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 March 31, 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 May 8, 1998, the number of shares outstanding of the issuer's
Common Stock, $.01 par value, was 7,302,328.
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BIG ENTERTAINMENT, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE(S)
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Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997..............................3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 (unaudited)...............4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 (unaudited)...............5
Notes to Condensed Consolidated Financial Statements
(unaudited)...................................................6-9
Item 2. Management's Discussion and Analysis or Plan of Operation......10-23
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................24
Item 6. Exhibits and Reports on Form 8-K................................24
Signature ................................................................25
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 329,686 $ 887,153
Receivable from shareholders 987,500 -
Trade receivables, net 257,400 243,168
Merchandise inventories 2,061,781 2,417,224
Prepaid expenses 380,301 548,206
Franchise fee receivable - 350,000
Other current assets 146,282 163,099
----------- -----------
Total current assets 4,162,950 4,608,850
PROPERTY AND EQUIPMENT, net 4,023,291 4,069,171
INVESTMENT IN NETCO PARTNERS 1,371,286 1,533,567
INTANGIBLE ASSETS, net 160,396 163,393
GOODWILL, net 320,957 325,817
OTHER ASSETS 653,423 531,523
DEFERRED TAX ASSET 1,407,600 1,407,600
----------- -----------
TOTAL ASSETS $12,099,903 $12,639,921
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,422,470 $ 2,108,202
Revolving line of credit 871,530 535,000
Accrued professional fees 115,644 205,313
Other accrued expenses 362,331 559,050
Deferred revenue 485,176 839,084
Loan from shareholder/officer 1,016,000 85,000
Current portion of capital lease obligations 807,057 768,714
----------- -----------
Total current liabilities 5,080,208 5,100,363
----------- -----------
CAPITAL LEASE OBLIGATIONS, less current portion 1,661,957 1,803,344
----------- -----------
CONVERTIBLE DEBENTURE, net 333,062 542,250
----------- -----------
MINORITY INTEREST 177,401 90,111
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 540,177 shares authorized;
none outstanding. - -
Series A variable rate convertible preferred stock, $6.25
stated value, 217,600 shares authorized; 217,600 issued
and outstanding. Liquidation preference of $1,562,912
at March 31, 1998 1,360,000 1,360,000
Series B variable rate convertible preferred stock, $5.21
stated and liquidation value, 142,223 shares authorized;
122,846 issued and outstanding at March 31,1998 and
December 31, 1997. 640,000 640,000
Series C, 4% convertible preferred stock, $100 stated
value, 100,000 shares authorized; 20,000 issued and
outstanding at March 31,1998 and December 31, 1997.
Liquidation preference of $2,000,000 at March 31,1998. 2,000,000 2,000,000
Common stock, $.01 par value, 25,000,000 shares authorized;
7,237,185 and 6,896,340 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively. 72,372 68,963
Additional paid-in capital 26,970,544 25,671,900
Warrants outstanding 672,831 586,600
Accumulated deficit (26,868,472) (25,223,610)
----------- -----------
Total shareholders' equity 4,847,275 5,103,853
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,099,903 $ 12,639,921
========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these consolidated balance sheets.
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
NET REVENUES $ 2,709,936 $ 1,704,155
COST OF SALES 1,105,525 954,405
---------------- ----------------
Gross profit 1,604,411 749,750
---------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative 1,946,406 1,146,580
Salaries and benefits 1,086,013 950,461
Amortization of goodwill and intangibles 7,853 113,145
---------------- ----------------
Total operating expenses 3,040,272 2,210,186
---------------- ----------------
Operating loss (1,435,861) (1,460,436)
EQUITY IN EARNINGS OF NETCO PARTNERS 169,182 3,167
OTHER:
Interest, net (234,588) (49,108)
Other, net 12,697 10,219
---------------- ----------------
Loss before minority interest (1,488,570) (1,496,158)
MINORITY INTEREST (94,374) (31,980)
---------------- ----------------
Net loss $ (1,582,944) $ (1,528,138)
================ ================
Basic and diluted loss per common share $ (0.24) $ (0.27)
================ ================
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these consolidated statements.
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,582,944) $ (1,528,138)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 218,446 282,673
Equity in earnings of Netco Partners, net of (invested)/return
of capital 162,281 (74,866)
Issuance of compensatory stock options and warrants 7,789 17,662
Recognition of deferred gain (10,097) (10,097)
Amortization of deferred financing costs 30,043 12,441
Amortization of discount on convertible debentures 80,812 -
Minority interest 94,374 31,980
Changes in assets and liabilities:
Receivables 335,768 (34,359)
Prepaid expenses 217,502 120,258
Merchandise inventories 355,443 (92,998)
Other current assets 16,817 (5,306)
Other assets (151,943) 145,927
Accounts payable (685,732) (34,218)
Accrued professional fees (89,669) 39,050
Deferred revenue (343,811) (7,512)
Other accrued expenses (185,102) 26,004
----------- -----------
Net cash used in operating activities (1,530,023) (1,111,499)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (126,907) -
Investment in patents and trademarks - (330)
Return of capital from Tekno Books to minority partner (7,084) (89,480)
----------- -----------
Net cash used in investing activities (133,991) (89,810)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock (540) -
Net proceeds from revolving line of credit 336,530 -
Net proceeds from shareholder/officer loan 931,000 200,000
Proceeds from the issuance of warrants - 4,100
Dividends on preferred stock (20,000) (20,000)
Repayments under capital lease obligations (140,443) (108,371)
----------- -----------
Net cash provided by financing activities 1,106,547 75,729
----------- -----------
Net decrease in cash and cash equivalents (557,467) (1,125,580)
CASH AND CASH EQUIVALENTS, beginning of period 887,153 1,675,852
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 329,686 $ 550,272
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 108,429 $ 49,178
=========== ===========
</TABLE>
Non-Cash Investing and Financing Activities:
In Q1-97 the Company entered into capital lease transactions totaling
$15,320.
In Q1-97 the Company accrued stock dividends on Series A and B Convertible
Preferred Stock in the amount of $30,230.
In Q1-98 the Company entered into capital lease transactions totaling
$93,399.
In Q1-98 the Company issued 10,430 shares of restricted common stock valued
at $50,000 to an employee.
In Q1-98 the Company issued common stock to certain equity investors.
Receivable from shareholders of $987,500, additional paid in capital of
$861,396, common stock of $2,373, warrants outstanding of $86,231 and
accrued expenses of $37,500 were recorded.
In Q1-98 the Company recorded dividends on Series A and B Convertible
Preferred Stock in the amount of $41,918, which were paid through the
issuance of 8,801 shares of common stock.
In Q1-98 the Company recorded the conversion of $290,000 of convertible
debentures, plus accrued interest, into 77,653 shares of common stock.
The accompanying notes to condensed consolidated financial statements are an
integral part of these consolidated statements.
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BIG ENTERTAINMENT INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION:
In the opinion of management, the accompanying condensed 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 months ended March 31,
1998 are not necessarily indicative of the results of operations or cash flows
which may be recorded for the remainder of 1998.
The accompanying condensed 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 (9.5% at March
31, 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 March 31, 1998, the Company's outstanding balance on the line of credit was
$871,530, 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 anticipates that it will need to modify the business
plan originally submitted to BankBoston and have such plan approved by
BankBoston in order to be in compliance with all such covenants throughout 1998.
Although there can be no assurance such modified plan will be approved, the
Company does not anticipate that such covenants and limitations will materially
adversely affect the Company.
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. The line of credit bears interest at the
JP Morgan Bank prime rate of interest. The outstanding balance under this line
of credit was $1,016,000 at March 31, 1998. In addition, the Company's Chairman
of the Board and Chief Executive Officer and the Company's Vice Chairman and
President, have represented that they would provide the Company, if required,
with an amount not to exceed $2.5 million during 1998 in order to enable the
Company to meet its working capital
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requirements for the balance of 1998; provided, however, that the commitment
will terminate in the event the Company raises no less than $2.5 million from
other sources during the year. In the event that the Company raises less than
$2.5 million, the dollar amount of the commitment will be reduced on a "dollar
for dollar" basis to the extent of such funds raised by the Company. This
commitment is in addition to the existing $1.1 million credit facility extended
by these executives. Any such working capital financing provided to the Company
by the Company's Chairman and Chief Executive Officer and the Company's Vice
Chairman and President will be upon terms negotiated and agreed to between them
and the Company's Board of Directors.
In August 1997, the Company issued a $650,000 convertible debenture to a single
institutional investor. The debenture accrues interest at 4% per annum, which is
payable in arrears on August 31, 1999, the maturity date of the debenture. The
debenture is convertible by the holder into shares of the Company's common stock
at a conversion price equal to 80% of the average closing bid price for the ten
trading days immediately preceding the date of conversion. The conversion
features restrict the maximum principal amount of the debenture which can be
converted through April 29, 1998. The debenture is redeemable at the option of
the Company at 125% of the principal amount plus accrued interest. The Company
can require the holder of the debenture to convert any portion of the debenture
still outstanding on the maturity date. As of March 31, 1998, $360,000 of the
debenture remained outstanding and $290,000 of the debenture had been converted.
In conjunction with issuance of the debenture, the buyer received warrants to
buy 32,499 shares of common stock at exercise prices ranging from $6.00 to $6.53
per share. The warrants expire March 2, 2003. The Company recorded the
convertible debenture net of a discount of $215,500 attributable to the
intrinsic value of the nondetachable conversion feature. The discount is being
amortized as interest expense from the date of issuance through April 1998, the
earliest date the investor can convert the entire debenture. The discount
balance at March 31, 1998 is $26,938.
(3) COMMON STOCK:
On March 31, 1998, the Company sold 237,321 shares of its common stock to three
accredited investors under separate stock purchase agreements. In conjunction
with the sale of these shares, the Company issued five-year warrants to one
investor to purchase 50,000 shares of the Company's Common Stock at $4.66 per
share. The gross proceeds of $987,500 from the sale of these securities were
received in April 1998. Expenses related to the issuance of these securities
totaling $37,500 were accrued as of March 31, 1998. In April 1998, the Company
issued 10,732 additional shares of Common Stock and 5,000 additional warrants
for gross proceeds of $50,000 to two other accredited investors under similar
terms. 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.
(4) FRANCHISE FEE INCOME:
Net revenues for the three months ended March 31, 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) LOSS PER COMMON SHARE:
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.
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The computation of weighted average common and common equivalent shares used in
the calculation of basic and diluted loss per share is shown below.
For the Three Months Ended March 31,
1998 1997
----------- -----------
Net loss $(1,582,944) $(1,528,138)
Less: Preferred Stock Dividends
Series A and B (41,918) (31,323)
Series C (20,000) (20,000)
----------- -----------
Loss Available to Common
Shareholders (1,644,862) (1,579,461)
Weighted Average Number of
Shares Outstanding 6,908,942 5,870,601
----------- -----------
Basic and Diluted Loss Per Share $(0.24) $(0.27)
=========== ===========
Options and warrants to purchase 1,949,648 shares of common stock at exercise
prices ranging from $.01 to $13.20 per share were outstanding during the first
quarter of 1998 and were not included in the computation of basic and diluted
loss per share because the result would be antidilutive.
(6) 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 of selected information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS 131 beginning
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.
(7) 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 LLC ("Huge Entertainment"), in
exchange for equity ownership and an aggregate of $8 million in promissory notes
from Huge Entertainment. In exchange for 51.75% of the equity of Huge
Entertainment and a promissory note in the amount of $4,140,000, the Company is
contributing (i) 100% of the intellectual properties presently owned by the
Company, (ii) the Company's 50% ownership interest in NetCo Partners, and (iii)
the Company's 51% interest in Tekno Books. In exchange for 46.05% of the equity
of Huge Entertainment and a promissory note in the amount of $3,684,000, C.P.
Group is contributing (i) its 50% ownership interest in NetCo Partners, and (ii)
two additional intellectual properties created by Tom Clancy - TOM CLANCY'S
CYBERNATION and TOM CLANCY'S TOP SECRET. In exchange for 2.20% of the equity in
Huge Entertainment and a promissory note in the amount of $176,000, Dr.
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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. It is anticipated that the transaction will be completed during the
second or third quarter of 1998.
The promissory notes bear interest at the Citibank, N.A. prime rate and mature
in seven years. Any payments on the notes will be made pro rata to all note
holders. The notes provide for optional prepayment without penalty and mandatory
prepayment (except in certain limited circumstances) in the event of an initial
public offering or other issuance of equity by Huge Entertainment.
(8) INCOME TAXES
A deferred tax asset and income tax benefit of $1,407,600 was recorded in the
fourth quarter of 1997. As a result of the transaction discussed above, net
income of approximately $4.1 million is expected to be generated which will
utilize a portion of the loss carryforward that exists as a result of operating
losses generated from inception (January 22, 1993) to March 31, 1998, thus
generating a deferred tax asset.
(9) RECLASSIFICATION:
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 classification.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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
and acquisition 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 operating history; operating losses and accumulated deficit;
its ability to manage and finance growth; dependence on relationships with
authors; risks related to retail operations; competition; dependence on
management; risks related to trademarks and proprietary rights; 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 engaged in the
development and licensing of intellectual properties, the development and
licensing of books, and the operation of entertainment-related retail stores.
Big Entertainment conducts these activities through the Company and its wholly
and majority-owned subsidiaries, as well as through a joint venture known as
NetCo Partners, in which the Company has a 50% ownership interest. The Company
has agreed to contribute its intellectual properties to a newly formed entity,
Huge Entertainment, LLC ("Huge Entertainment") which is discussed on page 13.
