FORM 10-KSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File No. 0-22908
BIG ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
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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)
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(561) 998-8000
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter periods that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $11,126,516.
The aggregate market value of the issuer's common stock, $.01 par value, held by
non-affiliates on March 17, 1999, based on the last sale price of the common
stock as reported by Nasdaq, was: $80,079,624.
As of March 17, 1999, there were 8,929,281 shares of the issuer's common stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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BIG ENTERTAINMENT, INC.
FORM 10-KSB
FOR THE YEAR ENDED
DECEMBER 31, 1998
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TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS........................................................................................3
PART I
Item 1. Description of Business...................................................................................3
Item 2. Description of Property..................................................................................12
Item 3. Legal Proceedings........................................................................................12
Item 4. Submission of Matters to a Vote of Securityholders.......................................................12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.................................................13
Item 6. Management's Discussion and Analysis or Plan of Operation................................................14
Item 7. Financial Statements.....................................................................................28
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................................................54
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act.................................................................55
Item 10. Executive Compensation..................................................................................59
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................................63
Item 12. Certain Relationships and Related Transactions..........................................................64
Item 13. Exhibits and Reports on Form 8-K........................................................................69
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FORWARD-LOOKING STATEMENTS
Big Entertainment, Inc. (the "Company" or "Big Entertainment") cautions
readers that certain important factors may affect the Company's actual results
and could cause such results to differ materially from any forward-looking
statements that may be deemed to have been made in this Form 10-KSB or that are
otherwise made by or on behalf of the Company. For this purpose, any statements
contained in this Form 10-KSB that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "expect," "believe," "anticipate," "intend,"
"could," "estimate," or "continue" or the negative other variations thereof or
comparable terminology are intended to identify forward-looking statements.
Factors that may affect the Company's results include, but are not limited to,
the Company's continuing operating losses and accumulated deficit, its
relationships with Internet search engines, portal companies and other web
sites, its dependence on its relationship with its authors, its reliance on
licensees, its ability to manage and finance growth, its dependence on key
management personnel, its ability to compete in the Internet/e-commerce,
entertainment, and licensing industries, and the Company's ability to realize
the carrying value of its investment in the mall-based retail business. The
Company is also subject to other risks detailed herein or detailed from time to
time in the Company's filings with the Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Big Entertainment is a diversified entertainment company engaged in the
operation of an e-commerce entertainment site, the development and licensing of
intellectual properties, and the operation of entertainment-related retail
stores. Big Entertainment conducts these activities through the Company and its
wholly and majority-owned subsidiaries, as well as through a joint venture known
as NetCo Partners ("NetCo Partners"), in which the Company has a 50% ownership
interest. The Company presently has two operating divisions: the entertainment
retail division (which includes an e-commerce business, BIGE.COM) and the
intellectual properties division. The Company intends to expand its Internet
operations with the pending acquisition of hollywood.com, a leading movie web
site, and CinemaSource, which management believes to be the nation's largest
distributor of movie showtimes and related movie information to the Internet
industry.
ENTERTAINMENT RETAIL DIVISION
GENERAL. The Company operates mall-based retail stores and an Internet
e-commerce studio store (BIGE.COM) which sell entertainment-related, branded
merchandise including apparel, jewelry, art, collectibles, novelty items, and
books. The merchandise is based on movies and television shows such as Star
WarsTM, Star TrekTM, X-FilesTM, South ParkTM and BatmanTM and popular culture.
INTERNET BUSINESS.
