEDS. The Company shall use the net proceeds from the
sale of the Securities hereunder for working capital purposes. Pending
application of the proceeds of this placement in the manner permitted hereby,
the Company will invest such proceeds in interest-bearing accounts and/or
short-term, investment grade interest bearing securities.
3.14 TRANSFER OF INTELLECTUAL PROPERTY RIGHTS. The Company shall not
(i) transfer, sell or otherwise dispose of any Intellectual Property Rights to
an Affiliate, except in the proposed transaction with Huge Entertainment, Inc.
or any successor or except in an arms' length transaction on terms comparable to
or not less favorable than that available with an unaffiliated third party; (ii)
allow any Intellectual Property Rights to become subject to any Liens, except in
connection with institutional financing; or (iii) fail to renew any material
Intellectual Property Rights (if renewable and it would otherwise lapse if not
renewed), without the prior written consent of the Purchaser, which shall not be
unreasonably withheld.
3.15 REIMBURSEMENT. If the Purchaser, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse the Purchaser for its reasonable legal and other expenses
(including the cost of any investigation and preparation) incurred in connection
therewith, as such expenses are incurred. In addition, other than with respect
to any matter in which the Purchaser is a named party, the Company will pay the
Purchaser the charges, as reasonably determined by the Purchaser, for the time
of any officers or employees of the Purchaser devoted to appearing and preparing
to appear as witnesses, assisting in preparation for hearings, trials or
pretrial matters, or otherwise with respect to inquiries, hearings, trials, and
other proceedings relating to the subject matter of this Agreement. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchaser who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchaser and any such Affiliate, and shall be binding upon and inure
to the benefit of any
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<PAGE>
successors, assigns, heirs and personal representatives of the Company, the
Purchaser and any such Affiliate and any such Person. The Company also agrees
that neither the Purchaser nor any such Affiliates, partners, directors, agents,
employees or controlling persons shall have any liability to the Company or any
person asserting claims on behalf of or in right of the Company in connection
with or as a result of the consummation of the Transaction Documents except to
the extent that any losses, claims, damages, liabilities or expenses incurred by
the Company result from the gross negligence or willful misconduct of the
Purchaser or entity in connection with the transactions contemplated by this
Agreement.
3.16 ISSUANCE OF ADJUSTMENT SHARES. (a) If the average Per Share Market
Value for the ten (10) Trading Days commencing the 150th day after the Closing
Date (the "FIRST ADJUSTMENT PRICE") is less than 116% of the Conversion Price
then in effect (the "FIRST ADJUSTED CONVERSION PRICE"), then the Company shall,
within thirteen (13) Trading Days following such 150th day, issue to the
Purchaser for no additional consideration such number of shares of Common Stock
(the "FIRST ADJUSTMENT SHARES") as equals the quotient obtained by dividing (i)
the product of (A) the First Adjusted Conversion Price, minus the First
Adjustment Price and (B) an amount equal to (x) the quotient obtained by
dividing (1) the lesser of (I) 1/3 of the number of Shares acquired by the
Purchaser on the Closing Date multiplied by the Stated Value or (II) the
aggregate number of Shares held by the Purchaser on the 150th day after the
Closing Date multiplied by the Stated Value (such lesser value shall be referred
to herein as the "FIRST REPRICED SHARE VALUE") by (2) the Conversion Price then
in effect, less (y) the number of shares of Common Stock held by the Purchaser
in a short position on the 150th day after the Closing Date and (ii) the First
Adjustment Price.
(b) If the average Per Share Market Value for the ten (10) Trading
Days commencing the 240th day after the Closing Date (the "SECOND ADJUSTMENT
PRICE") is less than 116% of the Conversion Price then in effect (the "SECOND
ADJUSTED CONVERSION PRICE"), then the Company shall, within thirteen (13)
Trading Days following such 240th day, issue to the Purchaser for no additional
consideration such number of shares of Common Stock (the "SECOND ADJUSTMENT
SHARES") as equals the quotient obtained by dividing (i) the product of (A) the
Second Adjusted Conversion Price, minus the Second Adjustment Price and (B) an
amount equal to (x) the quotient obtained by dividing (1) the lesser of (I) 1/3
of the number of Shares acquired by the Purchaser on the Closing Date multiplied
by the Stated Value or (II) the aggregate number of Shares held by the Purchaser
on the 150th day after the Closing Date multiplied by the Stated Value less the
First Repriced Share Value referred to in Section 3.16(a) above (such lesser
value shall be referred to herein as the "SECOND REPRICED SHARE VALUE"),
provided, however that in the event that the Second Repriced Share Value is
greater than the aggregate number of Shares held by the Purchaser on the 240th
day after the Closing Date multiplied by the Stated Value, the Second Repriced
Share Value shall equal the aggregate number of Shares held by the Purchaser on
the 240th day after the Closing Date multiplied by the Stated Value, by (2) the
Conversion Price then in effect, less (y) the number of shares of Common Stock
held by the Purchaser in a short position on the 240th day after the Closing
Date and (ii) the Second Adjustment Price.
(c) If the average Per Share Market Value for the ten (10) Trading
Days commencing the 365th day after the Closing Date (the "THIRD ADJUSTMENT
PRICE," and together with
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<PAGE>
the First Adjustment Price and the Second Adjustment Price, the "ADJUSTMENT
PRICE") is less than 116% of the Conversion Price then in effect (the "THIRD
ADJUSTED CONVERSION PRICE"), then the Company shall, within thirteen (13)
Trading Days following such 365th day, issue to the Purchaser for no additional
consideration such number of shares of Common Stock (the "THIRD ADJUSTMENT
SHARES," and together with the First Adjustment Shares and the Second Adjustment
Shares, the "ADJUSTMENT SHARES") as equals the quotient obtained by dividing (i)
the product of (A) the Third Adjusted Conversion Price, minus the Third
Adjustment Price and (B) an amount equal to (x) the quotient obtained by
dividing (1) the lesser of (I) 1/3 of the number of Shares acquired by the
Purchaser on the Closing Date multiplied by the Stated Value or (II) the
aggregate number of Shares held by the Purchaser on the 240th day after the
Closing Date multiplied by the Stated Value less the Second Repriced Share Value
referred to in Section 3.16(b) above (such lesser value shall be referred to
herein as the "THIRD REPRICED SHARE VALUE"), provided, however that in the event
that the Third Repriced Share Value is greater than the aggregate number of
Shares held by the Purchaser on the 365th day after the Closing Date multiplied
by the Stated Value, the Third Repriced Share Value shall equal the aggregate
number of Shares held by the Purchaser on the 365th day after the Closing Date
multiplied by the Stated Value, by (2) the Conversion Price then in effect, less
(y) the number of shares of Common Stock held by the Purchaser in a short
position on the 365th day after the Closing Date and (ii) the Third Adjustment
Price.
3.17 VOLUME AND TRADING RESTRICTIONS. (a) During the period from the
Original Issue Date until the Initial Conversion Date, the Purchaser shall not
sell, which shall include any short sale, a number of shares of Common Stock
equal to the greater of (i) 10% of the trading volume of the Common Stock on
such day or (ii) 10% of the average trading volume of the Common Stock for the
five Trading Days immediately preceding such day. This limitation shall only
apply to any sales of Common Stock at a price equal to or above $3.375 per
share, it being understood that the Purchaser shall not sell any shares of
Common Stock during the period from the Original Issue Date until the Initial
Conversion Date at a price less than $3.375 per share.
(b) The Purchaser shall not establish a short position in the Common
Stock and the Company shall not to purchase any shares of Common Stock during
the ten (10) Trading Days in which an Adjustment Price is determined pursuant to
with Section 3.16. Nothing herein shall preclude the Purchaser from maintaining
positions in the securities of the Company established prior to or after the
expiration of any such periods.
3.18 DRAW-DOWN OF EQUITY LINE OF CREDIT. As long as the Purchaser owns
Shares, the Company may not make draws against any equity line of credit
facility available to the Company at any time when the Per Share Market Value is
less than 210% of the Per Share Market Value for the five (5) Trading Days
immediately preceding the Closing Date.
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<PAGE>
ARTICLE IV
MISCELLANEOUS
4.1. FEES AND EXPENSES. At the Closing, the Company shall pay $20,000
to Robinson Silverman in connection with the preparation and negotiation of the
Transaction Documents. Other than the amount contemplated in the immediately
preceding sentence, and except as otherwise set forth in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Securities.
4.1. ENTIRE AGREEMENT; AMENDMENTS. The Transaction Documents together
with the Exhibits and Schedules thereto, and the Transfer Agent Instructions
contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, with respect to such matters, which the parties acknowledge have been
merged into such documents, exhibits and schedules.
4.2. NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile with a receipt of
confirmation at the facsimile telephone number specified in this Section prior
to 8:00 p.m. (Minnetonka, Minnesota time) on a Business Day, (ii) the Business
Day after the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile telephone number specified in this Agreement
later than 8:00 p.m. (Minnetonka, Minnesota time) on any date and earlier than
11:59 p.m. (Minnetonka, Minnesota time) on such date, (iii) the Business Day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The address for such notices and communications shall be
as follows:
If to the Company: Big Entertainment, Inc.
2255 Glades Road, Suite 237 West
Boca Raton, Florida, 33431
Facsimile No.: (561) 998-2974
Attn: Chief Executive Officer
With copies to: Broad and Cassel
201 S. Biscayne Boulevard
Miami, Florida 33131
Facsimile No.: (305) 373-9493
Attn: Dale S. Bergman, Esq.
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<PAGE>
If to the Purchaser: KA Investments LDC
c/o Deephaven Capital Management LLC
1712 Hopkins Crossroads
Minnetonka, MN 55305
Facsimile No.: (612) 542-4244
Attn: Bruce Lieberman
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson, Esq.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.3. AMENDMENTS; WAIVERS. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by both the Company and the Purchaser; or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
4.4. HEADINGS. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
4.5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchaser. Except as set forth in
Section 3.1(a), the Purchaser may not assign this Agreement or any of the rights
or obligations hereunder (other than to an Affiliate of the Purchaser) without
the consent of the Company, except that the Purchaser may assign its rights
hereunder and under the Transaction Documents without the consent of the Company
as long as such assignee demonstrates to the reasonable satisfaction of the
Company its satisfaction of the representations and warranties set forth in
Section 2.2. This provision shall not limit the Purchaser's right to transfer
securities or transfer or assign rights hereunder or under the Registration
Rights Agreement.
4.6. NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
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<PAGE>
4.7. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
4.8. SURVIVAL. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery and
conversion or exercise (as the case may be) of the Adjustment Shares, the Shares
and the Warrants.
4.9. EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.10. PUBLICITY. The Company and the Purchaser shall consult with each
other in issuing any press releases or otherwise making public statements or
filings and other communications with the Commission or any regulatory agency or
stock market or trading facility with respect to the transactions contemplated
hereby and neither party shall issue any such press release or otherwise make
any such public statement, filings or other communications without the prior
written consent of the other, which consent shall not be unreasonably withheld
or delayed, except that no prior consent shall be required if such disclosure is
required by law, in which such case the disclosing party shall provide the other
party with prior notice of such public statement, filing or other communication.
Notwithstanding the foregoing, the Company shall not publicly disclose or
include the name of the Purchaser in any filing with the Commission, or any
regulatory agency, trading facility or stock market without the prior written
consent of the Purchaser, except to the extent such disclosure (but not any
disclosure as to the controlling Persons thereof) is required by
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<PAGE>
law, in which case the Company shall provide the Purchaser with prior notice of
such disclosure.