Upon consummation of this transaction, which is anticipated to be completed
during the second or third quarter of 1998, the Company will have a 51.75%
ownership interest in Huge Entertainment, and it will conduct all of its
intellectual properties activities through Huge Entertainment.
Pending the consummation of the Huge Entertainment transaction, the Company has
two current operating divisions: the intellectual properties division and the
entertainment retail division.
The intellectual properties division owns the exclusive rights to certain
original characters and concepts, created by best-selling authors and media
celebrities, which it licenses across all media, including books, films and
television, multi-media software, toys and other products. The Company and NetCo
Partners acquire the rights to these intellectual properties pursuant to
agreements that generally grant them the exclusive rights to the intellectual
properties and the right to use the creator's name in the titles of the
intellectual properties (i.e., TOM CLANCY'S NET FORCE, MICKEY SPILLANE'S MIKE
DANGER, LEONARD NIMOY'S PRIMORTALS). The intellectual properties division also
includes a book licensing and packaging operation which focuses on developing
and executing book projects, frequently with best-selling authors, which books
are then licensed for publication to book publishers such as HarperCollins,
Bantam Doubleday Dell, Random House, Simon & Schuster, Viking Press and Warner
Books.
The entertainment retail division operates a chain of retail studio stores and
"Entertainment Super/bullet/Kiosks" that sell entertainment-related merchandise.
Although all of the retail outlets are currently Company-operated, Big
Entertainment has entered into two separate franchise agreements that provide in
certain limited territorial areas for the future development of franchised Big
Entertainment studio stores and Super/bullet/Kiosks in those areas. In addition,
the Company has an agreement with The ABC Television Network ("ABC"), a division
of The Walt Disney Company ("Disney") pursuant to which the entertainment retail
division runs ABC video clips on the television monitors in the Entertainment
Super/bullet/Kiosks in exchange for promotional and advertising spots on ABC
affiliate television stations.
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INTELLECTUAL PROPERTIES DIVISION
INTELLECTUAL PROPERTIES & LICENSING ACTIVITIES. The Company's intellectual
properties have been acquired and developed pursuant to agreements with
best-selling authors and media celebrities, which agreements generally grant the
Company all rights (including the rights to all media 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 other products featuring the intellectual
properties. The Company seeks when possible to license its intellectual
properties on terms that provide to the Company advance payments against
royalties to be earned and that minimize or eliminate the Company's additional
development costs going forward.
The Company's 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; and NEIL GAIMAN'S WHEEL OF WORLDS.
The Company's licensing agreements include:
/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 LEONARD NIMOY'S
PRIMORTALS.
/bullet/ A 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.
/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.)
/bullet/ A joint publishing agreement with Miramax Books and Hyperion Books,
both divisions of Disney, for publication of a book based on
MICKEY SPILLANE'S MIKE DANGER.
/bullet/ A licensing agreement with Books on Tape, Inc. for production of
unabridged audio recordings of two prose novels based on ANNE
MCCAFFREY'S ACORNA: THE UNICORN GIRL.
/bullet/ Various foreign licensing agreements for publication of both
LEONARD NIMOY'S PRIMORTALS and ANNE MCCAFFREY'S ACORNA: THE
UNICORN GIRL in countries outside the United States and Canada.
Other significant licensing activities are carried out by the Company through
its NetCo Partners joint venture. These licensing activities are discussed on
pages 14-16 herein.
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BOOK LICENSING AND PACKAGING. Big Entertainment conducts its book licensing and
packaging activities through its 51%-owned subsidiary, Tekno Books. Tekno Books
is a leading book packager of fiction and non-fiction, with approximately 970
books published to date (approximately 240 published since the fourth quarter of
1994, when the Company acquired its interest in Tekno Books) and approximately
another 180 books under contract that are forthcoming. In addition to providing
the Company with access to a number of best-selling authors, Tekno Books creates
book projects by developing concepts, negotiating publishing agreements and
executing substantially all aspects of the book projects. Tekno Books has worked
with approximately 50 New York Times best-selling authors, including Tom Clancy,
Jonathan Kellerman, Dean Koontz, Tony Hillerman, Robert Ludlum and Scott Turow,
and numerous media celebrities, including David Copperfield, Louis Rukeyser and
Willard Scott. These books have been published with more than 60 publishers
(including HarperCollins, Bantam Doubleday Dell, Random House, Simon & Schuster,
Viking Penguin and Warner Books), translated into 31 languages, and selected by
21 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 recently entered into several agreements through which it plans to
expand the scope of its projects. In September 1997, the Company entered into an
agreement with a company owned by Magic Johnson, June Bug Enterprises, Inc.,
which provides for pro basketball star Magic Johnson to develop textbooks,
children's books, novels, and action figure cartoon characters with special
appeal to children. Current plans are for Magic Johnson to work with Tekno Books
to develop a series of educational textbooks with material presented by Magic
Johnson as well as a series of children's books and novels. The textbooks are
expected to use examples from sports to illustrate important concepts and
enliven student interest and enthusiasm. The Company is currently in discussions
with various publishing houses to license these works. To the extent not borne
by the publishers, Tekno Books will advance all costs associated with the
development of these books and projects while the net proceeds (after agent's
fees and reimbursement of costs advanced by Tekno Books) will be divided equally
between Tekno Books and June Bug Enterprises, Inc.
In November 1997, Tekno Books entered into an agreement with MGM Consumer
Products granting Tekno Books the 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.
Also during 1997, Tekno Books, through its wholly-owned subsidiary, Tekno Books
International, LLC., entered into an agreement with The Classica Foundation, a
Russian charitable organization. The Classica Foundation holds the only
catalogue of archived documents contained in the Russian archives consisting of
millions of documents that were captured by the Soviets from the German archives
at the end of World War II. This agreement with The Classica Foundation grants
Tekno Books International, LLC the exclusive use of this catalogue to the
Russian archives, and the right to copy the materials contained therein for use
in licensing to publishers rights to publication of books and for licensing
rights for CD-ROMs, on-line, documentaries, television specials and feature
films based on these materials. Tekno Books has developed an extensive list of
major book projects that can be developed from these archives including books
about various topics such as the German military, German intelligence activities
before and during World War II, the attempt to kill Hitler in 1944, the Nazi
party, Hitler's personal papers and correspondence, Germany's plan for the
occupation of England and German-Vatican relations. Many of these topics also
have the potential to be developed as CD-ROMs, television specials and feature
films. Work has already begun on several book projects based on the archived
materials. The Company and Tekno Books intend to donate copies of any documents
related to the Holocaust or any profit derived therefrom to appropriate
Holocaust-related charitable organizations. Tekno Books paid $100,000 in 1997
and another $100,000 during the first quarter of 1998 to secure these rights
through March 12, 1999. Tekno Books International, LLC has an option, and under
certain circumstances an obligation, to extend this agreement through 2005 for
an additional payment of $300,000, payable in March 1999. There is one
additional 5-year option also available for another $500,000 payment.
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FORMATION OF HUGE ENTERTAINMENT LLC. In March 1998, the Company, C.P. Group, and
Dr. Martin H. Greenberg, CEO of Tekno Books and a director of the Company,
agreed to contribute certain assets to a newly formed entity, Huge Entertainment
LLC ("Huge Entertainment"), in exchange for equity ownership in Huge
Entertainment and an aggregate of $8 million in promissory notes from Huge
Entertainment. Huge Entertainment is a pure-play content company that will focus
on obtaining additional intellectual properties and the development and
licensing of intellectual properties in multiple media formats. In exchange for
51.75% of the equity of Huge Entertainment and a promissory note in the amount
of $4,140,000 from Huge Entertainment, the Company is contributing to Huge
Entertainment (i) 100% of the intellectual properties presently owned by the
Company, (ii) the Company's 50% ownership interest in NetCo Partners, and (iii)
the Company's 51% interest in Tekno Books. In exchange for 46.05% of the equity
of Huge Entertainment and a promissory note in the amount of $3,684,000, C.P.
Group is contributing to Huge Entertainment (i) its 50% ownership interest in
NetCo Partners and (ii) two additional intellectual properties created by Tom
Clancy - TOM CLANCY'S CYBERNATION and TOM CLANCY'S TOP SECRET. In exchange for
2.20% of the equity in Huge Entertainment and a promissory note in the amount of
$176,000, Dr. Martin H. Greenberg is contributing a 24.5% ownership interest in
Tekno Books.
The $8 million amount was mutually agreed to by the Company, C.P. Group, and Dr.
Greenberg, and represents an estimate of the portion of the anticipated net
proceeds from an initial public offering ("IPO") of Huge Entertainment that will
be distributed to the Company, C.P. Group, and Dr. Greenberg (subject to
underwriters' consent if paid from any such IPO proceeds), and still leave
adequate liquidity and capital resources in Huge Entertainment for its growth
strategy, and such $8 million is not indicative of the total valuation of Huge
Entertainment. There can be no assurance or guarantee that any such IPO will
occur. The promissory notes bear interest at the Citibank, N.A. prime rate and
mature in seven years. Any payments on the notes will be made pro rata to all
note holders. The notes provide for optional prepayment without penalty and
mandatory prepayment (except in certain limited circumstances) in the event of
an IPO or other issuance of equity by Huge Entertainment.
The formation of Huge Entertainment has been approved by the Company's Board of
Directors. It is anticipated that the transaction will be completed during the
second or third quarter of 1998. Plans are for Huge Entertainment to go public
via an IPO of Huge Entertainment securities and/or to add investors who are
strategic to Huge Entertainment's growth plans such as international media
companies, although there can be no assurances that Huge Entertainment will
successfully implement these plans.
ENTERTAINMENT RETAIL DIVISION
The Company operates mall-based retail stores which sell entertainment-related
merchandise including apparel, jewelry, art, collectibles, novelty items, and
books. The merchandise is based on movies and television shows such as Star
Wars/trademark/, Star Trek/trademark/, X-Files/trademark, South Park/trademark/
and Batman/trademark/. The Company operates two different retail concepts -
Entertainment Super/bullet/Kiosks and in-line studio stores. The Entertainment
Super/bullet/Kiosks feature an innovative futuristic design intended to create
an exciting shopping environment that encourages browsing and impulse purchases.
The Entertainment Super/bullet/Kiosks average 166 square feet in size. During
the fourth quarter of 1997, the Company opened three prototype in-line studio
stores. The new format in-line studio store prototype, at approximately 3,000
square feet, is significantly larger than the Entertainment Super/bullet/Kiosks
and enables the Company to offer a broader array of merchandise targeted at a
wider segment of the market.
The Company currently operates 28 mall-based retail stores consisting of 24
Entertainment Super/bullet/Kiosks and four in-line stores, including the three
new prototype studio stores and one mini in-line store. The Company currently
plans to open six to eight in-line studio stores during 1998 and expects to have
one or two franchised units in operation by the end of the year. Big
Entertainment's retail store strategy is to seek prime locations in regional and
major shopping malls in geographic areas determined by management as having
desirable demographic characteristics.
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/bullet/Kiosks, a 12-minute
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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/bullet/Kiosks
are located run promotional and advertising spots on the ABC affiliate stations
featuring the Company's Entertainment Super/bullet/Kiosks and in-line studio
stores. The Company also agreed to sell at the Entertainment
Super/bullet/Kiosks, as part of its product mix, mutually selected ABC products
featuring the ABC logo or its programs (such as "Home Improvement" T-shirts and
"Monday Night Football" caps), on terms to be agreed upon. The Company believes
that this arrangement with ABC provides its Entertainment Super/bullet/Kiosks
with a steady source of current programming for the Entertainment
Super/bullet/Kiosks that appeals to the target customers, at no cost to the
Company. Additionally and most importantly, the promotional spots featuring the
Company's entertainment retail stores 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 has entered into
two franchise agreements. The first such agreement dated December 1995 between
the Company and a private investor 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 received and recorded as
income during the first quarter of 1998.
The Company signed its second franchise agreement on May 1, 1997, under which at
least one Big Entertainment retail unit is expected to be built by the
franchisee in the Philadelphia area. The agreement, with a private investor,
also provides for up to three more franchised stores in the Philadelphia region.
Both franchise agreements provide for a continuing royalty payable to the
Company based upon sales.
NETCO PARTNERS
The Company also carries out substantial licensing activities through its joint
venture known as NetCo Partners. The Company and CP Group are each 50% partners
in NetCo Partners. Best-selling author Tom Clancy owns 50% of CP Group. 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. NetCo Partners reached an agreement
with ABC, a division of Disney, to develop and license a television mini-series
based on TOM CLANCY'S NET FORCE. The agreement provides for a license fee to be
paid to NetCo Partners of $8,000,000 for such mini-series, plus other specified
fees and profit participation for NetCo Partners. All such fees and profit
participation are to be split equally between the Company and C.P. Group, each
of which is a 50% partner of NetCo Partners. In the event that ABC does not meet
the "progress to production" and broadcast requirements for the mini-series as
set forth in the agreement, the agreement provides for the payment of $1.6
million to NetCo Partners. NetCo Partners recognized $1.6 million as income
during the second quarter of 1997 as this is the minimum amount due to NetCo
Partners under the agreement and NetCo Partners has fulfilled all of its
obligations to ABC under the agreement. ABC has hired the executive producers,
the director, the screenwriter and other production personnel for the
mini-series and the Company has been advised that ABC has proceeded with
production of the mini-series based on TOM CLANCY'S NET FORCE and has begun to
sell advertising thereon. The
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mini-series based on TOM CLANCY'S NET FORCE is currently scheduled to air for
four hours over two nights during the sweeps period in either November 1998 or
February 1999. There have been preliminary favorable discussions between ABC and
NetCo Partners regarding a possible second mini-series based on TOM CLANCY'S NET
FORCE.