INTERNET STUDIO STORE - BIGE.COM. The Company launched its Internet
studio store on November 26, 1998. This online store, BIGE.COM, offers an
expansive line of products including branded, licensed merchandise from
Hollywood studios, television networks, and popular culture. On December 25,
1998, the Company enhanced its e-commerce site with the addition of an auction
site where customers can bid on entertainment memorabilia and collectibles
offered either by the Company or by members of the auction
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site. The Company's strategy for the Internet studio store is to make the site
accessible through major search engines, portal companies and other popular
entertainment-oriented web sites to bring customers to the site. The Company has
entered into a number of agreements with popular web sites in which the
Company's Internet studio store, BIGE.COM, is either the exclusive studio store
on the site or a preferred studio store on the site. The Company's Internet
studio store is currently accessible directly at BIGE.COM, and also at
USATODAY.COM, FILM.COM, HOLLYWOOD.COM, and BROADCAST.COM. In addition, the
Company's merchandise is featured in Excite's Star Wars(TM) shop, representing
over half of the Star Wars(TM) products currently offered at EXCITE.COM.
Similarly, the Company's merchandise is included on the "Shop the Web" section
on AMAZON.COM. Additionally, the Company's products are expected to soon be
available in the Yahoo! mall and at IMDB.COM, the Internet movie data base
subsidiary of Amazon.com, Inc. The Company has expanded the relationship it
developed with Leonard Nimoy on the intellectual properties side of the
Company's business, as Nimoy, best known for his role as "Spock" on Star
Trek(TM), serves as the official spokesperson for the science fiction section of
BIGE.COM.
EXPANSION PLANS FOR INTERNET BUSINESS. The Company plans to expand its
Internet operations beyond e-commerce by developing and acquiring other
movie-related on-line businesses, with a goal of becoming the "category killer"
on the Internet for movies. The Company has two pending acquisitions, which will
increase the Company's Internet operations as detailed below.
HOLLYWOOD.COM - On January 10, 1999, the Company entered into a
definitive agreement to acquire Hollywood Online, Inc. ("Hollywood
Online") from the Times Mirror Company for $31.0 million, consisting of
the Company's common and preferred stock, and up to $1.0 million of
cash. Hollywood Online owns and operates HOLLYWOOD.COM. The
HOLLYWOOD.COM web site includes movie information, local movie theatre
times where users can input a zip code and view the movie choices in
their local area, movie reviews, trailers, and celebrity interviews and
information (plus links to the Company's Internet studio store) all in
one easy-to-use site. HOLLYWOOD.COM plans to offer on-line movie
ticketing to make the site a one-stop, comprehensive, on-line movie
supersite. Upon completion of the acquisition, the "HOLLYWOOD.COM" name
will be the brand name for the combined site, while the BIGE.COM URL
will still be utilized independently and as a component of
HOLLYWOOD.COM. BIGE.COM and HOLLYWOOD.COM currently have numerous
relationships with various media companies, including some that already
overlap. As a combined force, the Company currently expects to be able
to forge stronger relationships with these media companies, including
companies such as the Washington Post, Gannett, and Times Mirror. The
combined site is being promoted under an exclusive agreement with the
National Association of Theater Owners ("NATO") by airing trailers on
approximately 70% of all movie screens in the U.S. As part of the
transaction, the combined site will become the studio store for
LATIMES.COM, the web site of the Los Angeles Times, which is owned by
Times Mirror. HOLLYWOOD.COM is a leading movie web site with over one
million pages of movie-related content. During the fourth quarter of
1998, over 3.8 million unique users visited Hollywood.COM, viewing over
63 million pages on the site. The number of users and page views
continues to increase. For the week ended March 7, 1999, Hollywood
Online reported that traffic at HOLLYWOOD.COM had reached a new high
with more than 5.6 million page impressions for the week, reflecting
the popularity of HOLLYWOOD.COM's coverage of the upcoming Academy
Awards(R). Hollywood Online's traffic is measured by I/PRO. Hollywood
Online generated approximately $1.6 million in revenues for 1998,
primarily through the sale of advertising and sponsorships. Hollywood
Online's full-time advertising staff consisted of one person hired in
the third quarter of 1998. The Company plans to increase the
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advertising sales staff upon completion of the acquisition. Advertisers
and sponsors on HOLLYWOOD.COM include Visa, General Motors, Microsoft,
Intel, Panasonic, Sony and many others. The acquisition of Hollywood
Online is expected to close during the second quarter of 1999,
following approval by the Company's shareholders.