4.11. SEVERABILITY. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
4.12. REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchaser
will be entitled to specific performance of the obligations of the Company under
the Transaction Documents. Each of the Company and the Purchaser agree that
monetary damages may not be adequate compensation for any loss incurred by
reason of any breach of its obligations described in the foregoing sentence and
hereby agrees to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Preferred Stock Purchase Agreement to be duly executed by their respective
authorized signatories as of the date first indicated above.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
--------------------------------
Name: Mitchell Rubenstein
Title:
KA INVESTMENTS LDC
By: /s/ GARY SOBCZAK
---------------------------------
Name: Gary Sobczak
Title: Secretary
-22-
EXHIBIT 10.2
___________________________________________________________________
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Between
BIG ENTERTAINMENT, INC.
and
ZUBAIR KAZI
Dated as of November 6, 1998
_______________________________________________________________________________
<PAGE>
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement"),
dated as of November 6, 1998 between Big Entertainment, Inc., a Florida
corporation (the "Company"), and Zubair Kazi (the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desires to purchase from the Company shares of the Company's Series D
Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock"),
which are convertible into shares of the Company's common stock, $.01 par value
per share (the "Common Stock").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration, the receipt and adequacy are
hereby acknowledged, the Company and Purchaser agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK
1.1 THE CLOSINGS.
(a) THE CLOSING. (i) Subject to the terms and conditions set forth
in this Agreement, the Company shall issue and sell to the Purchaser and the
Purchaser shall purchase an aggregate of 50 shares of Preferred Stock (the
"Shares") for an aggregate purchase price of $500,000. The purchase price per
Share shall be $10,000.00. The closing of the purchase and sale of the Preferred
Stock (the "Closing") shall occur on November 6, 1998 at the executive offices
of the Company, or shall be effected by facsimile and wire, or otherwise as the
parties shall mutually agree.
(ii) At the Closing: (A) the Company shall deliver or cause to be
delivered (1) a stock certificate representing the Shares purchased on such
date, registered in the name of the Purchaser, (2) a common stock purchase
warrant, in the form of EXHIBIT D, registered in the name of the Purchaser,
pursuant to which the Purchaser shall have the right at any time and from time
to time thereafter through the fifth anniversary date of the issuance thereof to
acquire 22,222 shares of Common Stock at an exercise price per share of $6.75,
subject to adjustment (the "First Warrant"), (3) a common stock purchase
warrant, in the form of EXHIBIT D, registered in the name of the Purchaser,
pursuant to which the Purchaser shall have the right at any time and from time
to time thereafter through the fifth anniversary date of the issuance thereof to
acquire 33,333 shares of Common Stock at an exercise price per share of $5.625,
subject to adjustment (the "Second Warrant" and, together with the First
Warrant, the "Warrants"), (4) the legal opinion of Broad and Cassel, counsel to
the Company, substantially in the form of EXHIBIT C, and (5) all other
documents, instruments and writings required to have been delivered at or prior
to the Closing by the Company pursuant to this Agreement, including an executed
Registration Rights Agreement, dated the date hereof, between the Company and
the Purchaser, in the form of EXHIBIT B (the "Registration Rights Agreement"),
and the Irrevocable
<PAGE>
Transfer Agent Instructions, in the form of EXHIBIT E, delivered to and
acknowledged by the Company's transfer agent (the "Transfer Agent
Instructions"); and (B) the Purchaser shall deliver (1) $500,000.00 in United
States dollars in immediately available funds by wire transfer to an account
designated in writing by the Company for such purpose, and (2) all documents,
instruments and writings required to have been delivered at or prior to the
Closing by the Purchaser pursuant to this Agreement, including, without
limitation, an executed Registration Rights Agreement.
1.2 TERMS OF PREFERRED STOCK. The Preferred Stock shall have the
Rights, Preferences and Privileges Set forth in EXHIBIT A, and shall be
incorporated into the Articles of Amendment ("Articles of Amendment") which
shall be filed on or prior to the Closing Date by the Company with the Florida
Department of State, in form and substance mutually agreed to by the parties.
1.3 CERTAIN DEFINED TERMS. For purposes of this Agreement, "Conversion
Price," "Initial Conversion Date," "Original Issue Date," "Stated Value" and
"Trading Day" shall have the meanings set forth in EXHIBIT A; "Business Day"
shall mean any day except Saturday, Sunday and any day which shall be a federal
legal holiday in the United States of America or a day on which banking
institutions in the State of Florida are authorized or required by law or other
governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
makes the following representations and warranties to the Purchaser:
(a) ORGANIZATION AND QUALIFICATION. The Company is a corporation,
duly incorporated, validly existing and in good standing under the laws of the
State of Florida, with the requisite corporate power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth in SCHEDULE
2.1(A) (collectively, the "Subsidiaries"). Each of the Subsidiaries is an
entity, duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the full power and authority to own and use its properties
and assets and to carry on its business as currently conducted. Each of the
Company and the Subsidiaries is duly qualified to do business and is in good
standing as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of the Securities (as
defined below) or any of this Agreement, the Articles of Amendment, the
Registration Rights Agreement or the Warrants (collectively, the "Transaction
Documents"), (y) have or result in a material adverse effect on the results of
operations, assets, prospects, or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole, or (z) adversely impair the
Company's ability to perform fully on a timely basis its obligations under any
of the Transaction Documents (any of (x), (y) or (z), a "Material Adverse
Effect").
2
<PAGE>
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents, and otherwise to carry out
its obligations thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, except for any of the Required Approvals (as hereinafter defined). Each
of the Transaction Documents has been duly executed by the Company and, when
delivered in accordance with the terms hereof, will constitute the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms. Neither the Company nor any Subsidiary is in violation of any of
the provisions of its respective articles of incorporation or bylaws.
(c) CAPITALIZATION. The number of authorized, issued and outstanding
capital stock of the Company is set forth in SCHEDULE 2.1(C). No shares of
Common Stock are entitled to preemptive or similar rights, nor is any holder of
the Common Stock entitled to statutory preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as disclosed in SCHEDULE 2.1(C) or as a result of
the purchase and sale of the Shares and the Warrants and the issuance of
Adjustment Shares (as defined in Section 3.13), if any, there are no outstanding
options, warrants, rights to subscribe to, calls, or commitments of any
character whatsoever relating to securities, rights or obligations convertible
into or exchangeable for, or giving any Person any right to subscribe for or
acquire, any shares of Common Stock, or contracts, commitments, understandings,
or arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company,
except as specifically disclosed in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997, Quarterly Reports on Form 10-QSB for the
quarters ended March 31, 1998 and June 30, 1998, and Proxy Statement for the
July 1998 Annual Meeting of Shareholders (collectively, the "Current SEC
Reports") or SCHEDULE 2.1(C), no Person or group of related Persons beneficially
owns (as determined pursuant to Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) or has the right to
acquire by agreement with or by obligation binding upon the Company beneficial
ownership of in excess of 5% of the Common Stock. A "Person" means an individual
or corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.
(d) ISSUANCE OF THE SHARES, THE WARRANTS AND THE ADJUSTMENT SHARES.
The Shares and the Warrants are duly authorized, and, when issued and paid for
in accordance with the terms hereof, shall have been duly and validly issued,
and, in the case of the Shares, fully paid and nonassessable, free and clear of
all liens, encumbrances and rights of first refusal of any kind (collectively,
"Liens"). The Company has on the date hereof an adequate reserve of duly
authorized shares of Common Stock, reserved for issuance to the Purchaser and
the holders of the Shares and the Warrants, to enable it to perform its
conversion, exercise and other obligations under this Agreement, the Articles of
Amendment and the Warrants. Such initial number of reserved and available shares
of Common Stock is not less than the sum of the number of shares of Common Stock
that would be issuable on the Closing Date: (i) upon conversion in full of the
Shares and payment of dividends thereunder, assuming that the Shares are
outstanding for three
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years, all dividends for such three-year period are paid in shares of Common
Stock, and such conversion occurred at the lowest possible Conversion
Price pursuant to Section 5(c)(i) of the Articles of Amendment, (ii) upon
exercise of the Warrants, assuming the Warrants are exercised at the lowest
possible Exercise Price (as defined in the Warrants), and (iii) as Adjustment
Shares, assuming that the Adjustment Price (as defined in Section 3.13) is equal
to one-half of the lowest possible Conversion Price pursuant to Section 5(c)(i)
of the Articles of Amendment (such number of shares of Common Stock, the
"Initial Minimum"). All such authorized shares of Common Stock have been duly
reserved for issuance to the Purchaser and the holders of such Shares and
Warrants. The Adjustment Shares and the shares of Common Stock issuable upon
conversion of the Shares, as payment of dividends thereon and upon exercise of
the Warrants are collectively referred to herein as the "Underlying Shares." The
Shares, the Warrants and the Underlying Shares are, collectively, the
"Securities." When issued in accordance with this Agreement, the Articles of
Amendment and the Warrants, in accordance with their respective terms, the
Underlying Shares will be duly authorized, validly issued, fully paid and
nonassessable, and free and clear of all Liens.
(e) NO CONFLICTS. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its articles of incorporation or bylaws (each as
amended through the date hereof); (ii) subject to obtaining the Required
Approvals (as defined below), conflict with, or constitute a default (or an
event which with notice or lapse of time, or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time, or both) of, any agreement,
credit facility, indenture or instrument (evidencing a Company debt or
otherwise) to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected; or
(iii) result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or governmental authority
to which the Company is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company is bound or
affected, except in the case of each of clauses (ii) and (iii), as could not,
individually or in the aggregate, reasonably be expected to have or result in a
Material Adverse Effect. The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental authority,
except for violations which, individually or in the aggregate, could reasonably
be expected to not have or result in a Material Adverse Effect.
(f) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filing of the Articles of Amendment
with the Secretary of State of Florida, (ii) the filings required pursuant to
Section 3.7, (iii) the filing of the Underlying Securities Registration
Statement with the Securities and Exchange Commission (the "Commission") meeting
the requirements set forth in the Registration Rights Agreement and covering the
resale of the Underlying Shares by the Purchaser, (iv) the application(s) to The
Nasdaq Stock Market, Inc. for the listing of the Underlying Shares for trading
on the Nasdaq SmallCap Market ("NASDAQ") (and with any other national securities
exchange or market on which the Common Stock is then listed), (v)
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applicable Blue Sky filings as required by the Registration Rights Agreement,
and (vi) in all other cases where the failure to obtain such consent, waiver,
authorization or order, or to give such notice or make such filing or
registration could not reasonably be expected to have or result in, individually
or in the aggregate, a Material Adverse Effect (the consents, waivers,
authorizations, orders, notices and filings referred to in (i)-(vi) of this
Section are collectively, the "Required Approvals").
(g) LITIGATION; PROCEEDINGS. Except as specifically disclosed in the
Current SEC Reports, there is no action, suit, notice of violation, proceeding
or investigation pending or, to the knowledge of the Company, threatened against
or affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency, or
regulatory authority (federal, state, county, local or foreign) that (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, individually or in
the aggregate, reasonably be expected to have or result in a Material Adverse
Effect.
(h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred that has
not been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or is in violation of any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound, (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is in violation of any statute, rule or regulation of any governmental
authority, except as could not, individually or in the aggregate, have or result
in a Material Adverse Effect.