In April 1997, NetCo Partners entered into an agreement with The Berkley
Publishing Group ("Berkley"), a division of Penguin Putnam Inc., which is part
of the international media group Pearson plc, to publish a series of up to six
original novels based on TOM CLANCY'S NET FORCE. The contract, with total
maximum advances of $22,000,000, calls for initial publication of the first book
to coincide with the airing of the ABC mini-series referred to above. As of
March 31, 1998, NetCo Partners has received cumulative gross advances totaling
$3,000,000 under this contract, which have been distributed as part of NetCo
Partners' normal distributions to the Company and C.P. Group, its partners.
Additional advances become payable based on specific milestones such as
commencement of writing, delivery and acceptance of the manuscripts, and actual
publication of each of the six books. This contract also includes royalties on
paperback sales to be earned by NetCo Partners.
In April 1997, NetCo Partners also entered into a second agreement with Berkley
to publish up to 18 young adult novels based on TOM CLANCY'S NET FORCE. The
contract, with total maximum advances of $900,000, calls for initial publication
of the first book to coincide with the airing of the ABC mini-series referred to
above. An initial advance payment of $450,000 was received by NetCo Partners and
distributed during the quarter ended September 30, 1997, as part of NetCo
Partners' normal distributions to the Company and C.P. Group, its partners.
Additional advances are payable upon publication of each book under this
contract. This contract also includes for royalties on paperback sales of the
young adult novels to be earned by NetCo Partners.
Both of the Berkley contracts grant to Berkley only the North American
publishing rights to TOM CLANCY'S NET FORCE. NetCo Partners also plans to
license the rights to TOM CLANCY'S NET FORCE in numerous countries throughout
the world in all major languages. It is currently anticipated that the aggregate
of such foreign licenses will generate approximately 20% to 40% of the revenue
being generated by the North American book licenses referenced above. 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 in the United Kingdom for a fee of 1.2 million pounds (approximately $2
million). Acceptance of the manuscripts by Berkley, the North American
publisher, is deemed acceptance of the manuscripts by Headline under this
contract. NetCo Partners received gross advances totaling $489,750 from Headline
during the quarter ended March 31, 1998 under this contract, which it
distributed to the Company and CP Group, its partners. These revenues were
previously accrued in 1997. NetCo Partners has also entered into contracts
licensing all of the adult and young adult TOM CLANCY'S NET FORCE books with two
separate licensees for publication of these books in Germany and France. Total
advances under these two agreements aggregate approximately $1,045,000. NetCo
Partners is currently negotiating 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 received gross
advances totaling $300,000 during the quarter ended March 31, 1998 under this
contract, which it distributed to the Company and CP Group, its partners. These
revenues were previously accrued in 1997. NetCo Partners anticipates licensing
additional audio books in the series.
In April 1997, NetCo Partners entered into an agreement with the Dodge division
of Chrysler Corporation regarding placement of Chrysler and Dodge products in
TOM CLANCY'S NET FORCE novels. An initial advance payment of $100,000 was
received by NetCo Partners and distributed during 1997 as part of NetCo
Partners' normal distributions to the Company and C.P. Group, its partners.
NetCo Partners previously entered into an agreement with Playmates Toys, Inc.
("Playmates Toys") to develop, manufacture and market a line of toys based on
TOM CLANCY'S NET FORCE. Playmates Toys, which specializes in boys' action
figures, is currently the master toy licensee of STAR TREK/trademark/ and
TEENAGE MUTANT NINJA TURTLES/trademark/. The agreement with Playmates Toys
provides for payment to NetCo Partners of a maximum advance of $1 million. Of
this advance, $250,000 was received and recognized as income during 1997,
$250,000 is contingent upon the broadcast of TOM CLANCY'S NET FORCE mini-series
and $500,000 is contingent upon the broadcast of TOM CLANCY'S NET FORCE as a
prime time television series or a kids' television series scheduled for after
school, or Saturday or Sunday morning. While an agreement has been reached with
ABC for a four-hour mini-series for TOM CLANCY'S NET
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FORCE, there is currently no contractual agreement licensing production of a TOM
CLANCY'S NET FORCE prime time or kids' television series nor are there any
assurances that such a series will be produced. The agreement also provides for
royalties based on a percentage of Playmates Toys' receipts on worldwide sales.
NetCo Partners has also entered into an agreement to license TAD WILLIAMS'
MIRRORWORLD to HarperCollins for publication as an illustrated novel.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 ("Q1-98") AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1997 ("Q1-97").
The following table summarizes the revenues, cost of sales, gross profit and
equity in earnings of NetCo Partners by division for Q1-98 and Q1-97,
respectively:
INTELLECTUAL ENTERTAINMENT
PROPERTIES RETAIL TOTAL
-------- ---------- ----------
Q1-98
- -----
Net Revenues $395,227 $2,314,709 $2,709,936
Cost of Sales 136,269 969,256 1,105,525
-------- ---------- ----------
Gross Profit 258,958 1,345,453 1,604,411
Equity in Earnings of
NetCo Partners 169,182 - 169,182
-------- ---------- ----------
Combined Income $428,140 $1,345,453 $1,773,593
======== ========== ==========
Q1-97
- -----
Net Revenues $467,002 $1,237,153 $1,704,155
Cost of Sales 276,871 677,534 954,405
-------- ---------- ----------
Gross Profit 190,131 559,619 749,750
Equity in Earnings of
NetCo Partners 3,167 - 3,167
-------- ---------- ----------
Combined Income $193,298 $ 559,619 $ 752,917
======== ========== ==========
NET REVENUES
Net revenues (not including revenues attributable to the Company's 50% interest
in NetCo Partners) for Q1-98 increased by 59%, or $1,005,781, to $2,709,936 from
$1,704,155 for Q1-97. The increase in net revenues is attributable to the
continued growth in the Company's entertainment retail division offset by a
decrease in net revenues in the intellectual properties division due to the
timing of the development of licensing projects. For Q1-98, revenues generated
by the entertainment retail division comprised 85% of the Company's total
revenues while revenues from the intellectual properties division amounted to
15% of the total. By comparison for Q1-97, entertainment retail revenues
amounted to 73% of the total and intellectual properties revenues were 27% of
the total.
GROSS PROFIT
Overall Company gross profit increased by 114%, or $854,661, to $1,604,411 for
Q1-98 from $749,750 in Q1-97. As a percentage of net revenues, gross profit
increased to 59% in Q1-98 from 44% in Q1-97. The increase in gross profit is
primarily due to increases in gross profit in the Company's entertainment retail
division resulting from the impact of the ABC programming agreement and
franchise fee income.
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COMBINED INCOME
Combined income (gross profit plus the equity in earnings of NetCo Partners)
increased by $1,020,676, or 136%, to $1,773,593 in Q1-98 as compared to $752,917
for Q1-97. This increase reflects the above mentioned growth in the
entertainment retail division coupled with $169,182 of equity in earnings of
NetCo Partners during Q1-98 in comparison to income of $3,167 from NetCo
Partners during Q1-97. The equity in earnings of NetCo Partners of $169,182 for
Q1-98 represents the Company's 50% share of the earnings generated by NetCo
Partners. For Q1-98 the entertainment retail division comprised 76% of the
combined income (including the Company's 50% interest in the earnings of NetCo
Partners) while the intellectual properties division amounted to 24% of the
total.
INTELLECTUAL PROPERTIES DIVISION
The intellectual properties division generates revenues from several different
activities including book licensing and packaging, licensing, and publishing
MYSTERY SCENE MAGAZINE. In Q1-97, publishing also included minor residual
revenues from publication of comic books, which the Company has discontinued.
The revenue breakdown from these activities for Q1-98 and Q1-97 is as follows:
Q1-98 Q1-97
--------------- ----------------
$ % $ %
-------- --- -------- ---
Book Licensing & Packaging $367,611 93% $373,490 80%
Licensing 13,600 3 68,054 15
Publishing 14,016 4 25,458 5
-------- --- -------- ---
Total $395,227 100% $467,002 100%
======== === ======== ===
Book licensing and packaging represents 93% of the revenues generated by the
intellectual properties division in Q1-98. The Company's book licensing and
packaging activities are conducted through Tekno Books, its 51% owned
subsidiary. Tekno Books focuses on developing and executing book projects,
frequently with best-selling authors, and then licensing the books for
publication with various publishers. Book licensing and packaging revenues
decreased by 2%, or $5,879, to $367,611 for Q1-98 from $373,490 for Q1-97.
While revenues from Tekno Books declined from Q1-97 to Q1-98, the Company
anticipates 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.
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Licensing revenues (excluding revenues generated by NetCo Partners) decreased by
80%, or $54,454, from $68,054 in Q1-97 to $13,600 in Q1-98. 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 Q1-98 consisted of advances for secondary
publication rights for ANNE MCAFFREY'S ACORNA: THE UNICORN GIRL for publication
of this property as an audio book in the United States and for book publication
in various foreign countries. This book is the first of a series of two, which
is expected to be expanded, due to its popularity. The Company has verbally
agreed to a continuation of the Acorna series with HarperCollins, the publisher
for the first two books of the series. Licensing revenues for Q1-97 included
advances for books published by both Warner Books and HarperCollins, as well as
royalties from the sales of LEONARD NIMOY'S PRIMORTALS CD-ROM. It is important
to note that licensing revenues generated by NetCo Partners (in which the
Company has a 50% interest) are not included in the above licensing figures, but
rather are included in equity in earnings of NetCo Partners discussed in more
detail on page 19.
Publishing revenues decreased by 45%, or $11,442, from $25,458 in Q1-97 to
$14,016 in Q1-98. The decrease in publishing revenues is attributable to the
Company's decision to discontinue its comic book publishing operation due to the
sustained losses incurred in the publication of comic books. The Company began
to reduce the number of comic book titles it published during 1996 and
completely ceased publication of all titles during Q1-97. Publishing revenues
during Q1-98 reflect 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, ELLERY QUEEN MYSTERY MAGAZINE and ALFRED HITCHCOCK MYSTERY MAGAZINE,
to build a combined internet website called "mysterypages.com," which will sell
subscriptions to all three magazines, provide an overview of the current
magazine issues, include interviews with mystery and suspense authors and
contain a message board for mystery fans to contact their favorite authors. It
may be possible to buy books over the site as well. The site is expected to be
fully-operational in June 1998.
Gross profit for the intellectual properties division (not including the
Company's 50% equity in the earnings of NetCo Partners) increased by 36%, or
$68,827, to $258,958 in Q1-98 from $190,131 in Q1-97. This increase in gross
profit is attributable to higher margins for Tekno Books, in part due to a
higher proportion of income from royalties. As a percent of revenues, gross
profit increased to 66% from 41% in the Q1-97, reflecting the more profitable
continuing operations of book licensing and packaging and licensing. Cost of
goods sold for Q1-97 included certain residual expenses from the publication of
comic books. While the Company was engaged in comic book publishing, it advanced
100% of all costs associated with the development of its comic book titles
including character and storyline development, design, writing, and
illustration, plus the Company paid for the printing and distribution of all
books, and was responsible for returns, which are a normal part of the book
publishing business. By now developing its intellectual properties through
licensing arrangements, the Company has essentially limited the costs incurred
to payments to writers for books and teleplays or scripts, and typically funds
these costs from advance payments received from publishers pursuant to licensing
agreements.
The same holds true for the book licensing and packaging operation. Production
expenses to publish the books are borne by the publishers. The book licensing
and packaging operation typically secures the publishing agreements in advance
of determining amounts to be paid to authors and for permissions, thereby
ensuring a profit on the projects based on the up-front advances received, plus
obtaining an ongoing royalty stream for future sales once the advances have been
earned.
ENTERTAINMENT RETAIL DIVISION
Net revenues for the Company's entertainment retail division increased by 87%,
or $1,077,556, to $2,314,709 for Q1-98 from $1,237,153 for Q1-97. Net revenues
for Q1-98 are derived from sales of entertainment-related products and
merchandise at the Entertainment Super/bullet/Kiosks and in-line studio stores,
imputed income from the ABC programming agreement, and franchise fee income.
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The composition of revenues is as follows:
Q1-98 Q1-97
------------------ ------------------
$ % $ %
---------- --- ---------- ---
Retail Sales $1,514,709 65% $1,237,153 100%
ABC Advertising Income 450,000 20 - -
Franchise Fee Income 350,000 15 - -
---------- --- ---------- ---
$2,314,709 100% $1,237,153 100%
========== === ========== ===
The Company had 28 retail units in operation at both March 31, 1998 and March
31, 1997, although the composition of these units was different. In addition to
closing certain unprofitable kiosk units and opening kiosks in other more
desirable locations, the Company also operated three new in-line studio stores
during Q1-98. These in-line studio stores, which were not open during Q1-97, are
the Company's new prototype retail format. Retail sales increased by 22%, or
$277,556, to $1,514,709 for Q1-98 from $1,237,153 for Q1-97. The increase in
retail sales was entirely attributable to the revenues from the new in-line
studio stores, as comparable store sales for the Entertainment
Super/bullet/Kiosks in operation during both Q1-97 and Q1-98 decreased by 6.8%.
The decline in comparable store sales was principally caused by lower dollar
sales during the month of March, although unit movement was strong, reflecting
significant mark-downs in March as part of a clearance sale to move out older
merchandise and make room for the merchandise for summer blockbusters such as
Godzilla. Through February, comparable store sales increased by 2.1%. The
Company is currently shifting its merchandising focus to the core mall customer,
reacting quicker to trends in the entertainment industry, bringing in new
products and testing the merchandise mix in the kiosks.