CINEMASOURCE - On March 29, 1999, the Company entered into a definitive
agreement to acquire CinemaSource, Inc. ("CinemaSource"), a privately
held company, for $6.5 million in cash and 436,191 shares of the
Company's common stock. Alternatively, the Company has the option to
pay all cash for CinemaSource in an amount equal to $6.5 million plus
the product of 436,191 times the greater of $12.50 or the average
closing price for the Company's common stock for the ten trading days
ending on the second day preceeding consummation of the CinemaSource
acquisition. Management believes that CinemaSource is the nation's
largest distributor of movie showtimes and related movie information to
the Internet industry. CinemaSource gathers movie data, including
showtimes, synopses, photos and trailers, from theaters across the
country, and then sells this data, in a compiled, organized manner, to
both large and small media companies. The growth of CinemaSource's
business is in providing movie showtime data to Internet companies,
particularly the portals. CinemaSource currently provides movie
showtime data to Yahoo!, Excite, MSN, Go Network, MovieFone, Inc.,
CitySearch, Zip 2, and others. CinemaSource's customers also include
newspapers such as The New York Times and the Knight Ridder chain. The
acquisition of CinemaSource is expected to close during the second
quarter of 1999. The acquisition is subject to customary
representations, warranties, and due diligence, including receipt of
audited financial statements for CinemaSource for 1998 and 1997 that
are satisfactory to the Company. In addition, the Company may, at its
option, condition the closing of the CinemaSource acquisition on the
Company's closing of the Hollywood Online acquisition.
The Company plans to further expand its entertainment web site by
increasing its strategic alliances with other Internet sites, media companies,
and media/entertainment celebrities, as well as through additional acquisitions
or joint ventures. The Company currently has the option to acquire a 50%
ownership interest in Florida Championship Wrestling ("FCW"), one of the
nation's oldest and leading regional wrestling organizations, at no cost to the
Company provided that the Company is able to obtain a network television
contract for FCW. The Company is currently in discussions with an international
television network regarding such a licensing agreement, although there can be
no assurances that the Company will be able to obtain such a network television
contract for FCW. Provided such transaction is completed, the name FCW will be
changed to "Big Wrestling". The Company also plans to feature live professional
wrestling events on its entertainment web site. Professional wrestling, with
millions of avid fans, is a billion-dollar industry that encompasses cable TV,
pay-per-view events, and merchandising. Wrestling programs typically occupy four
or five of the top ten ratings slots among basic cable TV programs.
The Company's Internet business is conducted through its wholly-owned
subsidiary, Big Online, Inc. Big Online, Inc. has established its own Board of
Directors, currently comprised of Mitchell Rubenstein and Laurie S. Silvers, the
founders and key executive officers of Big Entertainment, Inc., and Frederic M.
Seegal, the President of Wasserstein Perella & Co., Inc., an investment banking
firm. Mr. Seegal recently advised GeoCities on its sale to Yahoo! and Lycos in
its transaction with USA Networks. The Company plans to utilize Mr. Seegal's
expertise and guidance to further build its Internet operations, and to possibly
spin off the Internet business into a separately traded public company, although
there can be no assurances that the Company will successfully carry out any of
these plans.
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MALL-BASED STORES. Currently, the Company operates six mall-based
retail stores. The following table sets forth information with respect to the
Company's existing mall-based retail locations:
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LOCATION DATE OPENED STORE TYPE
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Mall of America, Bloomington, Minnesota September 1994 Mini In-Line
Florida Mall, Orlando, Florida October 1994 Super-Kiosk
Willowbrook Mall, Wayne, New Jersey October 1997 In-Line Studio Store
Woodbridge Mall, Woodbridge, New Jersey November 1997 In-Line Studio Store
Irvine Spectrum Center, Irvine, California November 1998 In-Line Studio Store
The Block at Orange, Orange Park, California November 1998 In-Line Studio Store
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This represents a significant reduction from the 34 mall-based stores
that were in operation at the end of 1997, as the Company has determined to exit
from the mall-based retail business and focus exclusively on its Internet
operations. During 1998, the Company closed 29 kiosk locations. One in-line
store has been closed to date in 1999. The Company intends to sell the remaining
six locations. Two separate groups have expressed interest in a purchase of the
remaining mall-based retail stores, which represent some of the Company's better
locations. The Company will pursue further negotiations with the potential
buyers, with the ultimate goal being a complete exit from the mall-based retail
operations. There can be no assurances, however, that the Company will be able
to consummate such a sale.