(i) PRIVATE OFFERING. Assuming the accuracy of the representations
and warranties of the Purchaser set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchaser as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). Neither the Company nor any Person acting on its
behalf has taken any action that could subject the offering, issuance or sale of
the Securities to the registration requirements of the Securities Act.
(j) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company has filed all
reports required to be filed by it under the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the three years preceding the date hereof
(or such shorter period as the Company was required by law to file such
material) (the foregoing materials being collectively referred to herein as the
"SEC Documents" and, together with the Schedules to this Agreement, the
"Disclosure Materials") on a timely basis or has received a valid extension of
such time of filing and has filed any such SEC Documents prior to the expiration
of any such extension. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Documents, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under that which they were made, not misleading. All material
agreements to which the Company is a party or to which the property or assets of
the Company are subject and that were required to have been
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filed as exhibits to the SEC Documents have been so filed. The financial
statements of the Company included in the SEC Documents comply in all material
respects with applicable accounting requirements and the rules and regulations
of the Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis ("GAAP") during the periods
involved, except as may be otherwise specified in such financial statements or
the notes thereto, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments. Since December 31, 1997 except as specifically
disclosed in the Current SEC Reports or as set forth on SCHEDULE 2.1(J), (a)
there has been no event, occurrence or development that has had or that could
have or result in a Material Adverse Effect, (b) the Company has not incurred
any liabilities (contingent or otherwise) other than (x) liabilities incurred in
the ordinary course of business consistent with past practice and (y)
liabilities not required to be reflected in the Company's financial statements
pursuant to GAAP or required to be disclosed in filings made with the
Commission, (c) the Company has not altered its method of accounting or the
identity of its auditors and (d) the Company has not declared or made any
payment or distribution of cash or other property to its shareholders or
officers or directors (other than in compliance with existing Company stock
option plans or salary paid in accordance with existing employment agreements or
otherwise made in the ordinary course consistent with prior practice) with
respect to its capital stock, or purchased, redeemed (or made any agreements to
purchase or redeem) any shares of its capital stock. The Company last filed
audited financial statements with the Commission for the year ended December 31,
1997, and has not received any comments from the Commission in respect thereof.
(k) INVESTMENT COMPANY. The Company is not, and is not an Affiliate
(as defined in Rule 405 under the Securities Act) ) of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(l) CERTAIN FEES. Except for certain fees payable by the Company to
the parties set forth on SCHEDULE 2.1(L), no fees or commissions will be payable
by the Company to any broker, financial advisor or consultant, finder, placement
agent, investment banker, or bank with respect to the transactions contemplated
by this Agreement. The Purchaser shall have no obligation with respect to any
fees or with respect to any claims made by or on behalf of other Persons for
fees of a type contemplated in this Section that may be due in connection with
the transactions contemplated by this Agreement. The Company shall indemnify and
hold harmless the Purchaser, its employees, officers, directors, agents, and
partners, and their respective Affiliates, from and against all claims, losses,
damages, costs (including the costs of preparation and attorney's fees) and
expenses suffered in respect of any such claimed or existing fees, as such fees
and expenses are incurred.
(m) SOLICITATION MATERIALS. Neither the Company nor any Person
acting on the Company's behalf has solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) FORM S-3 ELIGIBILITY. The Company is eligible to register
securities for resale with the Commission under Form S-3 promulgated under the
Securities Act.
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(o) SENIORITY. Except as set forth on Schedule 2.1(o), no class of
equity securities of the Company is senior to the Shares in right of payment,
whether upon liquidation, dissolution, or otherwise.
(p) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. The Company has
not, in the two years preceding the date hereof, received notice (written or
oral) from the NASDAQ or any other stock exchange, market or trading facility on
which the Common Stock is or has been listed (or on which it has been quoted) to
the effect that the Company is not in compliance with the listing or maintenance
requirements of such exchange or market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such maintenance requirements.
(q) PATENTS AND TRADEMARKS. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and rights (collectively, the
"Intellectual Property Rights") that are necessary or material for use in
connection with its business, and that the failure to so have could reasonably
be expected to have a Material Adverse Effect. To the best knowledge of the
Company, all such Intellectual Property Rights are enforceable and there is no
existing infringement by another Person of any of the Intellectual Property
Rights.
(r) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as set
forth on SCHEDULE 6(B) to the Registration Rights Agreement, (i) the Company has
not granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority that have not been satisfied and
(ii) no Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(s) REGULATORY PERMITS. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Documents, except where the failure to
possess such permits, individually or in the aggregate, could reasonably be
expected to have or result in a Material Adverse Effect ("Material Permits"),
and neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.
(t) TITLE. Neither the Company nor any of its Subsidiaries own any
real property. The Company and the Subsidiaries have good and marketable title
to all personal property owned by them that is material to the business of the
Company and its Subsidiaries, in each case free and clear of all Liens, except
for liens, claims or encumbrances that do not materially affect the value of
such property and do not interfere with the use made and proposed to be made of
such property by the Company and its Subsidiaries. Any real property and
facilities held under lease by the Company and its Subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.
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(u) DISCLOSURE. The Company confirms that it has not provided the
Purchaser or its agents or counsel with any information that constitutes or
might constitute material non-public information. The Company understands and
confirms that the Purchaser shall be relying on the foregoing representations in
effecting transactions in securities of the Company. All disclosure provided to
the Purchaser regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASEr. The Purchaser
hereby represents and warrants to the Company as follows:
(a) BINDING OBLIGATION. Each of this Agreement and the Registration
Rights Agreement has been duly executed and delivered by the Purchaser and
constitutes the valid and legally binding obligation of the Purchaser,
enforceable against him in accordance with its terms. Neither this Agreement nor
the Registration Rights Agreement will result in a default under or breach of,
or conflict with, any agreement, instrument or obligation to which the Purchaser
is a party or any order, restriction or judgment to which the Purchaser is
subject.
(b) INVESTMENT INTENT. The Purchaser is acquiring the Securities for
his own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof or interest
therein, without prejudice, however, to the Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all times
to sell or otherwise dispose of all or any part of such Securities pursuant to
an effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration.
(c) PURCHASER STATUS. At the time the Purchaser was offered the
Shares, the Warrants and the Adjustment Shares, he was, and at the date hereof
he is, and at each exercise date under the Warrants, he will be, an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
(d) EXPERIENCE OF THE PURCHASER. The Purchaser, either alone or
together with his representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) ABILITY OF THE PURCHASER TO BEAR RISK OF INVESTMENT. The
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) ACCESS TO INFORMATION. The Purchaser acknowledges receipt of the
Disclosure Materials and further acknowledges that he has reviewed the
Disclosure Materials and has been afforded (i) the opportunity to ask such
questions as he has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities;
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(ii) access to information about the Company and the Company's financial
condition, results of operations, business, properties, management and prospects
sufficient to enable him to evaluate his investment; and (iii) the opportunity
to obtain such additional information that the Company possesses or can acquire
without unreasonable effort or expense that is necessary to make an informed
investment decision with respect to the investment and to verify the accuracy
and completeness of the information contained in the Disclosure Materials.
Neither such inquiries nor any other investigation conducted by or on behalf of
such Purchaser or his representatives or counsel shall modify, amend or affect
such Purchaser's right to rely on the truth, accuracy and completeness of the
Disclosure Materials and the Company's representations and warranties contained
in the Transaction Documents.
(g) GENERAL SOLICITATION. The Purchaser is not purchasing the Shares
as a result of or subsequent to any advertisement, article, notice or other
communication regarding the Shares published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar.
(h) RELIANCE. The Purchaser understands and acknowledges that (i)
the Securities are being offered and sold to him without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and the Purchaser hereby consents to such
reliance.
The Company acknowledges and agrees that the Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
Article III
OTHER AGREEMENTS OF THE PARTIES
3.1 TRANSFER RESTRICTIONS. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred securities under the
Securities Act. Any such transferee shall agree in writing to be bound by the
terms of this Agreement and shall have the rights of the Purchaser under this
Agreement and the Registration Rights Agreement.
(b) The Purchaser agrees to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN
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REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above nor
any other legend if the conversion of Shares, the payment of dividends thereon,
the exercise of Warrants, the issuance of Adjustment Shares or other issuances
of Underlying Shares as contemplated hereby, by the Articles of Amendment or the
Warrants occurs at any time while an Underlying Securities Registration
Statement is effective under the Securities Act or, in the event there is not an
effective Underlying Securities Registration Statement at such time, if in the
opinion of counsel to the Company such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission). The Company shall cause
its counsel to issue the legal opinion included in the Transfer Agent
Instructions to the Company's transfer agent on the day that the Underlying
Securities Registration Statement is declared effective by the Commission. The
Company agrees that, in the event any Underlying Shares are issued with a legend
in accordance with this Section 3.1(b), it will provide the Purchaser, upon
request, with a certificate or certificates representing such Underlying Shares,
free from such legend at such time as such legend would not have been required
under this Section 3.1(b) had such issuance occurred on the date of such
request. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company which enlarge the restrictions
of transfer set forth in this Section.
3.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Adjustment Shares and the Underlying Shares issuable upon
conversion of the Shares and payment of dividends thereon in accordance with the
terms of the Articles of Amendment, and upon exercise of the Warrants in
accordance with their terms, may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligation to issue Underlying Shares
pursuant to Section 3.13 and upon (x) conversion of the Shares and payment of
dividends thereon in accordance with the terms of the Articles of Amendment, and
(y) exercise of the Warrants in accordance with their terms, is unconditional
and absolute, subject to the limitations set forth herein, in the Articles of
Amendment or pursuant to the Warrants, regardless of the effect of any such
dilution.
3.3 FURNISHING OF INFORMATION. As long as the Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. As long as the Purchaser owns Securities, if
the Company is not required to file reports pursuant to such sections, it will
prepare and furnish to the Purchaser and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act such information as is
required for the Purchaser to sell the
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Securities under Rule 144. The Company further covenants that it will take such
further action as any holder of Securities may reasonably request, all to the
extent required from time to time to enable such Person to sell Underlying
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144 promulgated under the Securities Act,
including the legal opinion referenced above in this Section. Upon the request
of any such Person, the Company shall deliver to such Person a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
3.4 BLUE SKY LAWS. In accordance with the Registration Rights
Agreement, the Company shall qualify or exempt the issuance and sale of the
Underlying Shares under the securities or Blue Sky laws of such jurisdictions as
the Purchaser may reasonably request and shall continue such qualification or
exemption at all times until the Purchaser notifies the Company in writing that
it no longer owns Securities; provided, however, that neither the Company nor
its Subsidiaries shall be required in connection therewith to qualify as a
foreign corporation where they are not now so qualified or to take any action
that would subject the Company to general service of process in any such
jurisdiction where it is not then subject.
3.5 INTEGRATION. The Company shall not, and shall use its best efforts
to ensure that, no Affiliate shall, sell, offer for sale or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchaser.