Net revenues include imputed income totaling $450,000 from running ABC video
clips on the in-store television monitors in exchange for advertising air time
on local ABC affiliate television stations during Q1-98. No revenues were
imputed in Q1-97 as this barter arrangement with ABC was not in place at that
time. 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. This income represents the territorial exclusivity fee
which the Company received during Q1-98 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 increased by 140%, or
$785,834, to $1,345,453 for Q1-98 from $559,619 for Q1-97. As a percentage of
entertainment retail division revenues, gross profit increased to 58% for Q1-98,
from 45% for Q1-97. The increase in gross profit was due to the impact of the
ABC programming agreement and the franchisee fee income discussed above, for
which there were no offsetting costs included in cost of goods sold. Despite the
increase in retail sales, gross profit from retail sales was essentially flat
from Q1-97 to Q1-98 as the Company was significantly over-inventoried at the end
of 1997, and management elected to mark down the excess inventories in order to
clear out older merchandise and make room for new product. While the Company
contemplates continued promotional activity throughout the remainder of 1998, it
believes that the mark downs for the remainder of the year will not be as
substantial as in Q1-98.
EQUITY IN EARNINGS OF NETCO PARTNERS
The Company's 50% share in the earnings of NetCo Partners amounted to $169,182
for Q1-98 as compared to $3,167 for Q1-97. The income in Q1-98 is primarily
attributable to revenues recognized by NetCo Partners from its
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licensing agreements with Berkley and with the German and French licensees for
TOM CLANCY'S NET FORCE, net of product-related and operating expenses. The
income in Q1-97 is related to revenues generated by NetCo Partners from its
licensing agreement with HarperCollins for TAD WILLIAMS' MIRRORWORLD. NetCo
Partners recognizes revenues when the earnings process has been completed based
on the terms of the various agreements. When advances are received prior to
completion of the earnings process NetCo Partners defers recognition of revenue
until the earnings process has been completed. Costs related to acquisition,
development and sales of 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 and amortization of goodwill and intangibles. Operating
expenses increased by 38%, or $830,086, to $3,040,272 for Q1-98 from $2,210,186
for Q1-97. (Note that $450,000 of the increase represents non-cash advertising
expense imputed under the ABC barter agreement discussed below. Excluding the
non-cash ABC advertising expense operating expenses increased by $380,086, or
17%.) As a percentage of net revenues, total operating expenses decreased to
112% in Q1-98 from 130% in Q1-97. The increase in total operating expenses in
Q1-98 as compared to total operating expenses in Q1-97 reflects increases in
selling, general and administrative expenses and salaries and benefits of
$799,826, or 70%, and $135,552, or 14%, respectively, which were slightly offset
by a $105,292, or 93%, reduction in amortization of goodwill and intangibles. Of
the $799,826 increase in selling, general and administrative expenses, $225,697
or 28%, is attributable to occupancy, depreciation and other store-level
expenses for the new in-line studio stores opened during 1997, and $450,000, or
56% of the increase, 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 $135,552, or 14%, increase in salaries and
benefits is attributable to additional expenses in the entertainment retail
division as a result of new employees added to staff the new in-line studio
stores and the minimum wage rate increase which was effective September 1, 1997.
INTEREST EXPENSE, NET
Net interest expense increased by 378%, or $185,480, to $234,588 for Q1-98 as
compared to $49,108 for Q1-97, primarily representing increased interest expense
pertaining to the $650,000 convertible debenture. Although the coupon rate on
the debenture is only 4%, the discount attributable to the conversion feature of
the debenture is being amortized as interest expense and this non-cash
amortization totaled $80,812 for Q1-98. Interest on the inventory line of
credit, the shareholder loan, and on the capital leases entered into to finance
the cost of the new in-line studio stores also contributed to the additional
interest expense during Q1-98.
NET LOSS
Net loss increased by 4%, or $54,806, to $1,582,944 for Q1-98 as compared to a
net loss of $1,528,138 for Q1-97. The increase in net loss is attributable to an
increase of $185,480 or 377% in net interest expense offset by an increase of
$166,015 or 524% in equity in earnings of NetCo Partners and a decrease in
operating loss of $24,575 or 2%. Basic and diluted loss per common share was
($0.24) per share for Q1-98 and ($0.27) per share for Q1-97, a decrease of $.03
per share or 11%.
The Company has made several modifications to its initial business plan in an
effort to reverse the losses that have been sustained since its inception.
During 1997, the Company stopped publishing comic books, an activity that
required a substantial amount of resources and had not proven to be profitable.
Essentially all of the overhead associated with comic book publishing was
eliminated effective with the second quarter of 1997. At the same time, the
Company decided to expand its retail operations with the development of three
prototype in-line retail stores. Substantial resources were devoted to the
development of the three prototype in-line stores which opened in the fourth
quarter of 1997, including professional fees and expenses incurred to design the
new stores, the hiring of additional field and administrative personnel, the
selection and acquisition of new hardware and software for a new retail
accounting and merchandising system to be implemented, and the capital
expenditures for the new stores. The Company believes that the in-line studio
store concept will allow it to more quickly achieve economies of scale in
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its entertainment retail division. Toward this goal, during Q1-98, the Company
hired an experienced retail veteran, Andrew S. Bailen, as Chief Operating
Officer for its entertainment retail division. Mr. Bailen has 18 years of
progressive retail experience, most recently as Sr. Vice President and General
Merchandise Manager for Blockbuster Entertainment Group. At the same time, 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. Most importantly, the Company has agreed to contribute its
intellectual properties to a newly-formed entity, Huge Entertainment, which is
discussed on page 13. The Company will own 51.75% of Huge Entertainment, which
in turn will own two additional intellectual properties created by best-selling
author Tom Clancy, in addition to TOM CLANCY'S NET FORCE. The Company believes
that these additional properties will generate significant future revenues for
the Company similar to the revenue stream that NetCo Partners is currently
enjoying from TOM CLANCY'S NET FORCE. While the Company believes that these
measures will ultimately reverse its operating losses, there can be no
assurances that the revenues generated by the intellectual properties and
entertainment retail divisions will be sufficient to offset the associated
expenses incurred.
SHAREHOLDER'S EQUITY
Shareholder's equity decreased 5% or $256,578, to $4,847,275 at March 31, 1998
as compared to shareholder's equity of $5,103,853 as of December 31, 1997. The
decrease in shareholder's equity is attributable to the Company's net loss for
Q1-98 of $1,582,944 offset in part by new shares of Common Stock issued under
several stock purchase agreements and as a result of conversion of a portion of
the Company's convertible debenture.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of $329,686 and a
working capital deficit of $917,258 compared to cash and cash equivalents of
$887,153 and a working capital deficit of $491,513 at December 31, 1997. Net
cash used in operating activities during Q1-98 was $1,530,023 primarily
representing cash used to pay for merchandise inventories previously acquired
and to fund the Company's net loss. Net cash used in investing activities was
$133,991, while $1,106,547 in cash was provided by financing activities for a
total decrease in cash and cash equivalents of $557,467. During Q1-97, net cash
used in operating activities was $1,111,499, net cash used in investing
activities was $89,810, and $75,729 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 entertainment retail division.
The primary obligor on the credit facility is the Company's wholly-owned
subsidiary that constitutes the Company's entertainment retail division, and the
Company is the guarantor. Availability under this credit facility is limited to
50%-55% of the cost of retail inventories and certain other factors. The term of
the facility is 48 months. Interest is payable monthly at the prime rate plus 1%
for the first two years and the prime rate plus 1/2% for the third and fourth
years. In conjunction with the inventory line of credit, the Company issued
5-year warrants to BankBoston to acquire 30,000 shares of the Company's common
stock at $9.68 per share. As of March 31, 1998, the Company's outstanding
balance on the line of credit was $871,530, 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 anticipates that it will need
to modify the business plan originally submitted to BankBoston and have such
plan approved by BankBoston in order to be in compliance with all such covenants
throughout 1998. Although there can be no assurance such modified plan will be
approved, the Company does not anticipate that such covenants and limitations
will materially adversely affect the Company.
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On March 31, 1998, the Company issued 237,321 shares of Common Stock to three
accredited investors for gross proceeds of $987,500. Expenses related to the
issuance of these securities totaling $37,500 were accrued as of March 31, 1998.
The proceeds from the sale of these shares were received in April 1998. In
conjunction with this stock issuance, the Company issued 5-year warrants to one
of the investors to acquire 50,000 shares of the Company's Common Stock at $4.66
per share. In April 1998, the Company issued 10,732 additional shares of Common
Stock and 5,000 additional warrants for gross proceeds of $50,000 to two other
accredited investors under similar terms. 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.
FINOVA Capital Corporation ("FINOVA") has agreed to enter into a sale/leaseback
transaction with the Company for 17 Entertainment Super/bullet/Kiosk units. The
Company entered into a similar transaction with FINOVA during 1996 for its other
kiosk units. The terms of the proposed sale/leaseback transaction are a sales
price equal to 75% of the original invoice cost for the units, a 42-month lease
term, monthly payments approximating $19,500 including taxes, and a $1 buy-out
at the end of the lease term. The Company anticipates that this sale/leaseback
transaction will close during May 1998, and that the net proceeds to the Company
after all transaction costs will approximate $580,000.
The success of the Company's operations in future years is dependent on its
ability to generate adequate revenue to offset operating expenses. Unless
otherwise noted, the proceeds from the financing transactions described above
are for general corporate purposes. The Company's management expects to require
additional financing for the expansion of its business, and in particular the
growth of the Company's in-line studio stores, and to support working capital
requirements of its retail division in future years. As of May 8, 1998, the
Company has entered into four additional leases for in-line studio stores to be
opened in the future. The Company currently is exploring financing alternatives
to allow the Company to finance such expansion, although there can be no
assurance that such financing alternatives will be available to the Company or
will be implemented on terms favorable to the Company. In the event such
financing is not secured, the Company's Chairman of the Board and Chief
Executive Officer and the Company's Vice Chairman and President, have
represented that they would provide the Company, if required, with an amount not
to exceed $2.5 million during 1998 in order to enable the Company to meet its
working capital requirements for the balance of 1998; provided, however, that
the commitment will terminate in the event the Company raises no less than $2.5
million from other sources during the year. In the event that the Company raises
less than $2.5 million, the dollar amount of the commitment will be reduced on a
"dollar for dollar" basis to the extent of such funds raised by the Company.
This commitment is in addition to the existing $1.1 million credit facility
extended by these executives, pursuant to a $1.1 million promissory note
executed by the Company. Borrowings under this credit facility are unsecured and
bear interest at the JP Morgan Bank prime rate of interest (8.5% at March 31,
1998). At March 31, 1998, the Company had borrowed $1,016,000 from the Company's
Chairman and Chief Executive Officer and the Company's Vice Chairman and
President pursuant to this facility. The terms of the Promissory Note were
previously approved by the Company's Board of Directors. Any such working
capital financing provided to the Company by the Company's Chairman and Chief
Executive Officer and the Company's Vice Chairman and President will be upon
terms negotiated and agreed to between them and the Company's Board of
Directors.
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
licensing and packaging operation as a result of the general publishing industry
practice of paying royalties semi-annually. The Company's entertainment retail
business is also seasonal with the holiday season accounting for the largest
percentage of annual net sales. Accordingly, as the Company expands its
entertainment retail division, it anticipates that its results of operations
will be increasingly affected by seasonality. In addition, although not
seasonal, the Company's intellectual properties division and NetCo Partners both
experience significant fluctuations in their respective revenue streams,
earnings and cash flow as a result of the significant amount of time that is
expended in the creation and development of the intellectual
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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
During March and April 1998, the Company issued an aggregate
of 248,053 shares of its Common Stock pursuant to five
separate stock purchase agreements, each with a different
accredited investor, in exchange for an aggregate purchase
price of $1,037,500. Additionally the Company issued to one
such investor a warrant to purchase 50,000 shares of its
Common Stock exercisable during the five-year period beginning
on March 31, 1998 and ending on March 31, 2003 at an exercise
price of $4.6589 per share. The holder of such warrant has the
right at any time on or after March 31, 1998 and ending on
March 31, 1999 to return the warrant to the Company and
receive in exchange therefor 20,000 shares of the Company's
Common Stock, provided that such right shall expire if any
portion of the warrant is exercised. The Company also issued
to two other such investors warrants to purchase an aggregate
of 5,000 shares of its Common Stock exercisable during the
five-year period beginning on April 10, 1998 and ending on
April 10, 2003 at an exercise price of $4.6589 per share. The
holders of said warrants have the right at any time during the
twelve months immediately following the date of issuance of
such warrants to return the warrants to the Company in
exchange for an aggregate of 2,145 shares of the Company's
Common Stock.
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. No placement fees or commissions
were paid in connection with the issuance of the securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1 Employment Agreement dated March 26,1998
between Tekno Comix, Inc., and Andrew
S. Bailen
10.2 Form of Stock Purchase Agreement between
the Company and Individual Investors
27.1 Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 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: May 15, 1998 By: /s/ Mitchell Rubenstein
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1998 By: /s/ Marci L. Yunes
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 Employment Agreement dated March 26, 1998 between Tekno Comix,
Inc., and Andrew S. Bailen
10.2 Form of Stock Purchase Agreement between the Company and
Individual Investors
27.1 Financial Data Schedule
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement") effective as of the 26th day of
March, 1998, between TEKNO COMIX, INC., a Florida corporation (the "Company"),
and Andrew S. Bailen, an individual, (the "Employee").
BACKGROUND
A. The Company is a wholly owned subsidiary of BIG ENTERTAINMENT, INC.,
a Florida corporation ("Big Entertainment") which is a diversified entertainment
company involved in the licensing of entertainment properties, the operation of
entertainment-related retail stores and the publishing and packaging of books;
and
B. The Company desires to employ the Employee and the Employee is
willing to be employed by the Company, pursuant to the terms and subject to the
conditions set forth in this Agreement; and
C. Big Entertainment is willing to join in this Agreement in order to
guaranty the payments due from Company to Employee and to issue the stock of Big
Entertainment and options to purchase the stock of Big Entertainment as set
forth hereunder.