The Company has also discontinued its efforts to develop franchised
stores. The Company had previously entered into two franchise agreements for the
Philadelphia and Phoenix markets. During 1998 the Company refunded the $50,000
franchise fee it previously received from the Philadelphia franchisee, in
exchange for termination of this franchise agreement and mutual releases of both
parties. During 1998, the Phoenix franchisee paid $350,000 as a territorial
exclusivity fee for the Phoenix, Arizona market. This franchisee must open the
first store by December 1999 and open one store each year thereafter in order to
preserve its exclusive rights to the Phoenix market. The Company has no further
obligation under either of the franchise agreements.
ABC PROGRAMMING AGREEMENT. During March 1997, the Company entered into
a programming agreement with ABC, a division of The Walt Disney Company. Under
this agreement, the Company runs ABC video clips on the television monitors in
its retail stores. In exchange for the Company's agreement to run the ABC
programming and to promote ABC on its web site, ABC affiliate stations in
markets where the Company's retail stores are located run promotional and
advertising spots featuring the Company's mall-based and Internet studio stores.
The promotional spots provide the Company with substantial television
advertising in the markets where the retail units are located at no cash expense
to the Company. The ad spots began to run on the ABC affiliate stations during
the third quarter of 1997, and continued throughout 1998. Management is
currently in discussion with ABC regarding modification of this agreement given
the Company's expanding Internet operations and the phase out of its mall-based
retail operations.
INTELLECTUAL PROPERTIES DIVISION
The Company, through its 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
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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., MICKEY SPILLANE'S MIKE DANGER, LEONARD
NIMOY'S PRIMORTALS). The intellectual properties division also includes a book
licensing and packaging operation, which focuses on developing and executing
book projects, typically with best-selling authors. These books are then
licensed for publication to book publishers such as HarperCollins, Bantam
Doubleday Dell, Random House, Simon & Schuster, Viking Press and Warner Books.
Until early 1997, the intellectual properties division published works based on
these properties itself, rather than licensing them to others; however, the
Company has opted to exclusively pursue licensing of its intellectual properties
since early 1997.
INTELLECTUAL PROPERTIES AND LICENSING ACTIVITIES. The Company's current
intellectual properties, and the licensing activities related thereto, are
discussed below. Those properties which are owned through NetCo Partners (in
which the Company has a 50% interest) are so indicated. It is important to note
that the Company (or NetCo Partners, if applicable) has the right to include the
author's or celebrity's name as part of the title of the intellectual property
for all licensed products, including books, television series and films based on
such intellectual properties. The Company is generally obligated to pay the
authors or celebrities fees based on amounts received by the Company from the
licensing to third parties of the rights to produce other products featuring the
intellectual properties. The Company seeks when possible to license its
intellectual properties on terms that provide to the Company advance payments
against royalties to be earned and that minimize or eliminate the Company's
additional development costs going forward.
/bullet/ TOM CLANCY'S NETFORCE (a NetCo Partners' property) was
developed by best-selling author Tom Clancy, who has had 22
books listed on the New York Times bestsellers list, in
collaboration with Steve Pieczenik, who also collaborated with
Clancy on the best-selling TOM CLANCY'S OP CENTER series of
books. TOM CLANCY'S NETFORCE was licensed for production as a
four-hour television mini-series which aired on ABC in
February 1999; for publication of six adult and 18 young adult
novels to be published in North America by Berkley Publishing
Group (a division of Pearson, plc.); for publication of the
first two adult books as audio books by Random House Audio
Publishing; and for book publication and distribution rights
in foreign countries and languages throughout the world with
eight different foreign publishers. NetCo Partners has also
entered into a product placement agreement with Dodge, a
division of Chrysler Corporation, pursuant to which NetCo
Partners has agreed to feature Dodge vehicles in the first
four TOM CLANCY'S NETFORCE novels. TOM CLANCY'S NETFORCE is
discussed in more detail under "Management's Discussion and
Analysis or Plan of Operation - Equity in Earnings of NetCo
Partners" included in Item 6 of Part II of this Form 10-KSB.