3.6 INCREASE IN AUTHORIZED SHARES. If on any date the Company would be
precluded from issuing the full number of Underlying Shares as would then be
issuable (a) upon a conversion in full of the then-outstanding Shares and as
payment of all accrued and then-unpaid dividends thereon in shares of Common
Stock, (b) upon exercise in full of the then-unexercised portion of the
Warrants, and (c) as Adjustment Shares, assuming that the applicable Adjustment
Price is one half of the lowest possible Conversion Price pursuant to Section
5(c)(i) of the Articles of Amendment (the "Current Required Minimum"), due to
the unavailability of a sufficient number of authorized but unissued or reserved
shares of Common Stock, then the Board of Directors of the Company shall
promptly (and in any case, subject to clearance of the Company's proxy materials
by the Commission, within 30 Business Days from such date) prepare and mail to
the shareholders of the Company proxy materials requesting authorization to
amend the Company's Articles of Incorporation to increase the number of shares
of Common Stock that the Company is authorized to issue to at least such number
of shares as reasonably requested by the Purchaser in order to provide for such
number of authorized and unissued shares of Common Stock to enable the Company
to comply with its issuance, conversion, exercise and reservation of shares
obligations as set forth in this Agreement, the Articles of Amendment and the
Warrants (the sum of (x) the number of shares of Common Stock then authorized,
(y) the number of shares of Common Stock then outstanding plus all shares of
Common Stock issuable upon exercise of all outstanding options, warrants and
convertible instruments, and (z) the Current Required Minimum (provided that,
for purposes of such calculation, the number of Adjustment Shares to be issued
shall equal the greater of the number provided in clause (c) above in this
Section and the number of Adjustment Shares as would be issuable based upon the
formula set forth in Section 3.13 assuming that such issuance would occur on
each determination date), shall be a reasonable number). In connection
therewith, the
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Board of Directors shall (i) adopt proper resolutions authorizing such increase,
(ii) recommend to and otherwise use its best efforts to promptly and duly obtain
shareholder approval to carry out such resolutions (and hold a special meeting
of the shareholders no later than the 60th day after mailing of the proxy
materials relating to such meeting) and (iii) within five Business Days of
obtaining such shareholder authorization, file an appropriate amendment to the
Company's Articles of Incorporation to evidence such increase.
3.7 LISTING AND RESERVATION OF UNDERLYING SHARES. The Company shall (i)
not later than the fifth Business Day following the Original Issue Date of the
Shares purchased and sold at the Second Closing (or, if the Second Closing does
not occur or is delayed, not later than 45 days following the Original Issue
Date of the Shares purchased and sold at the Closing) prepare and file with the
NASDAQ (and such other national securities exchange or market or trading or
quotation facility on which the Common Stock is then listed) an additional
shares listing application covering a number of shares of Common Stock that is
not less than the Initial Minimum, (ii) take all steps necessary to cause such
shares to be approved for listing in the NASDAQ (as well as on any such other
national securities exchange or market or trading or quotation facility on which
the Common Stock is then listed) as soon as possible thereafter, and (iii)
provide to the Purchaser evidence of such listing, and the Company shall
maintain the listing of its Common Stock thereon. If the number of Adjustment
Shares issuable pursuant to Section 3.13 and upon conversion in full of the
then-outstanding Shares, as payment of dividends thereon, and upon exercise of
the then-unexercised portion of the Warrants exceeds 85% of the number of
Underlying Shares previously listed on account thereof with NASDAQ (and such
other required exchanges), then the Company shall take the necessary actions to
immediately list a number of Underlying Shares as equals no less than the
Current Required Minimum (provided that, for purposes of such calculation, the
number of Adjustment Shares to be issued shall equal the greater of the number
provided in clause (c) of Section 3.6 and the number of Adjustment Shares as
would be issuable based upon the formula set forth in Section 3.13 assuming that
such issuance would occur on each determination date), shall be a reasonable
number).
(b) The Company shall maintain a reserve of Common Stock for
issuance pursuant to Section 3.13, and upon conversion of the Shares and for
payment of dividends thereupon in shares of Common Stock and upon exercise of
the Warrants in accordance with this Agreement, the Articles of Amendment and
the Warrants, respectively, in such amount as may be required to fulfill its
obligations in full under the Transaction Documents, which reserve shall equal
no less than the Current Required Minimum (provided that, for purposes of such
calculation, the number of Adjustment Shares to be issued shall equal the
greater of the number provided in clause (c) of Section 3.6 and the number of
Adjustment Shares as would be issuable based upon the formula set forth in
Section 3.13 assuming that such issuance would occur on each determination
date).
3.8 CONVERSION AND EXERCISE PROCEDURES. The Transfer Agent
Instructions, Conversion Notice (as defined in EXHIBIT A) and Notice of Exercise
under the Warrants set forth the totality of the procedures with respect to the
conversion of the Shares and exercise of the Warrants, including the form of
legal opinion, if necessary, that shall be rendered to the Company's transfer
agent and such other information and instructions as may be necessary to enable
the Purchaser to convert its Shares and exercise the Warrants as contemplated in
the Articles of Amendment and the Warrants (as applicable).
12
<PAGE>
3.9 NOTICE OF BREACHES. Each of the Company and the Purchaser shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof
that would reasonably be likely to cause any representation or warranty or other
agreement of such party, as the case may be, contained therein to be incorrect
or breached as of the Closing Date. However, no disclosure by either party
pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in any Transaction
Document.
3.10 CONVERSION AND EXERCISE OBLIGATIONS OF THE COMPANY. The Company
shall honor conversions of the Shares and exercises of the Warrants and shall
deliver Underlying Shares in accordance with the respective terms, conditions
and time periods set forth in the Articles of Amendment and the Warrants,
respectively.
3.11 USE OF PROCEEDS. The Company shall use the net proceeds from the
sale of the Securities hereunder for working capital purposes. Pending
application of the proceeds of this placement in the manner permitted hereby,
the Company will invest such proceeds in interest-bearing accounts and/or
short-term, investment grade interest-bearing securities.
3.12 REIMBURSEMENT. If the Purchaser, other than by reason of his gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
shareholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse the Purchaser for his reasonable legal and other expenses
(including the cost of any investigation and preparation) incurred in connection
therewith, as such expenses are incurred. In addition, other than with respect
to any matter in which the Purchaser is a named party, the Company will pay the
Purchaser the charges, as reasonably determined by the Purchaser, for the time
of any officers or employees of the Purchaser devoted to appearing and preparing
to appear as witnesses, assisting in preparation for hearings, trials or
pretrial matters, or otherwise with respect to inquiries, hearings, trials, and
other proceedings relating to the subject matter of this Agreement. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability that the Company may otherwise have, shall extend upon
the same terms and conditions to any Affiliates of the Purchaser who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchaser and any such Affiliate, and shall be binding upon and inure
to the benefit of any successors, assigns, heirs and personal representatives of
the Company, the Purchaser and any such Affiliate and any such Person. The
Company also agrees that neither the Purchaser nor any such Affiliates,
partners, directors, agents, employees or controlling persons shall have any
liability to the Company or any person asserting claims on behalf of or in right
of the Company in connection with or as a result of the consummation of the
Transaction Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or willful misconduct of the Purchaser or entity in connection with the
transactions contemplated by this Agreement.
3.13 ISSUANCE OF ADJUSTMENT SHARES. (a) If the average Per Share Market
Value for the 10 Trading Days commencing the 150th day after the Closing Date
(the "First Adjustment Price")
13
<PAGE>
is less than 116% of the Conversion Price then in effect (the "First Adjusted
Conversion Price"), then the Company shall, within 13 Trading Days following
such 150th day, issue to the Purchaser for no additional consideration such
number of shares of Common Stock (the "First Adjustment Shares") as equals the
quotient obtained by dividing (i) the productof (A) the First Adjusted
Conversion Price, minus the First Adjustment Price and (B) an amount equal to
(x) the quotient obtained by dividing (1) the lesser of (I) 1/3 of the number
of Shares acquired by the Purchaser on the Closing Date multiplied by the
Stated Value or (II) the aggregate number of Shares held by the Purchaser on
the 150th day after the Closing Date multiplied by the Stated Value (such
lesser value shall be referred to herein as the "First Repriced Share Value")
by (2) the Conversion Price then in effect, less (y) the number of shares of
Common Stock held by the Purchaser in a short position on the 150th day after
the Closing Date and (ii) the First Adjustment Price.
(b) If the average Per Share Market Value for the 10 Trading Days
commencing the 240th day after the Closing Date (the "Second Adjustment Price")
is less than 116% of the Conversion Price then in effect (the "Second Adjusted
Conversion Price"), then the Company shall, within 13 Trading Days following
such 240th day, issue to the Purchaser for no additional consideration such
number of shares of Common Stock (the "Second Adjustment Shares") as equals the
quotient obtained by dividing (i) the product of (A) the Second Adjusted
Conversion Price, minus the Second Adjustment Price and (B) an amount equal to
(x) the quotient obtained by dividing (1) the lesser of (I) 1/3 of the number of
Shares acquired by the Purchaser on the Closing Date multiplied by the Stated
Value or (II) the aggregate number of Shares held by the Purchaser on the 150th
day after the Closing Date multiplied by the Stated Value less the First
Repriced Share Value referred to in Section 3.13(a) above (such lesser value
shall be referred to herein as the "Second Repriced Share Value"), provided,
however, that in the event that the Second Repriced Share Value is greater than
the aggregate number of Shares held by the Purchaser on the 240th day after the
Closing Date multiplied by the Stated Value, the Second Repriced Share Value
shall equal the aggregate number of Shares held by the Purchaser on the 240th
day after the Closing Date multiplied by the Stated Value, by (2) the Conversion
Price then in effect, less (y) the number of shares of Common Stock held by the
Purchaser in a short position on the 240th day after the Closing Date and (ii)
the Second Adjustment Price.
(c) If the average Per Share Market Value for the 10 Trading Days
commencing the 365th day after the Closing Date (the "Third Adjustment Price,"
and together with the First Adjustment Price and the Second Adjustment Price,
the "Adjustment Price") is less than 116% of the Conversion Price then in effect
(the "Third Adjusted Conversion Price"), then the Company shall, within 13
Trading Days following such 365th day, issue to the Purchaser for no additional
consideration such number of shares of Common Stock (the "Third Adjustment
Shares," and together with the First Adjustment Shares and the Second Adjustment
Shares, the "Adjustment Shares") as equals the quotient obtained by dividing (i)
the product of (A) the Third Adjusted Conversion Price, minus the Third
Adjustment Price and (B) an amount equal to (x) the quotient obtained by
dividing (1) the lesser of (I) 1/3 of the number of Shares acquired by the
Purchaser on the Closing Date multiplied by the Stated Value or (II) the
aggregate number of Shares held by the Purchaser on the 240th day after the
Closing Date multiplied by the Stated Value less the Second Repriced Share Value
referred to in Section 3.13(b) above (such lesser value shall be referred to
herein as the "Third Repriced Share Value"), provided, however, that in the
event that the Third Repriced Share Value is greater than the aggregate number
of Shares
14
<PAGE>
held by the Purchaser on the 365th day after the Closing Date multiplied by the
Stated Value, the Third Repriced Share Value shall equal the aggregate number of
Shares held by the Purchaser on the 365th day after the Closing Date multiplied
by the Stated Value, by (2) the Conversion Price then in effect, less (y) the
number of shares of Common Stock held by the Purchaser in a short position on
the 365th day after the Closing Date and (ii) the Third Adjustment Price.
3.14 VOLUME AND TRADING RESTRICTIONS. (a) During the period from the
Original Issue Date until the Initial Conversion Date, the Purchaser shall not
sell, which shall include any short sales, a number of shares of Common Stock
equal to the greater of (i) 10% of the trading volume of the Common Stock on
such day or (ii) 10% of the average trading volume of the Common Stock for the
five Trading Days immediately preceding such day. This limitation shall only
apply to any sales of Common Stock at a price equal to or above $3.375 per
share, it being understood that the Purchaser shall not sell any shares of
Common Stock during the period from the Original Issue Date until the Initial
Conversion Date at a price less than $3.375 per share.