NOW, THEREFORE, for and in consideration of the mutual agreements set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. TERM; RESIDENCE; DUTIES. The initial term of this Agreement shall be
for three years from March 26, 1998 (the "Commencement Date"). Employee will
serve as the Executive Vice President and Chief Operating Officer of the
Company's Retail Division for such term, unless Employee's employment is sooner
terminated as provided below (the "Employment Period"). During the Employment
Period, Employee will devote all of his time to the duties provided for under
the terms of this Agreement.
As Executive Vice President and Chief Operating Officer - Retail
Division, Employee shall have such duties as are assigned to Employee by the
Board of Directors of the Company or the Company's Chief Executive Officer or
President. Such duties shall be performed at the Company's office located in
Boca Raton, Florida or other office in South Florida, and at such other places
as the needs, business, or opportunities of the Company may require from time to
time. In connection with the performance of Employee's duties, the Company will
supply Employee with services and facilities reasonably appropriate to such
duties and position.
<PAGE>
2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform faithfully,
industriously, and to the best of Employee's ability, experience and talents,
all of the duties that may be required by this Agreement.
3. SALARY. As compensation for the services provided by Employee under
this Agreement, Company will pay Employee a salary as follows: (i) $75,000 from
the Commencement Date to March 26, 1999; (ii) $75,000 from March 26, 1999 to
March 26, 2000; and (iii) $125,000 from March 26, 2000 to March 26, 2001. In
accordance with the Company's payroll policy, wages will be paid bi-weekly. Upon
termination of this Agreement, payments under this Paragraph shall cease;
provided, however, that the Employee shall be entitled to payments for periods
or partial periods that occurred prior to the date of termination and for which
the Employee has not yet been paid.
4. SIGNING BONUS. Upon execution of this Agreement by the Company and
the Employee, Employee shall receive a signing bonus in the amount of
$50,000.00, payable in shares of Big Entertainment's Common Stock (the "Bonus
Stock"). The number of shares shall be determined based on the average closing
bid price of Big Entertainment's Common Stock as reported by NASDAQ, or such
other nationally recognized stock exchange on which Big Entertainment may be
listed for trading, for the thirty (30) trading days prior to the Commencement
Date. The Bonus Stock will carry a restrictive legend stating that the Bonus
Stock may not be sold, transferred or otherwise disposed of prior to close of
business on the second anniversary of the Commencement Date (the "Restricted
Period").
Employee understands that such shares have not been registered under
the Securities Act of 1933, as amended (the "Act"), or the securities laws of
any state, that the shares are for investment purposes only, and not with a view
to distribution or resale, nor with the intention of selling, transferring or
otherwise disposing of all or any part of such shares for any particular price,
or at any particular time, or upon the happening of any particular event or
circumstance, except selling, transferring, or disposing of said shares made in
compliance with all applicable provisions of the Act, the Rules and Regulations
promulgated by the Securities and Exchange Commission thereunder, and applicable
state securities laws; and that such shares must be held indefinitely unless
they are subsequently registered under the Act, or an exemption from such
registration is available, and will require an opinion of counsel that
registration is not required under the Act or such state securities laws, and
that the certificates to be issued will bear an additional legend indicating
that transfer of the shares has not been so registered and the legend may bear
the following or similar words:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the securities laws of
any state or other jurisdiction, and may not be sold, transferred,
pledged, hypothecated or otherwise disposed of in the absence of (1) an
effective Registration Statement for such securities under applicable
law, or (2) an
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opinion of counsel, satisfactory to Big Entertainment, that such
registration is not required.
(the "1933 Act Legend").
If Employee resigns his position, is terminated "for cause" (as defined
in Paragraph 16), or otherwise vacates his position due to death or disability
before the end of the Restricted Period, Employee will forfeit all rights to the
Bonus Stock and Employee will return all such certificates representing such
Bonus Stock to either the Company or Big Entertainment (at the direction of
Company) within twenty (20) days of such resignation, termination or date
Employee vacates his position.
In the event Company terminates Employee's employment under this
Agreement without cause (as defined by Paragraph 16), then any Bonus Stock which
is restricted and subject to forfeiture shall become unrestricted.
5. ANNUAL BONUS. Employee will be eligible, at the discretion of the
Board of Directors, for an annual bonus equal to the greater of (i) fifty
percent (50%) of Employee's annual salary or (ii) $50,000.00. The annual bonus
shall be based on Employee's achieving specific budgeted performance goals (the
"Performance Goals") in sales and earnings and shall be established and approved
by the Company's Board of Directors in its sole and absolute discretion. The
Performance Goals for 1998 shall be set out by the Board of Directors within 90
days of the date of this Agreement, and the Performance Goals for subsequent
years shall be set out by the Board of Directors by February 1 of each year. The
annual bonus shall be payable in shares of Big Entertainment's Common Stock
("Annual Stock") with the number of shares to be determined based on the closing
bid price of Big Entertainment's Common Stock as reported by NASDAQ, or such
other nationally recognized stock exchange on which Big Entertainment's stock
may be listed for trading, on the last business day prior to approval by Big
Entertainment's Board of Directors of the granting of the Annual Stock.
The Annual Stock will be restricted and subject to forfeiture (as
described below) for a period of three (3) years from the date of grant of such
Annual Stock. The Annual Stock shall become unrestricted as follows:
(i) One-third (1/3) of the Annual Stock shall become
unrestricted from one (1) year from the date of issuance of such Annual Stock;
(ii) One-third (1/3) of the Annual Stock shall become
unrestricted from two (2) years from the date of issuance of such Annual Stock;
and
(iii) One-third (1/3) of the Annual Stock shall become
unrestricted from three (3) years from the date of issuance of such Annual
Stock.
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The Annual Stock granted under this paragraph shall be restricted and
subject to forfeiture if Employee resigns his position, is terminated for
"cause" (as defined in Paragraph 16) or otherwise vacates his position due to
death or disability before the end of the period that the Annual Stock (or any
portion of the Annual Stock) becomes unrestricted (as described above). In the
event of such a forfeiture Employee will forfeit all rights to the Annual Stock
and Employee will return all such certificates representing such Annual Stock to
either the Company or Big Entertainment (at the direction of Company) within
twenty (20) days of such resignation, termination or date Employee vacates his
position.
In the event Company terminates Employee's employment under this
Agreement without cause (as defined by Paragraph 16), then any Annual Stock
which is restricted and subject to forfeiture shall become unrestricted.
Employee understands that the Annual Stock, like the Bonus Stock, have
not been registered under the Act, or the securities laws of any state, that the
shares are for investment purposes only, and not with a view to distribution or
resale, nor with the intention of selling, transferring or otherwise disposing
of all or any part of such shares for any particular price, or at any particular
time, or upon the happening of any particular event or circumstance, except
selling, transferring, or disposing of said shares made in compliance with all
applicable provisions of the Act, the Rules and Regulations promulgated by the
Securities and Exchange Commission thereunder, and applicable state securities
laws; and that such shares must be held indefinitely unless they are
subsequently registered under the Act, or an exemption from such registration is
available, and will require an opinion of counsel that registration is not
required under the Act or such state securities laws, and that the certificates
to be issued will bear a 1933 Act Legend as specified above.
6. STOCK OPTIONS. During the Employment Period, Employee shall be
eligible to receive options to purchase a total of 187,500 shares of Big
Entertainment's Common Stock (the "Options"), which Options shall have exercise
price equal to the closing bid price of the Common Stock as reported by NASDAQ,
or such other nationally recognized stock exchange on which Big Entertainment
may be listed for trading, at the close of business of the date prior to the
grant date. The Options shall be granted as follows: (a) 62,500 shares shall be
granted on the Commencement Date; (b) an additional 25,000 shares will be
granted on the first anniversary of the Commencement Date; (c) an additional
25,000 shares will granted on the second anniversary of the Commencement Date;
(d) an additional 37,500 shares will granted on the first anniversary of the
Commencement Date based on attainment of specific budgeted performance goals in
sales and earnings and shall be established and approved by the Company's Board
of Directors in its sole and absolute discretion; and (e) an additional 37,500
shares will be granted on the second anniversary of the Commencement Date based
on attainment of specific budgeted performance goals in sales and earnings and
shall be established and approved by the Company's Board of Directors in its
sole and absolute discretion. The Performance Goals for 1998 shall be
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<PAGE>
set out by the Board of Directors within 90 days of the date of this Agreement,
and the Performance Goals for subsequent years shall be set out by the Board of
Directors by February 1 of each year. No grants will be made or required should
Employee not be employed by the Company on the applicable grant date. All
Options granted hereunder are non-qualified options as that term is defined in
Section 422 of the Internal Revenue Code of 1986, as amended, and will vest in
accordance with Big Entertainment's Stock Option Plan as in effect on the date
of such grant. A copy of Big Entertainment's Stock Option Plan as currently in
effect is attached hereto as Exhibit "A". In the event Employee's employment
with the Company is terminated by the Company without cause, then Employee shall
have six (6) months from the date of such termination to exercise any Options
granted by this Agreement, nothwithstanding any provision to the contrary in Big
Entertainment's Stock Option Plan.
7. MAJOR EVENTS. In the event that Big Entertainment either (i) sells
the Company (either through a sale of stock, sale of all or substantially all of
its assets or tax-free reorganization); or (ii) goes private, either through the
repurchase of shares held by the public through a tender offer, or through a
merger or consolidation into another corporation; or (iii) Big Entertainment is
sold to a third party (either through a sale of stock, sale of all or
substantially all of its assets or tax-free reorganization) (collectively a
"Major Event") then Employee's right to receive any future Options or Annual
Stock under this Agreement shall be terminated, and Big Entertainment shall have
the option of purchasing all of the stock of Big Entertainment and all of the
options to purchase the stock of Big Entertainment granted to Employee pursuant
to this Agreement. In the event Big Entertainment exercises such Option, it must
exercise such option to purchase all of Employee's Bonus Stock, Annual Stock and
Stock pursuant to the Options that have been issued pursuant to this Agreement,
whether such Stock or Options are restricted or otherwise subject to forfeiture.
The purchase price shall be equal to one hundred twenty-five percent (125%) of
the average closing bid price of the common stock of Big Entertainment as
reported by NASDAQ, or such other nationally recognized stock exchange on which
Big Entertainment may be listed for trading, for the twenty (20) trading days
ending on the date of the closing of the Major Event. Big Entertainment may
exercise its option to purchase pursuant to this paragraph by giving written
notice to Employee within thirty (30) days of the closing of the Major Event.
8. TAX MATTERS. Employee acknowledges that the value of the Bonus Stock
and the Annual Stock and the stock received by Employee upon exercise of any of
the Options will be required to be reported as income received by the Employee
based on the fair market value of the Bonus Stock and the Annual Stock, as such
stock becomes unrestricted and on the difference between the fair market value
of any stock purchased pursuant to the Options and the exercise price, pursuant
to Section 83 of the Internal Revenue Code of 1986 as amended (the "Code"). The
Employee and Company agree that the Options do not have a readily ascertainable
fair market value, as that term is defined in the Code. The Employee agrees that
he will not make an election to report the value of the Bonus Stock or the
Annual Stock as received in income pursuant to
5
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Section 83(b) of the Code, and will not report such income for tax purposes
until such stock becomes unrestricted.
Employee acknowledges that the Company will report the fair market
value of the Bonus Stock and the Annual Stock as salary paid to the Employee as
such stock becomes unrestricted, and will report such amounts on a Form W-2
filed with the Internal Revenue Service. Employee acknowledges that Company is
required to withhold the amount of Federal income taxes required in connection
with the payment of such salary, even though the payment of such salary is in
the form of stock. At Company's option, Company may either withhold other
amounts otherwise payable to Employee hereunder, or may, at Company's option,
agree to purchase a portion of the stock from Employee in an amount necessary to
yield the amount required to be withheld from Employee's salary. Such repurchase
shall be based on the prior thirty (30) day average closing bid price of Big
Entertainment common stock as reported by NASDAQ, or such other nationally
recognized stock exchange on which Big Entertainment may be listed for trade.
9. RELOCATION REIMBURSEMENT. The Company agrees to reimburse Employee
up to $25,000.00 for costs incurred in relocating to Boca Raton, Florida from
Plano, Texas. Reimbursable costs include, but are not limited to, moving of
household goods, travel to the area to locate housing and travel-related
expenses, costs of real estate commissions, closing costs, mortgage points (if
any) and temporary living expenses. No reimbursements will be made by the
Company without submission of appropriate supporting documentation and/or
receipts. Company shall reimburse such expenses within thirty (30) days of
submission of supporting documentation.
10. EXPENSES. The Company will reimburse Employee for actual
"out-of-pocket" expenses in accordance with Company's policies in effect from
time to time. Such expenses include, but are not limited to, expenses for
travel, entertainment, and miscellaneous incurred in the conduct of the business
of the Company. Employee shall keep appropriate records of such expenses and
submit receipts or other evidence relating to them in accordance with the
Company's policy.
11. CELLULAR TELEPHONE; LAPTOP COMPUTER. The Company shall provide
Employee with a cellular telephone and laptop computer for his use during the
Employment Period. The Company will, upon submission of appropriate receipts or
other supporting documentation, reimburse Employee for all business-related
expenses incurred in connection with such equipment.