/bullet/ LEONARD NIMOY'S PRIMORTALS was published as a hardcover novel
in North America under a licensing agreement with Warner Books
during 1997. A paperback version was released in March 1998
under the same licensing agreement. It was also published as
an interactive CD-ROM in 1997 under a licensing agreement with
Sierra On-Line, Inc. The Company has also entered into an
agreement for publication and distribution of this book in
certain countries outside the United States and Canada. Under
a separate agreement, Leonard Nimoy, best known for his role
as "Spock" on STAR TREKTM, also serves as the official
spokesperson for the science fiction section of the Company's
web site, BIGE.COM.
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/bullet/ GENE RODDENBERRY'S XANDER IN LOST UNIVERSE has been licensed
to DAW Books, Inc. (partner of Penguin Putnam) for publication
of two novels based on this space adventure concept created by
the late creator of STAR TREKTM.
/bullet/ ISAAC ASIMOV'S I-BOTS was licensed to HarperCollins for
publication of an illustrated novel published in 1997 and as a
hardcover novel released in 1998.
/bullet/ MICKEY SPILLANE'S MIKE DANGER: During 1998, the Company
entered into an agreement with Pressman Films, granting
Pressman Films the option to produce a feature film or
television series based on MICKEY SPILLANE'S MIKE DANGER.
There is no guarantee that Pressman Films will exercise its
option. Pressman Films produced OLIVER STONE'S WALL STREET,
THE CROW, REVERSAL OF FORTUNE, and DAS BOOT. Pursuant to an
agreement with the Company, a novel based on this property is
expected to be published in the next 12 months jointly by
Hyperion Books and Miramax Books, both divisions of the Walt
Disney Co.
/bullet/ TAD WILLIAMS' MIRRORWORLD (a Netco Partners' property) was
published as an illustrated novel in 1998 under a licensing
agreement with HarperCollins.
/bullet/ ANNE MCCAFFREY'S ACORNA: UNICORN GIRL has been licensed to
HarperCollins for the North American publication and
distribution of four prose novels and one illustrated novel.
The original contract with HarperCollins included only the
first two prose novels and the illustrated novel, which were
published in 1997 and 1998. Based on the popularity of the
initial books, HarperCollins continued this book series by
entering into a licensing agreement with the Company for two
additional books. This intellectual property has also been
licensed to Books on Tape, Inc. for production of unabridged
audio recordings of the first three prose novels, two of which
were released in early 1999, and to various other parties for
licensing rights in certain countries outside the United
States and Canada.
/bullet/ MARGARET WEIS' TESTAMENT OF THE DRAGON has been licensed to
HarperCollins for publication of an illustrated novel, which
was published in 1997, and for publication of a prose novel,
which was released by HarperCollins in 1998.
/bullet/ ARTHUR C. CLARKE'S WORLDS OF ALEXANDER (a Netco Partners'
property) was developed by Arthur C. Clarke, the author of
2001: A SPACE ODYSSEY.
/bullet/ In addition, there are various other intellectual properties
owned by the Company and NetCo Partners, for which there
currently are no licensing agreements.
The Company is continually in discussions with publishers, television
networks, movie studios and other licensees to contract for additional licensing
opportunities based on the Company's library of intellectual properties. The
Company believes that successful feature films and/or television series will
significantly enhance the value of the intellectual property upon which such
feature film and/or television series is based, resulting in increased
opportunities for additional licensing and merchandising revenues. The Company
is represented in its efforts to secure book licenses with publishers by the
William Morris Agency.