(b) Neither the Purchaser nor any Affiliate of the Purchaser, either
directly or indirectly, shall establish a short position in the Common Stock or
enter into any put option or other similar security, agreement or position with
respect to the Shares, the Warrants or the Common Stock.
ARTICLE IV
MISCELLANEOUS
4.1 FEES AND EXPENSES. Except as otherwise set forth in the
Registration Rights Agreement, each party shall pay the fees and expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred by such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement. The Company shall pay all stamp and
other taxes and duties levied in connection with the issuance of the Securities.
4.2 ENTIRE AGREEMENT; AMENDMENTS. The Transaction Documents, together
with the Exhibits and Schedules thereto, and the Transfer Agent Instructions
contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, with respect to such matters, which the parties acknowledge have been
merged into such documents, exhibits and schedules.
4.3 NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile with a receipt of
confirmation at the facsimile telephone number specified in this Section prior
to 5:00 p.m. (Boca Raton, Florida time) on a Business Day, (ii) the Business Day
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Agreement later
than 5:00 p.m. (Boca Raton, Florida time) on any date and earlier than 11:59
p.m. (Boca Raton, Florida time) on such date, (iii) the Business Day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The address for such notices and communications shall be as follows:
15
<PAGE>
If to the Company: Big Entertainment, Inc.
2255 Glades Road, Suite 237 West
Boca Raton, Florida, 33431
Facsimile No.: (561) 998-2974
Attn: Chief Executive Officer
With copies to: Broad and Cassel
201 S. Biscayne Boulevard
Miami, Florida 33131
Facsimile No.: (305) 373-9493
Attn: Dale S. Bergman, P.A.
If to the Purchaser: Zubair Kazi
3671 Sunswept Drive
Studio City, CA 91604
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by both the Company and the Purchaser; or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
4.5 HEADINGS. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
4.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
Neither the Company nor the Purchaser may assign this Agreement or any of the
rights or obligations hereunder (other than to an Affiliate of the Purchaser)
without the written consent of the other party, which consent shall not
unreasonably withheld.
4.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
4.8 GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of Florida without regard to
the principles of conflicts of law thereof. Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
Palm Beach County, Florida for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of the any of the Transaction
16
<PAGE>
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law.
4.9 SURVIVAL. The representations, warranties, agreements and covenants
contained herein shall survive the Closing and the delivery and conversion or
exercise (as the case may be) of the Adjustment Shares, the Shares and the
Warrants.
4.10 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 PUBLICITY. The Company and the Purchaser shall consult with each
other in issuing any press releases or otherwise making public statements or
filings and other communications with the Commission or any regulatory agency or
stock market or trading facility with respect to the transactions contemplated
hereby and neither party shall issue any such press release or otherwise make
any such public statement, filings or other communications without the prior
written consent of the other, which consent shall not be unreasonably withheld
or delayed, except that no prior consent shall be required if such disclosure is
required by law, in which such case the disclosing party shall provide the other
party with prior notice of such public statement, filing or other communication.
Notwithstanding the foregoing, the Company shall not publicly disclose or
include the name of the Purchaser in any filing with the Commission, or any
regulatory agency, trading facility or stock market without the prior written
consent of the Purchaser, except to the extent such disclosure (but not any
disclosure as to the controlling Persons thereof) is required by law, in which
case the Company shall provide the Purchaser with prior notice of such
disclosure.
4.12 SEVERABILITY. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision that shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
4.13 REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchaser
will be entitled to specific performance of the obligations of the Company under
the Transaction Documents. Each of the Company and the Purchaser agree that
monetary damages may not be adequate compensation for
17
<PAGE>
any loss incurred by reason of any breach of its obligations described in the
foregoing sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law would be
adequate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized signatories as of the date first
indicated above.
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
---------------------------------------
Name
Title:
PURCHASER:
/s/ ZUBAIR KAZI
-------------------------------------------
Zubair Kazi
19
EXHIBIT 10.3
SECOND AMENDMENT
TO
PREFERRED STOCK PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO PREFERRED STOCK PURCHASE AGREEMENT (the
"Second Amendment") is made and entered into as of the 28th day of October, 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, as amended by a First Amendment
dated as of February 18, 1998 (together, the "Purchase Agreement"), pursuant to
which the Purchaser acquired and holds 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
further 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. In consideration of the Purchaser's
agreement to the provisions of this Second Amendment, the Conversion Price of
the Preferred Stock shall be adjusted to $4.00 per share, which is based on the
current market price of the Company's common stock (the "Common Stock"). The
parties hereby agree and acknowledge that the foregoing adjustment in the
Conversion Price is in complete satisfaction of any and all adjustments to the
Conversion Price that may have occurred prior to the date of this Second
Amendment.
2. FUTURE ADJUSTMENTS TO CONVERSION PRICE. Notwithstanding anything in
the Purchase Agreement to the contrary, the parties agree that:
(a) The first paragraph of Section 3(f)(ii)(A) of the Articles of
Amendment to Articles of Incorporation of Big Entertainment, Inc. for
Designation of Preferences, Rights and Limitations of 4% $100 Series C
Convertible Preferred Stock (the "Designation of Preferences") shall be amended
to read as follows:
"(A) In case at any time or from time to time after the Issuance Date,
the Company issues or sells, or is deemed by the express provisions of
this Section 3(f)(ii) to have issued or sold additional shares of
Common Stock, for an Effective Price less than the Current Market Price
in effect on the date of and immediately prior to such issue, then and
in each such case the then-existing Conversion Price for the Series C
Preferred Stock shall be reduced, as of the opening of business on the
date of such issue or sale, to the price determined as follows:"
<PAGE>
(b) Section 3(f)(ii)(A)(1) is hereby deleted in its entirety and
Section 3(f)(ii)(A)(2) shall be renumbered accordingly.
(c) Section 3(f)(ii)(D) shall be amended to read as follows:
"(D) Except as expressly provided herein, no adjustment in the
Conversion Price of any share of Series C Preferred Stock shall be made
in respect of the issue of additional shares of Common Stock unless the
consideration per share for such additional shares of Common Stock
issued or deemed to be issued by the Company is less than the Current
Market Price in effect on the date of, and immediately prior to, such
issue."
The remaining provisions of said Section 3(f) shall remain unchanged
and in full force and effect. The parties further agree and intend that Section
3(f) as amended in this Second Amendment shall apply from and after the date of
this Second Amendment.
3. SHARE DIVIDENDS. The Company may, at its sole option, pay dividends
accruing on the Preferred Stock in the form of shares of Common Stock, the
number of such shares so issued being based on the closing price of the Common
Stock on the date immediately preceding the "Dividend Payment Date" (as defined
in Section 2 of the Designation of Preferences of the Preferred Stock);
provided, however, that when issued to the Purchaser, such shares of Common
Stock are registered for resale under a registration statement (the
"Registration Statement") filed pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), that has either been declared effective on or
before the date of such issuance or is reasonably expected to be declared
effective within 75 days of such issuance. In the event that the Registration
Statement is not declared effective within such 75-day period, the Purchaser
shall have the right to return such share dividend to the Company and receive
instead a cash dividend equal to the value of the share dividend when originally
issued.
4. AUTOMATIC CONVERSION OF PREFERRED STOCK. All outstanding shares of
Preferred Stock shall be automatically converted into shares of Common Stock
immediately prior to the closing of the transactions effecting the organization
of Huge Entertainment, Inc. (or any successor, affiliate or transferee thereof),
as the successor in interest, directly or indirectly, to Big Entertainment's
intellectual property business and the initial public offering thereof;
provided, that such automatic conversion shall be effective if and only if such
closing occurs; and, provided further, that any shares received by the Purchaser
upon such closing be issued in a transaction that is registered under the
Securities Act.
5. AMENDMENT OF ARTICLES OF INCORPORATION. The parties agree that an
Articles of 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 Second Amendment.
6. DEFINED TERMS. Unless otherwise defined herein, all capitalized
terms shall have the meanings ascribed to them in the Purchase Agreement
(including Exhibit A thereto).
7. VALIDITY OF PURCHASE AGREEMENT. Except to the extent specifically
amended herein, all of the terms of the Purchase Agreement shall remain
unmodified.
2
<PAGE>
8. GOVERNING LAW. This Second 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.
9. COUNTERPARTS. This Second 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 Second Amendment as of the date first written
above.
COMPANY:
BIG ENTERTAINMENT, INC.
By: /s/ MITCHELL RUBENSTEIN
---------------------------------------
Mitchell Rubenstein, Chairman of
the Board and Chief Executive Officer
PURCHASER:
AURIC PARTNERS LIMITED
By: /s/ WILLIAM NICHOLSON
---------------------------------------
Name: William Nicholson
Title:
3
EXHIBIT 10.4
EXTENSION AND AMENDMENT AGREEMENT
THIS EXTENSION AND AMENDMENT AGREEMENT ("Agreement") is entered into as
of the 1st day of July, 1998 by and between Big Entertainment, Inc., a Florida
corporation (the "Company") and Laurie S. Silvers (the "Executive").
WITNESSETH:
WHEREAS, the Executive has served as President of the Company since its
inception, and presently serves in this capacity pursuant to a written
Employment Agreement with the Company entered into as of July 1, 1993 (the
"Current Employment Agreement"); and
WHEREAS, the five-year term of the Current Employment Agreement ends
July 1, 1998; and
WHEREAS, the Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel; and
WHEREAS, the Board of Directors (the "Board") of the Company recognizes
that the Executive's contribution to the growth and success of the Company has
been and will continue to be substantial and desires to assure the Company of
the Executive's continued employment in an executive capacity and to compensate
Executive therefor; and
WHEREAS, the Board has determined that entering into this Agreement to
extend and update the Current Employment Agreement will reinforce and encourage
the Executive's continued attention and dedication to the Company; and
WHEREAS, the Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
1. EXTENSION. The Current Employment Agreement is hereby extended for
an additional five-year term beginning on the date hereof and
ending on the fifth anniversary of said date unless sooner
terminated pursuant to the terms of said Current Employment
Agreement.
2. AMENDMENT TO REFLECT CURRENT BASE SALARY. Section 2.1 of the
Current Employment Agreement is amended to provide that the "Base
Salary" shall be $200,000 plus automatic cost of living adjustments
made to date and subject to adjustment in accordance with said
Section.
1
<PAGE>
The parties hereto acknowledge that the other terms of the Current Employment
Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on the day and year first above written.
COMPANY:
BIG ENTERTAINMENT, INC.,
a Florida corporation
/s/ MITCHELL RUBENSTEIN
-------------------------------------------
By: Mitchell Rubenstein
Title: Chief Executive Officer
EXECUTIVE:
/s/ LAURIE S. SILVERS
-------------------------------------------
Laurie S. Silvers
2
EXHIBIT 10.5
EXTENSION AND AMENDMENT AGREEMENT
THIS EXTENSION AND AMENDMENT AGREEMENT ("Agreement") is entered into as
of the 1st day of July, 1998 by and between Big Entertainment, Inc., a Florida
corporation (the "Company") and Mitchell Rubenstein (the "Executive").