12. VACATION; SICK LEAVE/HOLIDAYS. During the term of this Agreement,
Employee shall be entitled to annual paid vacation of three (3) weeks per year,
provided, however, that such vacation may not be taken during the first six (6)
months of the Employment Period. In addition, Employee shall be entitled to paid
sick time and paid holidays as provided within the Company's policies in effect
from time to time.
6
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13. FRINGE AND MEDICAL BENEFITS. Employee shall be eligible for
inclusion in the Company's Group Health Plan on the first day of the month after
completion of ninety (90) days of employment with the Company. Employee shall be
responsible for payment of a certain portion of the premium due for his
inclusion in the Group Health Plan.
Employee shall also be enrolled in the Company's Life and Long-Term
Disability Plans in accordance with the provisions of such policies, as same may
change from time to time. Employee shall bear no cost for Life and Long-Term
Disability coverage.
14. CONSIDERATION FOR PROMOTION. After completion of one full year of
employment with the Company, Employee shall be considered for promotion to the
position of President - Retail Division.
15. DEATH OR DISABILITY OF EMPLOYEE. If Employee dies during the term
of this Agreement, Employee's estate shall be entitled to such bonus payments
and payment of salary as may be due and owing Employee as of the date of
Employee's death, but due no other compensation of any kind. In the event
Employee become disabled during the term of this Agreement, subject to
governmental statutes and regulations, the Company may terminate this Agreement
at any time by giving Employee ninety (90) days' written notice to Employee. For
the purposes of this Agreement, the term "disability" shall mean a mental or
physical illness or condition that renders Employee incapable of performing all
of the essential functions of the services required of Employee under this
Agreement.
16. TERMINATION; SEVERANCE. In the event that Employee's employment
with the Company is terminated by the Company for any reason other than cause,
as defined in the following paragraph, prior to the end of the Employment
Period, the Company will pay to Employee a sum equal to six (6) months' salary
at the rate in effect at the time of termination (the "Severance Payments"),
which payments shall be distributed over a six (6) month period (the "Severance
Period"). All Severance Payments will be paid on a bi-weekly basis, in
accordance with the Company's payroll policy. If Employee obtains other
employment during the Severance Period, the Company may cease Severance Payments
and have no further obligation to Employee. Employee shall, three (3) days prior
to each bi-weekly payment of severance payments hereunder, deliver to Company a
notarized certification under penalty of perjury, that Employee has not obtained
employment or a position as an independent contractor with any other person or
company (the "Certification Statement") as follows:
CERTIFICATION
The undersigned hereby certifies to Tekno Comix, Inc., under
penalty of perjury, that he is not presently employed, self-employed or
engaged as an independent contractor with any person, corporation,
firm, partnership, or limited liability company or any other entity.
This
7
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certification is being issued in order to induce Tekno Comix, Inc. to
make certain severance payments to the undersigned pursuant to an
employment agreement dated March 26, 1998.
This Certification is given on [DATE].
/S/ ANDREW S. BAILEN
--------------------
Andrew S. Bailen
The Company shall have no obligation to deliver any bi-weekly severance
payment to Employee until Employee delivers such Certification Statement to
Company.
The Company will not be required to make Severance Payments if
Employee's employment with the Company is terminated due to "cause." For the
purposes of this Agreement, the term "cause" shall mean a failure or refusal on
the part of the Employee to perform substantially such person's duties (provided
that Company shall have given Employee ten (10) days written notice of such
failure, and such failure remains uncured, provided further that no such notice
will be required for any subsequent failures which are substantially similar to
the failure giving rise to the first such notice), the conviction of the
Employee of a crime, willful misconduct of the Employee contrary to the interest
of the Company which shall include, but not be limited to, violation of any
written or documented Company policies, the Employee's addiction to narcotics or
alcohol, or a material breach of the Employee's fiduciary duties to the Company.
In the event the Employee voluntarily terminates his employment with
the Company because the Company relocates its offices outside of Dade, Broward
or Palm Beach Counties, Florida, the Company will be deemed to have terminated
Employee without cause for purposes of this Agreement.
17. CONFIDENTIALITY AND NON-DISCLOSURE. Employee acknowledges that
Employee will have access to trade secrets and other confidential information
which is the property of Company and/or its affiliates, including but not
limited to, the marketing of the Company's products, and other information
relating to its present or future operations (all of the foregoing, whether or
not it qualifies as a "trade secret" under applicable law, is collectively
called "Confidential Information"). Employee recognizes that Confidential
Information is proprietary to the Company and its affiliates. Accordingly,
Employee agrees not to use or disclose any of the Confidential Information
during or after the term of this Agreement, except for the sole and exclusive
benefit of the Company, or pursuant to any relevant law or regulation, provided
in the latter case Employee shall give reasonable prior written notice of such
disclosure to the Company and only make such disclosure upon receipt of an
appropriate opinion of counsel confirming the necessity of such disclosure,
which opinion shall also be furnished to the Company. Upon any termination of
this Agreement, Employee will return to the Employee all tangible embodiments of
any Confidential Information. Employee agrees that each of the Company and its
affiliates would be irreparably injured by any breach
8
<PAGE>
of Employee's confidentiality agreement, that such injury would not be
adequately compensable by monetary damages, and that, accordingly, the Company
and any offended affiliate may specifically enforce the provisions of this
Paragraph by injunction or similar remedy by any court of competent
jurisdiction, without affecting any claim for damages.
18. REMEDIES AND REASONABILITY.
A. Employee agrees that, if Employee shall violate any of the
covenants or agreements contained in Paragraph 17 of this Agreement, the Company
shall be entitled to an accounting and repayment of all profits, compensation,
commissions, remuneration, or benefits which Employee directly or indirectly has
realized and/or may realize as a result of, growing out of, or in connection
with any such violation; such remedy shall be in addition to and not in
limitation of any injunctive relief or other rights or remedies to which the
Company may be entitled at law or in equity or under this Agreement.
B. With respect to the provisions of Paragraph 17, Employee
agrees that damages, by themselves, are an inadequate remedy at law, that a
material breach of the provisions of said Paragraph would cause irreparable
injury to the aggrieved party, and that the provisions of said Paragraph may be
specifically enforced by injunction or similar remedy in any court of competent
jurisdiction without affecting any claim for damages.
C. In the event that, notwithstanding the foregoing, any of
the provisions of Paragraph 17 shall be held to be invalid or unenforceable, the
remaining provisions thereof shall nevertheless continue to be valid and
enforceable as though invalid or unenforceable parts had not been included
therein.
D. Employee has carefully read and considered the provisions
of Paragraphs 16 and 17, and having done so, agrees that the restrictions set
forth are fair and reasonable and are reasonably required for the protection of
the interests of the Company, its officers, directors, and other employees.
19. NOTICES. All notices required or permitted under this Agreement
shall be in writing and shall be deemed delivered when delivered in person or
deposited in the United States mail, postage paid, addressed as follows:
To Company: Big Entertainment, Inc..
2255 Glades Road, Suite 237 West
Boca Raton, Florida 33431
Attn: Chief Executive Officer
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With copy to: Marvin A. Kirsner, Esquire
Greenberg Traurig
2255 Glades Road, Suite 419
Boca Raton, Florida 33431
To Employee: Andrew S. Bailen
1361 Cove Lake Rd.
North Lauderdale, FL 33068
Such addresses may be changed from time to time by either party by
providing written notice in the manner set forth above.
20. ARBITRATION. Except for the agreements contained in Paragraphs 17
and 18, the exclusive remedy with respect to any dispute arising between
Employee and the Company regarding the interpretation or enforcement of any
portion of this Agreement shall be determination by arbitration by a panel of
three (3) arbitrators under the rules of the Commercial Division of the American
Arbitration Association. Arbitration shall take place in Palm Beach County,
Florida, and any award, which may include attorneys' fees and costs, in the sole
discretion of the arbitration panel, may be enforced in any court of competent
jurisdiction. All awards and determinations of the arbitration shall be final.
No written interrogatories or recorded testimony shall be provided to either
party prior to any arbitration proceeding, but in his sole discretion the
arbitrator may compel either party to produce witnesses for interviews and
documents for inspection prior to any hearing.
21. APPLICABLE LAW; VENUE. This Agreement shall be governed by the
State of Florida. Venue for any action for either party in this Agreement shall
be the lowest state court of competent jurisdiction in Palm Beach County,
Florida.
22. ATTORNEYS' FEES. In the event that any action is filed in relation
to this Agreement, the unsuccessful party in such action shall pay to the
successful party in addition to all the sums that either party may be called on
to pay, a reasonable sum for attorneys fees, including fees incurred in
negotiation, preparation for trial and for any and all appeals.
23. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
24. AMENDMENTS. This Agreement, or any provisions hereof, may not be
amended, changed or modified without the prior written consent of each of the
parties hereto.
25. ENTIRE AGREEMENT. This Agreement and the agreements referred to in
it contain the entire agreement between the parties with respect to the
transactions
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provided for in them and supersede all previously written or oral negotiations,
commitments, representations and/or agreements.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EMPLOYER:
TEKNO COMIX, INC.,
a Florida corporation
By: /S/ MITCHELL RUBENSTEIN
----------------------------
EMPLOYEE:
/S/ ANDREW S. BAILEN
--------------------
Andrew S. Bailen
JOINDER
Big Entertainment joins in this agreement in order to confirm its
obligations to guaranty payment of the salary due to Employee hereunder and to
confirm its obligation to issue the Bonus Stock, the Annual Stock on the Options
to Employee as set forth hereunder.
BIG ENTERTAINMENT, INC.,
a Florida corporation
By: /S/ MITCHELL RUBENSTEIN, AS CEO
--------------------------------
11
EXHIBIT 10.2
EXHIBIT 10.2
FORM OF STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is dated as of
March/April __, 1998 between Big Entertainment, Inc., a Florida corporation (the
"Company"), and (the "Purchaser").
R E C I T A L S:
A. The Company desires to sell shares of the Company's Common Stock,
par value $.01 per share (the "Common Stock"), to the Purchaser pursuant to this
Agreement and to use the proceeds of such sale for general corporate purposes.
B. The Purchaser desires to purchase shares of Common Stock pursuant to
this Agreement on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals 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. PURCHASE OF COMMON STOCK. The Company hereby sells, conveys and
transfers to the Purchaser and the Purchaser hereby purchases from the Company
________ shares of Common Stock (the "Shares"), at a price of $_______ per share
(the "Purchase Price"), which Purchase Price equals the average of the closing
prices of the Common Stock for the 10 trading days immediately preceding the
date of this Agreement. The aggregate Purchase Price for the Shares of Common
Stock purchased hereunder shall be $ .
2. DELIVERIES BY THE PARTIES. On the date hereof:
(a) The Company is delivering to the Purchaser (i)
certificate(s) evidencing the Shares; (ii) a certified copy of resolutions of
the Board of Directors authorizing the execution and delivery of this Agreement
and consummation of the transactions contemplated hereby; and (iii) the legal
opinion of Broad and Cassel, counsel to the Company, in form and substance
reasonably satisfactory to the Purchaser.
(b) The Purchaser is delivering to the Company payment, by
wire transfer, of the Purchase Price for the Shares.
[(c) In connection with the purchase of the Shares, the
Company is issuing to the Purchaser five-year warrants (the "Warrants") to
purchase shares of the Company's
<PAGE>
Common Stock at an exercise price per share equal to the Purchase Price. The
Warrants are in the form attached hereto as Exhibit A.]
3. USE OF PROCEEDS. The Company currently intends that net proceeds of
the purchase of the Shares will be used for general corporate purposes.
4. REPRESENTATIONS OF THE PURCHASER. The Purchaser represents and
warrants as follows:
(a) RECEIPT OF CORPORATE INFORMATION. All requested publicly
available documents, records and books pertaining to the Company and the offer
and sale hereby of the Shares, [the Warrants and the shares of Common Stock
underlying the Warrants] (the ["Warrant Shares" and, together with the Shares
and the Warrants, the] "Securities"), including, without limitation, the
Company's Annual Report on Form 10-KSB for the Year Ended December 31, 1996 (the
"Form 10-KSB"); Quarterly Report on Form 10-QSB for the Quarter Ended September
30, 1997, as amended (the "Form 10-QSB"); and the Registration Statement on Form
S-3, File No. 333-38219 (the "Registration Statement"; the Form 10-KSB, Form
10-QSB and Registration Statement are collectively referred to herein as the
"SEC Documents"), have been delivered to the Purchaser and/or its advisors, and
all of the Purchaser's questions and requests for information have been answered
to the Purchaser's satisfaction.
(b) RISKS. The Purchaser acknowledges and understands that the
purchase of the Securities involves a high degree of risk and is suitable only
for persons of adequate financial means who have no need for liquidity in this
investment in that (i) the Purchaser may not be able to liquidate the investment
in the event of an emergency; (ii) transferability is extremely limited; and
(iii) in the event of a disposition, the Purchaser could sustain a complete loss
of its entire investment. The Purchaser is sufficiently experienced in financial
and business matters to be capable of evaluating the merits and risks of an
investment in the Company; has evaluated such merits and risks, including risks
particular to the Purchaser's situation; and the Purchaser has determined that
this investment is suitable for the Purchaser. The Purchaser has adequate
financial resources and can bear a complete loss of the Purchaser's investment.
(c) ACCREDITED INVESTOR STATUS. The Purchaser is an
"accredited investor" as defined in Rule 501(a) of Regulation D promulgated by
the Securities and Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "Securities Act").
(d) INVESTMENT INTENT. The Purchaser hereby represents that
the Securities being purchased hereunder are being acquired for the Purchaser's
own account with no intention of distributing such Securities to others. The
Purchaser has no contract, undertaking, agreement or arrangement with any person
to sell, transfer or otherwise distribute to any person or to have any person
sell, transfer or otherwise distribute for the Purchaser the Securities being
purchased hereunder or any interest therein. The Purchaser currently is not
engaged, nor does the Purchaser plan to engage within the currently foreseeable
future, in any discussion with any person regarding such a sale, transfer or
other distribution of the Securities being purchased hereunder or any interest
therein.