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NETCO PARTNERS. In June 1995, the Company and C.P. Group Inc. ("C.P.
Group"), entered into an agreement to form NetCo Partners (the "NetCo Joint
Venture Agreement"). NetCo Partners is engaged in the publishing and licensing
of entertainment properties, including TOM CLANCY'S NETFORCE, and has entered
into various licensing agreements described above.
The Company and C.P. Group are each 50% partners in NetCo Partners. Tom
Clancy owns 50% of C.P. Group. C.P. Group contributed to NetCo Partners all
rights to TOM CLANCY'S NETFORCE, and the Company contributed to NetCo Partners
all rights to TAD WILLIAMS' MIRRORWORLD, ARTHUR C. CLARKE'S WORLDS OF ALEXANDER
(formerly called CRIOSPHINX), NEIL GAIMAN'S LIFERS, and ANNE MCCAFFREY'S
SARABAND.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement,
the Company is responsible for developing, producing, manufacturing,
advertising, promoting, marketing and distributing NetCo Partners' illustrated
novels and related products and for advancing all costs incurred in connection
therewith. All amounts advanced by the Company to fund NetCo Partners'
operations are treated as capital contributions of the Company and the Company
is entitled to a return of such capital contributions before distributions of
cash flow are split equally between the Company and C.P. Group. The NetCo Joint
Venture Agreement provides for an initial term (the "Development Term") of five
years, during which the partners will jointly develop the contributed
properties. The Development Term may be extended by the mutual consent of the
partners and shall terminate upon 30 days' notice to the Company by C.P. Group
should Mitchell Rubenstein cease to be the Chief Executive Officer of the
Company and Laurie S. Silvers cease to be the President of the Company. At the
end of the Development Term, any undeveloped properties (other than TOM CLANCY'S
NETFORCE, which will continue to be owned 50% by the Company and 50% owned by
C.P. Group even after dissolution of NetCo Partners) are to be returned to their
respective contributing partners and any properties in development or already
developed will remain properties of the joint venture, which will continue until
its bankruptcy, dissolution, or the sale of all or substantially all of its
assets.
BOOK LICENSING AND PACKAGING. Big Entertainment conducts its book
licensing and packaging activities through its 51%-owned subsidiary, Tekno
Books. Tekno Books is a leading book packager of fiction and non-fiction, with
approximately 1,035 books published to date and in its history (approximately
325 published since the fourth quarter of 1994, when the Company acquired its
interest in Tekno Books) and approximately another 180 under contract that are
forthcoming. In addition to providing the Company with access to a number of
best-selling authors, Tekno Books creates book projects by developing concepts,
negotiating publishing agreements and executing substantially all aspects of the
book projects. Tekno Books has worked with approximately 50 New York Times
best-selling authors, including Tom Clancy, Jonathan Kellerman, Dean Koontz,
Tony Hillerman, Robert Ludlum and Scott Turow, and numerous media celebrities,
including David Copperfield, Louis Rukeyser and Willard Scott. These books have
been published with more than 60 publishers (including HarperCollins, Bantam
Doubleday Dell, Random House, Simon & Schuster, Viking Penguin and Warner
Books), translated into 30 languages, and selected by 22 different book clubs.
Tekno Books is also a leading producer of novels and anthologies in the science
fiction, fantasy, mystery, horror and Western genres. During 1998, some of the
books worked on by Tekno Books include TOM CLANCY'S POWER PLAYS: RUTHLESS.COM;
ONCE UPON A CRIME, a selection of the Mystery Guild; MURDER SHE WROTE III, under
license from Universal Studios; and 100 SNEAKY LITTLE SLEUTH STORIES done for
Barnes & Noble Books.
In November 1997, Tekno Books entered into an agreement with MGM
Consumer Products granting Tekno Books the exclusive right to publish books
based on the past, present and future properties from the film and television
show libraries of Metro-Goldwyn-Mayer Studios, United Artists Corporation,
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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. Pursuant to this agreement, three novels based on the
POLTERGEIST: THE LEGACY television series have been sold to Berkley Books.