WITNESSETH:
WHEREAS, the Executive has served as Chief Executive Officer of the
Company since its inception, and presently serves in this capacity pursuant to a
written Employment Agreement with the Company entered into as of July 1, 1993
(the "Current Employment Agreement"); and
WHEREAS, the five-year term of the Current Employment Agreement ends
July 1, 1998; and
WHEREAS, the Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel; and
WHEREAS, the Board of Directors (the "Board") of the Company recognizes
that the Executive's contribution to the growth and success of the Company has
been and will continue to be substantial and desires to assure the Company of
the Executive's continued employment in an executive capacity and to compensate
Executive therefor; and
WHEREAS, the Board has determined that entering into this Agreement to
extend and update the Current Employment Agreement will reinforce and encourage
the Executive's continued attention and dedication to the Company; and
WHEREAS, the Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
1. EXTENSION. The Current Employment Agreement is hereby extended for an
additional five-year term beginning on the date hereof and ending on
the fifth anniversary of said date unless sooner terminated pursuant to
the terms of said Current Employment Agreement.
2. AMENDMENT TO REFLECT CURRENT BASE SALARY. Section 2.1 of the Current
Employment Agreement is amended to provide that the "Base Salary" shall
be $200,000 plus automatic cost of living adjustments made to date and
subject to further adjustment in accordance with said Section.
1
<PAGE>
The parties hereto acknowledge that the other terms of the Current
Employment Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement on the day and year first above written.
COMPANY:
BIG ENTERTAINMENT, INC.,
a Florida corporation
/s/ LAURIE S. SILVERS
-------------------------------------------
By: Laurie S. Silvers
Title: President
EXECUTIVE:
/s/ MITCHELL RUBENSTEIN
-------------------------------------------
Mitchell Rubenstein
2
EXHIBIT 10.6
BIG ENTERTAINMENT, INC.
1993 STOCK OPTION PLAN
AS AMENDED JULY 2, 1998
1. PURPOSE. The purpose of this Plan is to advance the interests of BIG
ENTERTAINMENT, INC., a Florida corporation (the "Company"), by providing an
additional incentive to attract and retain qualified and competent persons as
employees or consultants or upon whose efforts and judgment the success of the
Company is largely dependent, through the encouragement of stock ownership in
the Company by such persons.
2. DEFINITIONS. As used herein, the following terms shall have the
meaning indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Committee" shall mean the stock option committee appointed by the
Board pursuant to Section 13 hereof or, if not appointed, the Board.
(c) "Common Stock" shall mean the Company's Common Stock, par value
$.01 per share.
(d) "Director" shall mean a member of the Board.
(e) "Disinterested Person" shall mean a Director who is not, during the
one year prior to his or her service as an administrator of this Plan, or during
such service, granted or awarded equity securities pursuant to this Plan or any
other plan of the Company or any of its affiliates, except that:
(i) participation in a formula plan meeting the conditions in
paragraph (c)(2)(ii) of Rule 16b-3 promulgated under the Securities Exchange Act
shall not disqualify a Director from being a Disinterested Person;
(ii) participation in an ongoing securities acquisition plan meeting
the conditions in paragraph (d)(2)(i) of Rule 16b-3 promulgated under the
Securities Exchange Act shall not disqualify a Director from being a
Disinterested Person; and
(iii) an election to receive an annual retainer fee in either cash
or an equivalent amount of securities, or partly in cash and partly in
securities, shall not disqualify a Director from being a Disinterested Person.
(f) "Fair Market Value" of a Share on any date of reference shall be
the "Closing Price" (as defined below) of the Common Stock on the business day
immediately preceding such date, unless the Common Stock is not publicly traded,
in which case, the "Fair Market Value" shall be the average of the price of
sales of Common Stock by the Company during the 90 days prior to the date of
grant or, if no sales have occurred during that period, "Fair Market Value"
shall be determined by the Committee in its sole discretion in a fair and
uniform manner without regard to any restriction other than a restriction
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which by its terms will never lapse. For the purpose of determining Fair Market
Value, the "Closing Price" of the Common Stock on any business day shall be (i)
if the Common Stock is listed or admitted for trading on any United States
national securities exchange, or if actual transactions are otherwise reported
on a consolidated transaction reporting system, the last reported sale price of
Common Stock on such exchange or reporting system, as reported in any newspaper
of general circulation, (ii) if the Common Stock is quoted on the National
Association of Securities Dealers Automated Quotations System ("NASDAQ"), or any
similar system of automated dissemination of quotations of securities prices in
common use, the mean between the closing high bid and low asked Quotations for
such day of Common Stock on such system, or (iii) if neither clause (i) or (ii)
is applicable, the mean between the high bid and low asked quotations for the
Common Stock as reported by the National Quotation Bureau, Incorporated if at
least two securities dealers have inserted both bid and asked quotations for
Common Stock on at least five of, the ten preceding days.
(g) "Incentive Stock Option" shall mean an incentive stock option as
defined in Section 422 of the Internal Revenue Code.
(h) "Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(i) "Non-Statutory Stock Option" shall mean an Option which is not an
Incentive Stock Option.
(j) "Officer" shall mean the Company's president, principal financial
officer, principal accounting officer and any other person who the Company
identifies as an "executive officer" for purposes of reports or proxy materials
filed by the Company pursuant to the Securities Exchange Act.
(k) "Option" (when capitalized) shall mean any option granted under
this Plan.
(l) "Optionee" shall mean a person to whom a stock option is granted
under this Plan or any person who succeeds to the rights of such person under
this Plan by reason of the death of such person.
(m) "Plan" shall mean this Stock Option Plan for the Company.
(n) "Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(o) "Share(s)" shall mean a share or shares of the Common Stock.
3. SHARES AND OPTIONS. The Company may grant to all Optionees from
time to time Options to purchase a total of one million five hundred thousand
(1,500,000) Shares from Shares held in the Company's treasury or from authorized
and unissued Shares. If any Option granted under the Plan shall terminate,
expire, or be canceled or surrendered as to any Shares, new Options may
thereafter be granted covering such Shares. An Option granted hereunder shall be
either an Incentive Stock Option or a Non-Statutory Stock Option as determined
by the Committee at the time of grant of such Option and shall clearly state
whether it is an Incentive Stock Option or Non-Statutory Stock Option. All
Incentive Stock Options shall be granted within 10 years from the effective date
of this Plan.
4. DOLLAR LIMITATION. Options otherwise qualifying as Incentive Stock
Options hereunder will not be treated as Incentive Stock Options to the extent
that the aggregate fair market value
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(determined at the time the Option is granted) of the Shares, with respect to
which Options meeting the requirements of Internal Revenue Code Section 422 are
exercisable for the first time by any individual during any calendar year (under
all plans of the Company), exceeds $100,000.
5. CONDITIONS FOR GRANT OF OPTIONS.
(a) Each Option shall be evidenced by an option agreement that may
contain any term deemed necessary or desirable by the Committee, provided such
terms are not inconsistent with this Plan or any applicable law. Optionees shall
be those persons selected by the Committee from the class of all regular
employees of the Company, and all consultants to the Company, whether or not
employees; provided, however, that no Incentive Stock Option shall be granted to
a consultant who is not also an employee of the Company or a Subsidiary. Any
person who files with the Committee, in a form satisfactory to the Committee, a
written waiver of eligibility to receive any Option under this Plan shall not be
eligible to receive any Option under this Plan for the duration of such waiver.
(b) In granting Options, the Committee may take into consideration the
contribution the person has made to the success of the Company and such other
factors as the Committee shall determine. The Committee shall also have the
authority to consult with and receive recommendations from officers and other
personnel of the Company with regard to these matters. The Committee may from
time to time in granting Options under the Plan prescribe such other terms and
conditions concerning such Options as it deems appropriate, including, without
limitation (i) prescribing the date or dates on which the Option becomes
exercisable, (ii) providing that the Option rights accrue or become exercisable
in installments over a period of years, or upon the attainment of stated goals
or both, or (iii) relating an Option to the continued employment of the Optionee
for a specified period of time, provided that such terms and conditions are not
more favorable to an Optionee than those expressly permitted herein.
(c) The Options granted to employees under this Plan shall be in
addition to regular salaries, pension, life insurance or other benefits related
to their employment with the Company. Neither the Plan nor any Option granted
under the Plan shall confer upon any person any right to employment or
continuance of employment by the Company.
(d) Notwithstanding any other provision of this Plan, and in addition
to any other requirements of this Plan, Options may not be granted to a Director
or Officer unless the grant of such Options is authorized by, and all of the
terms of such Options are determined by, a Committee that is appointed in
accordance with Section 13 of this Plan and all of whose members are
Disinterested Persons.
6. OPTION PRICE. The option price per Share of any Option shall be any
price determined by the Committee but shall not be less than the par value per
Share; provided, however, that in no event shall the option price per Share of
any Incentive Stock Option be less than the Fair Market Value of the Shares
underlying such Option on the date such Option is granted.
7. EXERCISE OF OPTIONS. An Option shall be deemed exercised when (i)
the Company has received written notice of such exercise in accordance with the
terms of the Option, (ii) full payment of the aggregate option price of the
Shares as to which the Option is exercised has been made, and (iii) arrangements
that are satisfactory to the Committee in its sole discretion have been made for
the Optionee's payment to the Company of the amount that is necessary for the
Company employing the
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Optionee to withhold in accordance with applicable federal or state tax
withholding requirements. Unless further limited by the Committee in any Option,
the option price of any Shares purchased shall be paid in cash, by certified or
official bank check, by money order, with Shares or by a combination of the
above; provided further, however, that the Committee in its sole discretion may
accept a personal check in full or partial payment of any Shares. If the
exercise price is paid in whole or in part with Shares, the value of the Shares
surrendered shall be their Fair Market Value on the date the Option is
exercised. The Company in its sole discretion may, on an individual basis or
pursuant to a general program established by the Committee in connection with
this Plan, lend money to an Optionee to exercise all or a portion of an Option
granted hereunder. If the exercise price is paid in whole or part with
Optionee's promissory note, such note shall (i) provide for full recourse to the
maker, (ii) be collateralized by the pledge of the Shares that the Optionee
purchases upon exercise of such Option, (iii) bear interest at a rate no less
than the rate of interest payable by the Company to its principal lender, and
(iv) contain such other terms as the Committee in its sole discretion shall
require. No Optionee shall be deemed to be a holder of any Shares subject to an
Option unless and until a stock certificate or certificates for such Shares are
issued to such person(s) under the terms of this Plan. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights for which the record date is
prior to the date such stock certificate is issued, except as expressly provided
in Section 10 hereof.
8. Exercisability of Options. Any Option shall become exercisable in
such amounts, at such intervals and upon such terms as the Committee shall
provide in such Option, except as otherwise provided in this Section 8.
(a) The expiration date of an Option shall be determined by the
Committee at the time of grant but in no event shall an Option be exercisable
after the expiration of 10 years from the date of grant of the Option.
(b) Unless otherwise provided in any Option, each outstanding Option
shall become immediately fully exercisable:
(i) if there occurs any transaction (which shall include a series
of transactions occurring within 60 days or occurring pursuant to a plan), that
has the result that shareholders of the Company immediately before such
transaction cease to own at least 51 percent of the voting stock of the Company
or of any entity that results from the participation of the Company in a
reorganization, consolidation, merger, liquidation or any other form of
corporate transaction;
(ii) if the shareholders of the Company shall approve a plan of
merger, consolidation, reorganization, liquidation or dissolution in which the
Company does not survive (unless the approved merger, consolidation,
reorganization, liquidation or dissolution is subsequently abandoned); or
(iii) if the shareholders of the Company shall approve a plan for
the sale, lease, exchange or other disposition of all or substantially all the
property and assets of the Company (unless such plan is subsequently abandoned).
(c) The Committee may in its sole discretion accelerate the date on
which any Option may be exercised and may accelerate the vesting of any Shares
subject to any Option or previously acquired by the exercise of any Option.