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<PAGE>
(e) COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. The
Purchaser understands that the Securities being offered and sold hereunder have
not been registered under the Securities Act. The Purchaser understands that the
Securities being offered and sold hereunder must be held indefinitely unless the
sale or other transfer thereof is subsequently registered under the Securities
Act or an exemption from such registration is available. Moreover, the Purchaser
understands that its right to transfer the Securities being purchased hereunder
will be subject to certain restrictions, which include restrictions against
transfer under the Securities Act and applicable state securities laws. In
addition to such restrictions, the Purchaser realizes that it may not be able to
sell or dispose of the Securities being purchased hereunder as there may be no
public or other market for them. The Purchaser understands that certificates
evidencing the Securities being purchased hereunder shall bear a legend
substantially as follows:
The securities represented by this certificate have not been
registered under the Securities Act of 1933 or any applicable
state law. They may not be offered for sale, sold, transferred
or pledged without (1) registration under the Securities Act
of 1933 and any applicable state law, or (2) an opinion
(reasonably satisfactory to the Company) of counsel that
registration is not required.
(f) AUTHORITY; ENFORCEABILITY. The Purchaser has the full
right, power, and authority to execute and deliver this Agreement and perform
its covenants and agreements hereunder. The execution and delivery of this
Agreement by the Purchaser, the performance by the Purchaser of its covenants
and agreements hereunder and the consummation by the Purchaser of the
transactions contemplated hereby have been duly authorized by all necessary
partnership action. This Agreement has been duly executed and delivered and
constitutes the valid and legally binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms except as such
enforceability may be limited by (i) bankruptcy, insolvency, moratorium or
similar laws affecting the enforcement of creditors' rights generally or by the
principles governing the availability of specific performance, injunctive relief
and other equitable remedies (regardless of whether such enforceability is
considered in equity or at law), including requirements of reasonableness and
good faith in the exercise of rights and remedies thereunder; (ii) applicable
laws and court decisions which may limit or render unenforceable certain terms
and provisions contained therein, but which in our opinion do not substantially
interfere with the practical realization of the benefits thereof, except for the
economic consequences of any procedural delay which may be imposed by, relate to
or result from such laws and court decisions; and (iii) the limitations on the
enforceability of the securities indemnification provisions set forth herein by
reason of matters of public policy.
(g) NONCONTRAVENTION. This Agreement constitutes a valid and
legally binding obligation of the Purchaser and neither the execution of this
Agreement, nor the consummation of the transactions contemplated hereby, will
constitute a violation of or default under, or conflict with, any judgment,
decree, statute or regulation of any governmental authority applicable to the
Purchaser or any contract, commitment, agreement or restriction of any kind to
which the Purchaser is a party or by which its assets are bound. The execution
and delivery
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<PAGE>
of this Agreement does not, and the consummation of the transactions described
herein will not, violate applicable law, or any mortgage, lien, agreement,
indenture, lease or understanding (whether oral or written) of any kind
outstanding relative to the Purchaser.
(h) APPROVALS. No approval, authorization, consent, order or
other action of, or filing with, any person, firm or corporation or any court,
administrative agency or other governmental authority is required in connection
with the execution and delivery of this Agreement by the Purchaser or the
consummation of the transactions described herein.
5. REPRESENTATIONS OF THE COMPANY. The Company acknowledges, represents
and agrees as follows:
(a) CORPORATE ORGANIZATION. The Company is duly organized,
validly existing and in good standing under the laws of the State of Florida and
has full corporate power, authority and legal right to own its properties and to
conduct the businesses in which it is now engaged. The Company is duly licensed
or qualified to transact business as a foreign corporation and is in good
standing in each jurisdiction where the ownership or lease of its assets or the
operation of its business requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on the business,
operations, property or financial or other condition of the Company (a "Material
Adverse Effect").
(b) AUTHORITY. The Company has full corporate power and
authority to execute and deliver this Agreement [and the Warrants] and to
perform all of its covenants and agreements thereunder. The execution and
delivery by the Company of this Agreement [and the Warrants], the performance by
the Company of its covenants and agreements thereunder and the consummation by
the Company of the transactions contemplated thereby have been duly authorized
by all necessary corporate action.
(c) ENFORCEABILITY. This Agreement [and the Warrants] have
been duly executed and delivered and constitute the valid and legally binding
obligations of the Company, enforceable against the Company in accordance with
their terms except as such enforceability may be limited by (i) bankruptcy,
insolvency, moratorium or similar laws affecting the enforcement of creditors'
rights generally or by the principles governing the availability of specific
performance, injunctive relief and other equitable remedies (regardless of
whether such enforceability is considered in equity or at law), including
requirements of reasonableness and good faith in the exercise of rights and
remedies thereunder; (ii) applicable laws and court decisions which may limit or
render unenforceable certain terms and provisions contained therein, but which
do not substantially interfere with the practical realization of the benefits
thereof, except for the economic consequences of any procedural delay which may
be imposed by, relate to or result from such laws and court decisions; and (iii)
the limitations on the enforceability of the securities indemnification
provisions set forth herein by reason of matters of public policy.
(d) NONCONTRAVENTION. Neither the execution and delivery of
this Agreement [and the Warrants] by the Company, nor the consummation of the
transactions contemplated
-4-
<PAGE>
thereby, nor the performance by the Company of its covenants and agreements
thereunder (i) violate any provision of the Articles of Incorporation or By-Laws
of the Company; (ii) violate any existing law, statute, ordinance, regulation,
or any order, judgment or decree of any court or governmental agency to which
the Company is a party or by which the Company or any of its assets is bound; or
(iii) conflict with or will result in any breach of any of the terms of or
constitute a default under or result in the termination of or the creation of
any lien pursuant to the terms of any indenture, mortgage, real property lease,
securities purchase agreement, credit or loan agreement or other material
agreement to which the Company is a party or by which the Company or any of its
assets is bound, to the extent such violation thereof, conflict therewith,
breach thereof, default thereunder or termination thereof would have a Material
Adverse Effect.
(e) THE SHARES. The Shares being offered and sold pursuant to
this Agreement have been duly and validly authorized and, when issued for the
consideration herein provided, will be duly and validly issued, fully paid and
nonassessable.
[(f) THE WARRANT SHARES. The Warrant Shares have been duly
authorized and reserved for issuance and, when issued upon exercise of the
Warrants in accordance with the terms thereof, will be duly and validly issued,
fully paid and nonassessable.]
(g) APPROVALS. Except as may be required under federal and
state securities laws (which have been or, in the case of compliance required on
a post-sale basis, will be complied with), the execution, delivery and
performance of this Agreement by the Company does not require (i) the consent,
waiver, approval, license or authorization of or any filing with any person or
any governmental authority; or (ii) the approval or authorization of the
shareholders of the Company. The issuance of the Shares[, Warrants and Warrant
Shares] pursuant to this Agreement is not subject to the registration or
prospectus delivery requirements of Section 5 of the Securities Act.
(h) LEGAL PROCEEDINGS. There are no (i) actions, suits,
claims, investigations or legal or administrative or arbitration proceedings
pending or, to the best knowledge of the Company, threatened against or
affecting the Company, whether at law or in equity, or before or by any
governmental authority; or (ii) judgments, decrees, injunctions or orders of any
governmental authority or arbitrator against the Company, which, in either case,
could have a Material Adverse Effect.
(i) SEC FILINGS, ETC. The Company has heretofore delivered to
each Purchaser correct and complete copies of the SEC Documents. The SEC
Documents were true and correct in all material respects at the time filed with
respect to the periods covered thereby; and such reports, as amended,
supplemented, or updated by subsequent filings, are true and correct as of the
date so amended, supplemented or updated in all material respects, do not
contain any misstatement of a material fact and do not omit to state a material
fact or any fact required to be stated therein or necessary to make the
statements contained therein not materially misleading with respect to the
periods covered thereby; and all amendments or supplements thereto required to
be filed under the federal securities laws have been so filed. The consolidated
financial statements of the Company included in the SEC Documents complied,
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<PAGE>
when filed, with the then-applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may have been indicated in the
notes thereto or, in the case of the unaudited statements, as permitted by Form
10-QSB promulgated by the SEC) and fairly presented (subject in the case of the
unaudited statements, to normal audit adjustments) the financial position of the
Company at the dates thereof and the consolidated results of the operations and
statement of changes in financial position for the periods then ended. The
Company has filed all documents and agreements that were required to be filed as
exhibits to the SEC Documents and all such documents and agreements when filed
were correct and complete in all material respects.
(j) CAPITALIZATION. As of the date of this Agreement, the
authorized capital stock of the Company consists of 25,000,000 shares of Common
Stock, par value $0.01, of which shares were issued and outstanding, and
1,000,000 shares of Preferred Stock, par value $0.01, of which 360,446 shares
were issued and outstanding. As of the date of this Agreement, the Company had
outstanding an aggregate of options and warrants exercisable for shares of the
Company's Common Stock. All of the outstanding shares of Common Stock and
Preferred Stock of the Company have been duly and validly authorized and issued
and are fully paid and nonassessable.
(k) ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in
the financial statements (the "Financial Statements") included in the SEC
Documents, or as incurred in the ordinary course of business subsequent to
September 30, 1997, as of the date hereof (i) the Company has no material
liability of any nature (matured or unmatured, fixed or contingent) that was not
provided for or disclosed in the Financial Statements, and (ii) to the best
knowledge of the Company, all liability reserves established by the Company and
set forth in the Financial Statements were adequate in all material respects for
the purposes indicated therein.
(l) NO CHANGE. Except as disclosed in or contemplated by the
SEC Documents, since September 30, 1997 there has not been (i) any material
change in the condition (financial or otherwise), operations, results of
operations, assets, liabilities, business or prospects of the Company taken as a
whole; (ii) any material liability or obligation (contingent or otherwise)
incurred by the Company, other than current liabilities (or obligations) or
capital leases incurred in the ordinary of business; (iii) any asset or property
of the Company made subject to a lien of any kind, except (A) liens for taxes
not yet due or which are being contested in good faith and by appropriate
proceedings provided adequate reserves with respect thereto are maintained on
the Company's books in accordance with generally accepted accounting principles;
(B) landlords', carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like liens arising in the ordinary course of business which
are not overdue for a period of more than 60 days or which are being contested
in good faith and by appropriate proceedings; (C) pledges or deposits in
connection with worker's compensation, unemployment insurance and other social
security legislation; (D) deposits to secure the performance of contracts, bids,
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature; (E) easements, rights-of-way, restrictions and
other similar encumbrances incurred in the ordinary course of business; and (F)
liens which, in the aggregate,
-6-
<PAGE>
are not material in amount, and which do not in any case materially detract from
the value of the property subject thereto or interfere with the ordinary conduct
of the Company's business; (iv) any waiver of any material valuable right of the
Company, or the cancellation of any material debt or claim held by the Company;
(v) any payment of dividends on, or other distributions with respect to, or any
direct or indirect redemption or acquisition of, any shares of the Common Stock
of the Company, or any agreement or commitment therefor; (vi) any mortgage,
pledge, sale, assignment or transfer of any tangible or intangible assets of the
Company, except, with respect to tangible assets, in the ordinary course of
business; (vii) any loan by the Company to any officer, director, employee or
shareholder of the Company, or any agreement or commitment therefor; (viii) any
material damage, destruction or loss (whether or not covered by insurance) which
does or may adversely affect the condition (financial or otherwise), operations,
results of assets, property, business or prospects of the Company; or (ix) any
change in the accounting methods or practices followed by the Company.
(m) TAXES. The Company has accurately prepared and timely
filed or has had accurately prepared and timely filed on its behalf all tax
returns which, to the knowledge of the Company, are required to be filed by it,
and has paid all taxes shown to be due and payable on said returns or on any
assessments made against it or any of its property and all other taxes, fees or
other charges imposed on it or any of its property by any nation or government,
any state or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government (other than those the amount or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with generally accepted accounting
principles have been provided on the books of the Company); and except as set
forth on a Schedule hereto, no tax liens have been filed and, to the knowledge
of the Company, no claims are being asserted with respect to any such taxes,
fees or other charges.
(n) RELATED PARTY TRANSACTIONS. Except to the extent described
in the SEC Documents, no current principal shareholder or current or former
director, officer or employee of the Company nor any "affiliate" (as defined in
the rules and regulations promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), of any such person, is currently, or since
September 30, 1997 has been, directly or indirectly through his affiliation with
any other person or entity, a party to any transaction (other than as an
employee, consultant or shareholder) with the Company providing for the
furnishing of services by, or rental of real or personal property from, or
otherwise requiring cash payments from or to any such person.
(o) DISCLOSURE. The representations or warranties made by the
Company in this Agreement or, except to the extent modified or amended by
subsequent written disclosure to the Purchaser through the date hereof, in any
other document or certificate furnished in connection herewith did not contain
at the time made or, if set forth herein, does not contain any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements herein or therein, in light of the circumstances under which they are
made, not misleading in any material respect. There is no fact known to the
Company that materially adversely affects or, other than general economic
conditions in the industry in which the Company operates, that the Company
reasonably believes will in the future materially adversely
-7-
<PAGE>
affect the business, operations, affairs or condition, financial or otherwise,
of the Company, which has not been set forth in this Agreement or in the SEC
Documents.