In 1997, Tekno Books, through its wholly owned subsidiary, Tekno Books
International, LLC, entered into an agreement with The Classica Foundation, a
Russian charitable organization. The Classica Foundation holds the only
catalogue of archived documents contained in the Russian archives consisting of
millions of documents that were captured by the Soviets from the German archives
at the end of World War II. This includes a substantial portion of the German
archives up to 1945 as well as voluminous documents from archives of countries
occupied by Germany during World War II. Until this time, these files have not
been seen outside of Russia. This agreement with The Classica Foundation grants
Tekno Books International, LLC the exclusive use of this catalogue to the
Russian archives, and the right to copy the materials contained therein for use
in licensing to publishers rights to publication of books and for licensing
rights for CD-ROMs, on-line, documentaries, television specials and feature
films based on these materials. Tekno Books has developed an extensive list of
major book projects that can be developed from these archives including books
about various topics such as the German military, German intelligence activities
before and during World War II, the attempt to kill Hitler in 1944, the Nazi
party, Hitler's personal papers and correspondence, Germany's plan for the
occupation of England and German-Vatican relations. Many of these topics also
have the potential to be developed as CD-ROMs, television specials and feature
films. Work has already begun on several book projects based on the archived
materials. The Company and Tekno Books intend to donate copies of any documents
related to the Holocaust or any profit derived therefrom to appropriate
Holocaust-related charitable organizations. Tekno Books paid $100,000 in 1997 as
a deposit to secure this contract and another $100,000 was paid during the first
quarter of 1998. Tekno Books has agreed to pay $25,000 to extend this contract
for another six months ending September 12, 1999. Further six month extensions
will be available to Tekno Books for additional payments of $25,000 each.
Since the acquisition of Tekno Books by the Company, this book
licensing and packaging subsidiary has contributed significantly to the
Company's net revenues and gross profits. The Company anticipates that Tekno
Books' revenues, which are derived primarily from cash advances from publishers
paid upon the acceptance of manuscripts and royalties from licensing such books,
will continue to grow during 1999. See "Management's Discussion and Analysis or
Plan of Operation -- Results of Operations" under Item 6 of Part II of this Form
10-KSB.
The Chief Executive Officer of Tekno Books, Dr. Martin H. Greenberg, is
also a director of the Company and owner of the remaining 49% interest in Tekno
Books. See "Certain Relationships and Related Transactions -- Tekno Books" under
Item 12 of Part III of this Form 10-KSB. Dr. Greenberg is the editor or author
of more than 700 books in various genre, including science fiction, fantasy,
mystery and adventure, and is widely regarded as the leading anthologist in
trade publishing. Dr. Greenberg was the 1995 recipient of the Ellery Queen
Award, presented by the Mystery Writers of America for Lifetime Achievement and
was Director of Graduate Studies at the University of Wisconsin - Green Bay.
Tekno Books also owns a 50% interest in MYSTERY SCENE MAGAZINE, a trade
journal of the mystery genre of which Dr. Greenberg is co-publisher. During
1995, the Company directly acquired an additional 25% interest in the magazine.
10
<PAGE>
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 in Huge Entertainment
and an aggregate of $8 million in promissory notes from Huge Entertainment. Huge
Entertainment was intended to be a pure-play content company that would focus on
obtaining additional intellectual properties and the development and licensing
of intellectual properties in multiple media formats. The original plan had been
to split the Company's business segments into separate entities by spinning the
Company's intellectual properties off to Huge Entertainment, because it was
believed that as separate entities the valuation of each would be greater than
if they continued as a combined entity. The Company still believes this to be
the case. However, in light of the Company's recent expansion into the Internet
business, the Company is currently evaluating various plans, including the
possibility of spinning off the Internet business into a separately traded
public company, in order to increase shareholder value and the Company does not
presently intend to proceed with the Huge Entertainment transaction. There can
be no assurances that the Company will successfully implement any of these
plans.