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(d) Options granted to Officers and Directors shall not be exercisable
until the expiration of a period of at least six months following the date of
grant.
9. TERMINATION OF OPTION PERIOD.
(a) The unexercised portion of any Option shall automatically and
without notice terminate and become null and void at the time of the earliest to
occur of the following:
(i) three months after the date on which the Optionee's employment
is terminated (or, in the case of a consultant, the date on which the Optionee
ceases his or her relationship with the Company) or, in the case of a
Non-Statutory Stock Option, and unless the Committee shall otherwise determine
in writing in its sole discretion, the date on which the Optionee's employment
is terminated, in either case for any reason other than by reason of (A) Cause,
which, solely for purposes of this Plan, shall mean the termination of the
Optionee's employment (or in the case of a consultant, the removal of the
Optionee as a consultant) by reason of the Optionee's willful misconduct or
gross negligence, (B) a mental or physical disability as determined by a medical
doctor satisfactory to the Committee, or (C) death;
(ii) immediately upon the termination of the Optionee's employment
for (or, in the case of a consultant, the removal of the Optionee as a
consultant) Cause;
(iii) one year after the date on which the Optionee's employment is
terminated (or, in the case of a consultant, the date the Optionee is removed as
a consultant) by reason of a mental or physical disability (within the meaning
of Internal Revenue Code Section 22(e)) as determined by a medical doctor
satisfactory to the Committee; or
(iv) twelve months after the date of termination of the Optionee's
employment (or, in the case of a consultant, the date the Optionee is removed as
a consultant) by reason of death of the employee.
Prior to becoming null and void as provided above, an Option held at the date of
termination of an Optionee's employment or consulting relationship with the
Company may be exercised in whole or in part, but only to the extent such Option
was exercisable at the date of such termination in accordance herewith.
(b) The Committee in its sole discretion may by giving written notice
("cancellation notice") cancel effective upon the date of the consummation of
any corporate transaction described in Subsections 8(b)(ii) or (iii) hereof any
Option that remains unexercised on such date. Such cancellation notice shall be
given a reasonable period of time prior to the proposed date of such
cancellation and may be given either before or after approval of such corporate
transaction.
10. ADJUSTMENT OF SHARES.
(a) If at any time while the Plan is in effect or unexercised Options
are outstanding, there shall be any increase or decrease in the number of issued
and outstanding Shares through the declaration of a stock dividend or through
any recapitalization resulting in a stock split-up, combination or exchange of
Shares, then and in such event:
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(i) appropriate adjustment shall be made in the maximum number of
Shares available for grant under the Plan, so that the same percentage of the
Company's issued and outstanding Shares shall continue to be subject to being so
optioned; and
(ii) appropriate adjustment shall be made in the number of Shares
and the exercise price per Share thereof then subject to any outstanding Option,
so that the same percentage of the Company's issued and outstanding Shares shall
remain subject to purchase at the same aggregate exercise price.
(b) Subject to the specific terms of any Option, the Committee may
change the terms of Options outstanding under this Plan, with respect to the
option price or the number of Shares subject to the Options, or both, when, in
the Committee's sole discretion, such adjustments become appropriate by reason
of a corporate transaction described in Subsections 8(b)(ii) or (iii) hereof;
provided, however, that the option price as so changed shall not be less than
the Fair Market Value of the shares subject to the Option at the time of such
change.
(c) Except as otherwise expressly provided herein, the issuance by the
Company of shares of its capital stock of any class, or securities convertible
into shares of capital stock of any class, either in connection with direct sale
or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to the number of or exercise price of Shares then subject
to outstanding Options granted under the Plan.
(d) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under the Plan shall not affect in any manner the
right or power of the Company to make, authorize or consummate (i) any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business; (ii) any merger or consolidation of
the Company; (iii) any issue by the Company of debt securities, or preferred or
preference stock that would rank above the Shares subject to outstanding
Options; (iv) the dissolution or liquidation of the Company; (v) any sale,
transfer or assignment of all or any part of the assets or business of the
Company; or (vi) any other corporate act or proceeding, whether of a similar
character or otherwise.
11. TRANSFERABILITY OF OPTIONS. Each Option shall provide that such
Option shall not be transferable by the Optionee otherwise than by will or the
laws of descent and distribution, and each Option shall be exercisable during
the Optionee's lifetime only by the Optionee.
12. ISSUANCE OF SHARES. As a condition of any sale or issuance of
Shares upon exercise of any Option, the Committee may require such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to assure
compliance with any such law or regulation including, but not limited to, the
following:
(i) a representation and warranty by the Optionee to the Company,
at the time any option is exercised that he is acquiring the Shares to be issued
to him for investment and not with a view to, or for sale in connection with,
the distribution of any such Shares; and
(ii) a representation, warranty and/or agreement to be bound by any
legends that are, in the opinion of the Committee, necessary or appropriate to
comply with the provisions of any
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securities law deemed by the Committee to be applicable to the issuance of the
Shares and are endorsed upon the Share certificates.
13. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Committee, which shall
consist of not less than two Directors, each of whom shall be Disinterested
Persons to the extent required by Section 5(d) hereof. The Committee shall have
all of the powers of the Board with respect to the Plan. Any member of the
Committee may be removed at any time, with or without cause, by resolution of
the Board and any vacancy occurring in the membership of the Committee may be
filled by appointment by the Board.
(b) The Committee, from time to time, may adopt rules and regulations
for carrying out the purposes of the Plan. The Committee's determinations and
its interpretation and construction of any provision of the Plan shall be final
and conclusive.
(c) Any and all decisions or determinations of the Committee shall be
made either (i) by a majority vote of the members of the Committee at a meeting
or (ii) without a meeting by the unanimous written approval of the members of
the Committee.
14. INCENTIVE OPTIONS FOR 10% SHAREHOLDERS. Notwithstanding any other
provisions of the Plan to the contrary, an Incentive Stock Option shall not be
granted to any person owning directly or indirectly (through attribution under
Section 424(d) of the Internal Revenue Code) at the date of grant, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company (or of any subsidiary (as defined in Section 424 of the
Internal Revenue Code) at the date of grant) unless the option price of such
Option is at least 110% of the Fair Market Value of the Shares subject to such
Option on the date the Option is granted, and such Option by its terms is not
exercisable after the expiration of five years from the date such Option is
granted.
15. INTERPRETATION.
(a) The Plan shall be administered and interpreted so that all
Incentive Stock Options granted under the Plan will qualify as Incentive Stock
Options under Section 422 of the Internal Revenue Code. If any provision of the
Plan should be held invalid for the granting of Incentive Stock Options or
illegal for any reason, such determination shall not affect the remaining
provisions hereof, but instead the Plan shall be construed and enforced as if
such provision had never been included in the Plan.
(b) This Plan shall be governed by the laws of the State of Florida.
(c) Headings contained in this Plan are for convenience only and shall
in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine, or neuter gender shall be
a reference to such other gender as is appropriate.
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16. TERM OF PLAN; AMENDMENT AND TERMINATION OF THE PLAN.
(a) This Plan shall become effective upon its adoption by the Board,
and shall continue in effect until all Options granted hereunder have expired or
been exercised, unless sooner terminated under the provisions relating thereto.
No Option shall be granted after 10 years from the date of the Board's adoption
of this Plan.
(b) The Board may from time to time amend the Plan or any Option;
provided, however, that, except to the extent provided in Section 10, no such
amendment may (i) without approval by the Company's shareholders, increase the
number of Shares reserved for Options or change the class of persons eligible to
receive Options or involve any other change or modification requiring
shareholder approval under Rule 16b-3 of the Securities Exchange Act of 1934, as
amended, (ii) permit the granting of Options that expire beyond the maximum
10-year period described in Subsection 8(a), or (iii) extend the termination
date of the Plan as set forth in Section 16(a); and, PROVIDED, FURTHER, that,
except to the extent otherwise specifically provided in Section 9, no amendment
or suspension of the Plan or any Option issued hereunder shall substantially
impair any Option previously granted to any Optionee without the consent of such
Optionee.
(c) Notwithstanding anything else contained herein, the provisions of
this Plan which govern the number of Options to be awarded hereunder, the
exercise price per share under each such Option, when and under what
circumstances an Option will be granted and the period within which each Option
may be exercised, shall not be amended more than once every six months (even
with shareholder approval), other than to conform to changes to the Code, or the
rules promulgated thereunder, and under the Employee Retirement Income Security
Act of 1974, as amended, or the rules promulgated thereunder, or with rules
promulgated by the Securities and Exchange Commission.
(d) The Board, without further approval of the Company's shareholder,
may at any time terminate or suspend this Plan. Any such termination or
suspension of the Plan shall not affect Options already granted and such Options
shall remain in full force and effect as if this Plan had not been terminated or
suspended. No Option may be granted while the Plan is suspended or after it is
terminated. The rights and obligations under any Option granted to any Optionee
while this Plan is in effect shall not be altered or impaired by the suspension
or termination of this Plan without the consent of such Optionee.
17. RESERVATION OF SHARES. The Company, during the term of the Plan,
will at all times reserve and keep available a number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
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EXHIBIT 10.7
BIG ENTERTAINMENT, INC.
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DIRECTORS STOCK OPTION PLAN
(As Amended Effective July 2, 1998)
1. PURPOSE. The purpose of this Plan is to advance the interests of BIG
ENTERTAINMENT, INC., a Florida corporation, by providing an additional incentive
to attract and retain directors who are neither employees nor consultants
through the encouragement of stock ownership in the Company by such persons.
2. DEFINITIONS. As used herein, the following terms shall have the
meaning indicated:
(a) "Annual Meeting Date" shall mean the date of the annual meeting
of the Company's shareholders at which the Directors are elected.
(b) "Board" shall mean the Company's Board of Directors.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the stock option committee appointed by
the Board pursuant to Section 12 hereof or if not appointed, the Board.
(e) "Common Stock" shall mean the Common Stock, par value $.01 per
share, of the Company.
(f) "Company" shall mean BIG ENTERTAINMENT, INC., a Florida
corporation.
(g) "Director" shall mean a member of the Board.
(h) "Eligible Director" means any person who is a member of the
Board and who is not an employee, full time or part time, of or consultant
to the Company. For purposes of this Plan, a director who does not receive
regular compensation from the Company or its subsidiaries, other than
directors' fees and reimbursement for expenses, shall not be considered to
be an employee or consultant of the Company, even if such director is an
officer of the Company or a subsidiary of the Company.
(i) "Fair Market Value" of a Share on any date of reference shall be
the "Closing Price" (as defined below) of the Common Stock on the business
day immediately preceding such date, unless the Common Stock is not
publicly traded, in which case, "Fair Market Value" shall be the average
of the price of sales of Common Stock by the Company during the 90 days
prior to the date of grant or, if no sales have occurred during that
period "Fair Market Value" shall be as determined by the
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Committee in its sole discretion in a fair and uniform manner;
provided, that for purposes of grants made on the Initial Grant Date to
persons are Eligible Directors on the Effective Date, the term "Fair
Market Value" shall mean the initial public offering price per share of
Common Stock. For this purpose, the "Closing Price" of the Common Stock on
any business day shall be (i) if such Common Stock is listed or admitted
for trading on any United States national securities exchange, or if
actual transactions are otherwise reported on a consolidated transaction
reporting system, the last reported sale price of Common Stock on such
exchange or reporting system, as reported in any newspaper of general
circulation, (ii) if the Common Stock is quoted on the National
Association of Securities Dealers Automated Quotations System or any
similar system of automated dissemination of quotations of securities
prices in common use, the mean between the closing high bid and low asked
quotations for such day of the Common Stock on such system, or (iii) if
neither clause (i) or (ii) is applicable, the mean between the high bid
and low asked quotations for the Common Stock as reported by the National
Quotation Bureau, Incorporated if at least two securities dealers have
inserted both bid and asked quotations for the Common Stock on at least
five of the ten preceding days.