6. REGISTRATION RIGHTS.
(a) FILING OF REGISTRATION STATEMENT. The Company shall use
its best efforts to file with the SEC a registration statement on Form S-3 or
other applicable form (the "Registration Statement") and to cause the
Registration Statement to be declared effective within 90 days of the date of
this Agreement. The Registration Statement shall cover the resale of the Shares
[and the Warrant Shares.]
(b) OBLIGATIONS OF THE COMPANY. In connection with the filing
of the Registration Statement, the Company shall
(i) Prepare and file with the SEC such amendments
(including post- effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
and take such other reasonable action as may be necessary to keep the
Registration Statement effective until the earlier of the (A) public sale of the
Shares [and Warrant Shares] or (B) the Shares [and Warrant Shares] becoming
capable of full and complete public sale without registration under the
Securities Act and to comply with the provisions of the Securities Act and the
Exchange Act, and the rules and regulations thereunder, with respect to the
disposition of the Shares [and Warrant Shares];
(ii) Notify the Purchaser, after becoming aware
thereof, (A) when the Registration Statement or the prospectus included therein
or any prospectus amendment or supplement or post-effective amendment has been
filed and, with respect to the Registration Statement or any post-effective
amendment, when the same has become effective or (B) of any request by the SEC
for amendment of or supplement to the Registration Statement or related
prospectus or for additional information;
(iii) Furnish promptly to the Purchaser such reasonable
number of copies of a prospectus, and all amendments and supplements thereto, in
conformity with the requirements of the Securities Act, and such other documents
as the Purchaser may reasonably request in order to facilitate their disposition
of any Shares [or Warrant Shares];
(iv) Use its best efforts to register and qualify the
Shares [and Warrant Shares] under the securities or Blue Sky laws of such states
as shall be reasonably requested by the Purchaser, and prepare and file in those
states such amendments (including post-effective amendments) and supplements and
to take such other actions as may be necessary to maintain such registration and
qualification in effect at all times during the period the Company is required
to maintain the Registration Statement effective, and to take all other actions
necessary or advisable to enable the disposition of the Shares [and Warrant
Shares] in such states, provided that the Company shall not be required in
connection therewith or as a condition thereto to subject itself to taxation, to
qualify to do business or to file a general consent to service of process in any
such states; and
-8-
<PAGE>
(v) Notify the Purchaser, at any time when a
prospectus relating to the Shares [and Warrant Shares] is required to be
delivered under the Securities Act, of the happening of any event as a result of
which the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The Company shall promptly amend or supplement the Registration Statement to
correct any such untrue statement or omission, and provide the Purchaser with an
amended or supplemented prospectus with respect to the Shares [and Warrant
Shares] that corrects such untrue statement or omission.
(c) PURCHASER'S OBLIGATIONS. It shall be a condition precedent
to the obligations of the Company to the Purchaser to take any action pursuant
to this Section that the Purchaser shall furnish to the Company such information
regarding the Purchaser, the Shares [and Warrant Shares], and other shares of
the Company's Common Stock held by the Purchaser and the intended method of
disposition of such securities as shall be reasonably required to effect the
registration of the Shares [and Warrant Shares] and shall execute such documents
in connection with such registration as the Company may reasonably request.
(d) EXPENSES OF REGISTRATION. All expenses incurred by the
Company in complying with this section, including, without limitation,
registration and filing fees, fees and expenses of complying with state
securities and Blue Sky laws, printing expenses, and fees and disbursements of
the Company's counsel and accountants, shall be paid by the Company. In
addition, the Company shall pay the reasonable fees and expenses of one firm
serving as counsel to the Purchaser. All selling commissions applicable to the
disposition of the Shares [and Warrant Shares] shall not be borne by the Company
but shall be borne by the Purchaser.
(e) INDEMNIFICATION.
(i) The Company will indemnify and hold harmless the
Purchaser, the directors, officers, employees, agents and partners of the
Purchaser and the Purchaser's affiliates, if any, and each person, if any, who
controls the Purchaser within the meaning of the Securities Act or the Exchange
Act (each, a "Purchaser Indemnified Party" and collectively, the "Purchaser
Indemnified Parties"), against any losses, claims, damages, expenses or
liabilities (joint or several) to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such losses, claims,
damages, expenses or liabilities (or actions or proceedings, whether commenced
or threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively, a "Violation"): (A)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (B) the
omission or alleged omission to state therein information required to be stated
therein, or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading or (C) any violation or
alleged violation by the Company of the Securities Act, the Exchange Act or any
state securities or Blue Sky law; and the Company will reimburse each Purchaser
Indemnified Party, promptly as such expenses are incurred, for any legal or
other expenses reasonably incurred by any of
-9-
<PAGE>
them in connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that the indemnity agreement
contained in this Section shall not apply to amounts paid in settlement of any
such loss, claim, damage, expense, liability, action or proceeding if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, expense, liability, action or proceeding to
the extend that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished by or on
behalf of the Purchaser (in its capacity as such) expressly for use in the
Registration Statement by the Purchaser.
(ii) The Purchaser will indemnify and hold harmless
the Company, each of its directors, each of its officers who has signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act (collectively, the
"Company Indemnified Parties") against any losses, claims, damages, expenses or
liabilities (joint or several) to which any of them may become subject, under
the Securities Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages, expenses or liabilities (or actions in respect
thereof) arise out of or are based upon: (A) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto and (B) the omission or alleged omission
to state therein information required to be stated therein, or necessary to make
the statements therein not misleading, in each case to the extent (and only to
the extent) that such losses, claims, damages, expenses or liabilities are
caused by statements made in the Registration Statement in reliance upon and in
strict conformity with written information furnished by or on behalf of the
Purchaser (in its capacity as such) expressly for use therein; and the Purchaser
will reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that the indemnity agreement
contained in this section shall not apply to amounts paid in settlement or any
such loss, claim, damage, expense, liability, action or proceeding if such
settlement is effected without the consent of the Purchaser, which consent shall
not be unreasonably withheld.
(iii) Promptly after receipt by an indemnified party
under this Section of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this section, deliver
to the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and, to the extent the
indemnifying party so desires to assume control of the defense thereof with
counsel mutually satisfactory to the indemnifying and indemnified parties;
provided, however, that an indemnified party shall have the right to retain its
own counsel, with the fees and expenses to be paid by the indemnifying party,
if, in the reasonable opinion of the indemnified party, representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall relieve
such indemnifying party of any liability to the indemnified party under this
section only to the extent
-10-
<PAGE>
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party shall not relieve it of any liability
that it may have to any indemnified party otherwise than under this section. The
indemnification required by this section shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, promptly
as such expense, loss, damage or liability is incurred.
(iv) To the extent any indemnification by an
indemnifying party is prohibited or limited by law, or is otherwise unavailable
to or insufficient to hold harmless an indemnified party, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under this section, provided that no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(f) REPORTS UNDER THE EXCHANGE ACT. With a view to making
available to the Purchaser the benefits of Rule 144 ("Rule 144") under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Purchaser to sell securities of the Company to the public without
registration, the Company agrees to use its best efforts to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144;
(ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Exchange Act; and
(iii) furnish to the Purchaser, so long as such
Purchaser owns any Common Stock, forthwith upon request (A) a written statement
by the Company that it has complied with the reporting requirements of Rule 144;
(B) a copy of the most recent annual or quarterly report of the Company and such
other reports and documents so filed by the Company; and (C) such other publicly
available information as may be reasonably requested in availing the Purchaser
of any rule or regulation of the SEC that permits the selling of any such
securities without registration.
(g) ASSIGNMENT OF REGISTRATION RIGHTS. Rights under this
Agreement may be assigned by the Purchaser to transferees or assignees of the
Purchaser's Common Stock; provided, however, that the Company is, within a
reasonable time after such transfer or assignment, furnished with notice of the
name and address of such transferee or assignee and the Common Stock with
respect to which such registration rights are being assigned; provided, further,
that such assignment effectively only if, immediately following such transfer or
assignment, the further disposition of the Common Stock by the transferee or
assignee is restricted under the Securities Act. The term "Purchaser" used in
this Agreement includes permitted assignees of rights under this Agreement in
accordance with this Section.
7. NOTICES. All notices, reports and other communications to the
Purchaser or the Company hereunder shall be in writing, shall refer specifically
to this Agreement and shall be
-11-
<PAGE>
hand delivered or sent by facsimile transmission or by registered mail or
certified mail, return receipt requested, postage prepaid, in each case to the
respective persons and addresses specified below (or to such other persons or
addresses as may be specified in writing to the other party):
If to the Purchaser, to:
With a copy to:
If to the Company, to: Big Entertainment, Inc.
2255 Glades Road
Suite 237W
Boca Raton, Florida 33431
Attn: Mr. Mitchell Rubenstein
Chief Executive Officer
Fax No.: (561) 998-2974
With a copy to: Broad and Cassel
Miami Center, Suite 3000
201 South Biscayne Boulevard
Miami, Florida 33131
Attn: Dale S. Bergman, P.A.
Fax No.: (305) 373-9493
Any notice or communication given in conformity with this
Section shall be deemed to be effective when received by the addressee if
delivered by hand or overnight courier or by facsimile (with confirmed receipt),
and three days after mailing, if mailed.
8. NO IMPLIED WAIVERS; RIGHTS CUMULATIVE. No failure on the part of the
Purchaser or the Company to exercise and no delay in exercising any right,
power, remedy or privilege under this Agreement or provided by statute or at law
or in equity or otherwise, including, without limitation, the right or power to
terminate this Agreement, shall impair, prejudice or constitute a waiver of any
such right, power, remedy or privilege or be construed as a waiver of any breach
of this Agreement or as an acquiescence therein, nor shall any single or partial
exercise of any such right, power, remedy or privilege preclude any other or
further exercise thereof or the exercise of any other right, power, remedy or
privilege.
-12-
<PAGE>
9. AMENDMENTS. No amendment, modification, waiver, termination or
discharge of any provision of this Agreement, nor consent to any departure
therefrom, shall in any event be effective unless the same shall be in writing
specifically identifying this Agreement and the provision(s) intended to be
amended, modified, waived, terminated or discharged and signed by the Purchaser
and the Company, and each amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by the Purchaser and the Company.
10. INDEMNIFICATION BY THE COMPANY. The Company hereby agrees to
indemnify and hold the Purchaser Indemnified Parties harmless from, and to
reimburse each of the Purchaser Indemnified Parties for, on an after-tax basis,
any loss, damage, deficiency, claim, liability, obligation, suit, action, fee,
cost or expense of any nature whatsoever (including, but not limited to,
reasonable attorney's fees and costs) arising out of, based upon or resulting
from (a) any inaccuracy in or any breach of any representation or warranty of
the Company contained in this Agreement, certificate or other written instrument
or document delivered by the Company pursuant hereto or (b) any breach of any of
the covenants, agreements or undertakings of the Company contained in or made
pursuant to this Agreement.
11. INDEMNIFICATION BY THE PURCHASER. The Purchaser hereby agrees to
indemnify and hold the Company and its subsidiaries, affiliates, directors,
officers, employees and agents (collectively, the "Company Indemnitees")
harmless from, and to reimburse each of the Company Indemnitees for, on an
after-tax basis, any loss, damage, deficiency, claim, liability, obligation,
suit, action, fee, cost or expense of any nature whatsoever (including, but not
limited to, reasonable attorney's fees and costs) arising out of, based upon or
resulting from (i) any inaccuracy in or any breach of any representation or
warranty of the Purchaser contained in this Agreement, certificate or other
written instrument or document delivered by the Purchaser pursuant hereto or
(ii) any breach of any of the covenants, agreements or undertakings of the
Purchaser contained in or made pursuant to this Agreement.
12. INTEGRATION. This Agreement, including any Schedules hereto,
represents the entire understanding and agreement of the parties with respect to
the subject matter hereof. No other representations, statements or warranties
have been made, other than what is written herein.
13. COSTS OF PARTIES; ATTORNEYS' FEES. Each party shall bear its own
costs in connection with this Agreement and the transactions contemplated
hereby, provided that the Company agrees to reimburse the Purchaser for its
reasonable attorneys' fees related thereto. Except as otherwise set forth
herein, all costs and expenses, including reasonable attorneys' fees, incurred
in the enforcement of this Agreement, shall be paid to the prevailing party by
the non-prevailing party, upon demand.
-13-
<PAGE>
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which may be considered one and the same agreement and each
of which shall be deemed an original.
15. GOVERNING LAW. This Agreement shall be enforced, governed and
construed in all respects in accordance with the internal laws, and not the laws
pertaining to conflicts or choice of laws, of the State of .
16. NO BROKERS. Each party represents to the other that it has not
employed or dealt with any broker, agent or finder in respect of the
transactions provided for herein. Each party hereto agrees to indemnify and hold
harmless the other party hereto from and against all fees, expenses, commissions
and costs due and owing any broker, agent or finder, on account of or in any way
resulting from any contract or understanding existing between the indemnifying
party and such broker, agent or finder.
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
officers, have executed this Agreement as of the date first written above.
COMPANY:
BIG ENTERTAINMENT, INC.
By:__________________________________
Name: Mitchell Rubenstein
Title: Chief Executive Officer
PURCHASER:
By:__________________________________
Name:
Title:
-14-
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 329,686
<SECURITIES> 0
<RECEIVABLES> 1,284,882
<ALLOWANCES> 39,982
<INVENTORY> 2,061,781
<CURRENT-ASSETS> 4,162,950
<PP&E> 5,826,791
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0
4,000,000
<COMMON> 72,372
<OTHER-SE> 774,903
<TOTAL-LIABILITY-AND-EQUITY> 12,099,903
<SALES> 2,709,936
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<CGS> 1,105,525
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<OTHER-EXPENSES> (12,697)
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<INCOME-TAX> 0
<INCOME-CONTINUING> (1,582,944)
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