(j) "Initial Grant Date" means (i) in the case persons who are or
become Eligible Directors of the Company on the effective date of the
Company's Registration Statement on Form SB-2 (the "Effective Date") to be
filed with the Securities and Exchange Commission in connection with the
Company's initial public offering, the Effective Date and (ii) in all
other cases, the date on which a person is elected as a member of the
Board.
(k) "Option" (when capitalized) shall mean any option granted under
this Plan.
(l) "Option Agreement" means the agreement between the Company and
the Optionee for the grant of an option.
(m) "Optionee" shall mean a person to whom a stock option is granted
under this Plan or any person who succeeds to the rights of such person
under this Plan by reason of the death of such person.
(n) "Parent" means a "parent corporation" as defined in Section
425(e) and (g) of the Code.
(o) "Plan" shall mean this Directors Stock Option Plan for the
Company.
(p) "Share(s)" shall mean a share or shares of the Common Stock.
(q) "Subsidiary" shall mean any corporation (other than the Company)
in any unbroken chain of corporations beginning with the Company if, at
the time of the granting of the Option, each of the corporations other
than the last corporation in the unbroken chain owns stock possessing 50
percent or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
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3. SHARES AND OPTIONS. Subject to Section 9 of this Plan, the Company
may grant to all Optionees from time to time Options to purchase a total of one
hundred thousand (100,000) Shares from authorized and unissued Shares. If any
Option granted under the Plan shall terminate, expire, or be canceled or
surrendered as to any Shares, new Options may thereafter be granted covering
such Shares.
4. GRANTS OF OPTIONS.
(a) On the Initial Grant Date, each Eligible Director shall receive
the grant of an Option to purchase Shares having a Fair Market Value at
the time of grant equal to $25,000.
(b) Each Eligible Director shall receive an annual grant of an
Option to purchase Shares having a Fair Market Value at the time of
grant equal to $25,000, on each Annual Meeting Date subsequent to his
election as a director of the Company or commencement of the Plan,
beginning with the first Annual Meeting Date after the Initial Grant
Date for each such Eligible Director.
(c) Upon the grant of each Option, the Company and the Eligible
Director shall enter into an Option Agreement, which shall specify the
grant date and the exercise price and shall include or incorporate by
reference the substance of this Plan and such other provisions
consistent with this Plan as the Committee may determine.
5. EXERCISE PRICE. The exercise price per Share of any Option shall be
the Fair Market Value of the Shares underlying such Option on the date such
Option is granted.
6. EXERCISE OF OPTIONS. An Option shall be deemed exercised when (i)
the Company has received written notice of such exercise in accordance with the
terms of the Option, (ii) full payment of the aggregate exercise price of the
Shares as to which the Option is exercised has been made, and (iii) arrangements
that are satisfactory to the Committee in its sole discretion have been made for
the Optionees payment to the Company of the amount that is necessary for the
Company to withhold in accordance with applicable federal or state tax
withholding requirements. The exercise price of any Shares purchased shall be
paid in cash, by certified or official bank check or personal check, by money
order, with Shares or by a combination of the above. If the exercise price is
paid in whole or in part with Shares, the value of the Shares surrendered shall
be their Fair Market Value on the date the Option is exercised. No Optionee
shall be deemed to be a holder of any Shares subject to an Option unless and
until a stock certificate or certificates for such Shares are issued to such
person(s) under the terms of the Plan. No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as expressly provided in Section 9
hereof.
7. EXERCISABILITY OF OPTIONS.
(a) Each Option granted hereunder shall not be exercisable until
after six months following its grant to an Eligible Director.
Thereafter, such option shall be exercisable in full. The expiration
date of an Option shall be 10 years after the date of grant of the
Option.
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(b) Unless otherwise provided in any Option, each outstanding Option
shall become immediately fully exercisable:
(i) if there occurs any transaction (which shall include a series of
transactions within 60 days or occurring pursuant to a plan), that has
the result that shareholders of the Company immediately before such
transaction cease to own at least 51 percent of the voting stock of the
Company or of any entity that results from the participation of the
Company in a reorganization, consolidation, merger, liquidation or any
other form of corporate transaction;
(ii) if the shareholders of the Company shall approve a plan of
merger, consolidation, reorganization, liquidation or dissolution in
which the Company does not survive (unless the approved merger,
consolidation, reorganization, liquidation or dissolution is
subsequently abandoned); or(iii)if the shareholders of the Company
shall approve a plan for the sale, lease, exchange or other disposition
of all or substantially all the property and assets of the Company
(unless such plan is subsequently abandoned).
8. TERMINATION OF OPTION PERIOD.
(a) The unexercised portion of any Option shall automatically and
without notice terminate and become null and void at the time of the
earliest to occur of the following:
(i) one year after the date on which the Optionee ceases to be a
Director for any reason other than by reason of Cause, which, for
purposes of this Plan, shall mean the removal of the Optionee as a
Director by reason of any act of (1) fraud or intentional
misrepresentation or (2) embezzlement, misappropriation, or
conversion of assets or opportunities of the Company or any
Subsidiary; and
(ii) immediately upon the removal of the Optionee as a Director
for Cause.
Prior to becoming null and void as provided above, an Option held at the date on
which an Optionee ceases to be a Director of the Company may be exercised in
whole or in part, but only to the extent such Option was exercisable at the date
of such Optionee ceased to be a Director.
(b) The Committee in its sole discretion may, by giving written
notice ("Cancellation Notice"), cancel any Option that remain,
unexercised on the date of the consummation of any corporate
transaction:
(i) if the shareholders of the Company shall approve a plan of
merger, consolidation, reorganization, liquidation or dissolution in
which the Company does not survive (unless the approved merger,
consolidation, reorganization, liquidation or dissolution is
subsequently abandoned); or
4
<PAGE>
(ii) if the shareholders of the Company shall approve a plan for
the sale, lease, exchange or other disposition of all or
substantially all the property and assets of the Company (unless
such plan is subsequently abandoned); or
(iii) provided that Cancellation Notice shall be given a
reasonable period of time prior to the proposed date of such
cancellation, upon the giving of a Cancellation Notice, all Options
shall vest in full and at any time prior to the date of cancellation
the Option may be exercised in whole or in part.
9. Adjustment of Shares.
(a) If at any time while the Plan is in effect or unexercised Options
are outstanding, there shall be any increase or decrease in the number
of issued and outstanding Shares through the declaration of a stock
dividend or through any recapitalization resulting in a stock split-up,
combination or exchange of Shares, then and in such event:
(i) appropriate adjustment shall be made in the maximum number of
Shares available for grant under the Plan, so that the same
percentage of the Company's issued and outstanding Shares shall
continue to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the number of Shares
and the exercise price per Share thereof then subject to any
outstanding Option, so that the same percentage of the Company's
issued and outstanding Shares shall remain subject to purchase at
the same aggregate exercise price.
(b) Subject to the specific terms of any Option, the Committee may
change the terms of Options outstanding under this Plan with respect to
the exercise price or the number of Shares subject to the Options, or
both, when, in the Committee's sole discretion, such adjustments become
appropriate by reason of a corporate transaction described in
Subsections 8(b)(i) or (ii) hereof.
(c) Except as otherwise expressly provided herein, the issuance by
the Company of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in
connection with a direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or
obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or exercise price of the Shares
then subject to outstanding Options granted under the Plan.
(d) Without limiting the generality of the foregoing, the existence
of outstanding Options granted under the Plan shall not affect in any
manner the right or power of the Company to make, authorize or
consummate (i) any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or
its business; (ii) any merger or consolidation of the Company; (iii)
any issue by the Company of debt securities, or preferred or preference
stock that would rank above the Shares subject to outstanding Options;
(iv) the dissolution or liquidation of the Company;
5
<PAGE>
(v) any sale, transfer or assignment of all or any part of the
assets or business of the Company; or (vi) any other corporate act or
proceeding, whether of a similar character or otherwise.
10. TRANSFERABILITY OF OPTIONS. Each Option shall not be transferable
by the Optionee otherwise than by will or the laws of descent and distribution,
and each Option shall be exercisable during the Optionee's lifetime only by the
Optionee.
11. ISSUANCE OF SHARES. As a condition of any sale or issuance of
Shares upon exercise of any Option, the Committee may require such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to assure
compliance with any such law or regulation including, but not limited to, the
following:
(a) A representation and warranty by the Optionee to the Company, at
the time any Option is exercised, that he is acquiring the Shares to be
issued to him for investment and not with a view to, or for sale in
connection with, the distribution of any such Shares; and
(b) A representation, warranty and/or agreement to be bound by any
legends that are, in the opinion of the Committee, necessary or
appropriate to comply with the provisions of any securities law deemed
by the Committee to be applicable to the issuance of the Shares and are
endorsed upon the Share certificates.
12. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Committee of not less than
two Directors who are not Eligible Directors. Any member of the
Committee may be removed at any time, with or without cause, by
resolution of the Board and any vacancy occurring in the membership of
the Committee may be filled by appointment by the Board.
(b) The Committee, from time to time, may adopt rules and
regulations for the purposes of the Plan. The Committee's
determinations and its interpretation and construction of any provision
of the Plan shall be final and conclusive.
(c) Any and all decisions or determinations of the Committee shall
be made either (i) by a majority vote of the members of the Committee
at a meeting or (ii) without a meeting by the unanimous written
approval of the members of the Committee.
13. INTERPRETATION.
(a) If any provision of the Plan should be held invalid or illegal
for any reason, such determination shall not affect the remaining
provisions hereof but instead the Plan shall be construed and enforced
as if such provision had never been included in the Plan. The
determinations and the interpretation and construction of any provision
of the Plan by the Committee shall be final and conclusive.
(b) This Plan shall be governed by the laws of the State of Florida.
6
<PAGE>
(c) Headings contained in this Plan are for convenience only and
shall in no manner be construed as part of this Plan.
(d) Any reference to the, masculine, feminine or neuter gender shall
be a reference to such other gender as is appropriate.
14. TERM OF PLAN; AMENDMENT AND TERMINATION OF THE PLAN.
(a) Plan shall become effective upon its adoption by the Board, and
shall continue in effect until all Options granted hereunder have
expired or been exercised, unless sooner terminated under the
provisions relating thereto. No Option shall be granted after 10 years
from the date of the Board's adoption of this Plan.
(b) The Board may from time to time amend the Plan or any Option;
PROVIDED, HOWEVER, that, except to the extent provided in Section 9, no
such amendment may (i) without approval by the Company's shareholders,
increase the number of Shares reserved for Options or change the class
of persons eligible to receive Options or involve any other change or
modification requiring shareholder approval under Rule 16b-3 of the
Securities Exchange Act of 1934, as amended, (ii) permit the granting
of Options that expire beyond the 10-year period described in
Subsection 7(a), or (iii) extend the termination date of the Plan as
set forth in Section 14(a); and, provided, further, that, except to the
extent otherwise specifically provided in Section 8, no amendment or
suspension of the Plan or any Option issued hereunder shall
substantially impair any Option previously granted to any Optionee
without the consent of such Optionee.
7
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