COMPETITION
GENERAL. Competition is generally intense in the entertainment
industries in which the Company operates. There are a large number of
substantial public and private companies competing with each other in all
aspects of the entertainment industry.
INTERNET OPERATIONS. The Company's e-commerce studio store and combined
movie web site will compete with numerous other e-commerce and content web
sites. The number of web sites competing for both consumer attention and
spending, as well as for advertising revenues, has increased and is expected to
continue to increase. The Company feels that its strategic alliances with media
companies such as Gannett and Times Mirror and the exclusive contractual
agreement between Hollywood Online, NATO (the National Association of Theatre
Owners) and its member theaters may give the Company a competitive advantage in
the movie category of the Internet.
ENTERTAINMENT RETAIL. During 1998 the Company reduced the number of its
mall-based retail outlets from 34 to 7. One additional store was closed in 1999.
Management is seeking a buyer for the remaining mall-based retail operations and
intends to focus its ongoing entertainment retail efforts on the Company's
Internet e-commerce store. The Company's Internet studio store competes
for sales with specialty stores and other retail outlets which offer
entertainment merchandise, including Internet and catalog retailers, many of
which hve significantly greater resources and are more widely recognized than
the Company.
LICENSING. Numerous companies and individuals are engaged in the
business of licensing entertainment properties and characters in the
entertainment-related licensing market. The Company competes with a wide range
of other corporations as well as individuals in the licensing market.
BOOK LICENSING AND PACKAGING. Competition in the book licensing and
packaging business is somewhat less intense than that in the other areas of the
Company's business, as it is based for the most part on unique, original
concepts and long-term relationships.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company has applied for U.S. and international trademark
registration of the name "Big Entertainment," as well as for trademark and
copyright protection for each of its titles and featured characters. As of the
date hereof, the Company has approximately 35 U.S. registered trademarks and
approximately 53 trademark applications are pending. As the Company's
properties are developed, the Company intends to apply for further trademark and
copyright protection in the United States and certain foreign countries.
11
<PAGE>
Copyright protection in the United States on new publications extends
for a term of 75 years from the date of initial publication. Trade names and
trademark registration in the United States runs for a period of 10 years after
registration and may be renewed for an indefinite number of additional 10-year
periods upon showing of continued use.
EMPLOYEES
At March 17, 1999, the Company employed approximately 47 full-time and
39 part-time employees. Of the Company's 86 employees, 25 were corporate and
administrative employees, four were engaged in intellectual property related
activities, and 59 were engaged in retail store operations, distribution and
order fulfillment (including substantially all part-time employees). None of the
Company's employees are represented by a labor union, nor has the Company
experienced any work stoppages. The Company considers its relations with its
employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 9,200 square feet of office space in
Boca Raton, Florida, for its executive offices. The lease of this office space
provides for a monthly basic rent of approximately $9,900 and expires on August
31, 2002, with one option to renew for an additional eight years. The Company
believes that suitable additional space, if required, is readily available on
favorable terms. The Company's retail outlets are occupied under leases with
terms that expire at various dates through 2008. The Company also leases 6,000
square feet of warehouse space in Broward County, Florida, which serves as a
distribution center for the merchandise for its retail stores and Internet
operation, pursuant to a lease expiring May 31, 2000, at a current monthly
rental of approximately $2,600.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the
ordinary course of business, none of which are expected to materially adversely
impact the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None.
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
Big Entertainment, Inc.'s common stock is traded on The Nasdaq SmallCap
Market ("Nasdaq") under the symbol BIGE. The following table sets forth, for the
periods indicated below, the high and low sales prices for the common stock, as
reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter....................................... $ 6.531 $ 5.250
Second Quarter...................................... $ 5.469 $ 4.438
Third Quarter....................................... $ 6.281 $ 4.531
Fourth Quarter...................................... $ 7.625 $ 5.625
1998
First Quarter....................................... $ 6.375 $ 4.500
Second Quarter...................................... $ 6.125 $ 4.625
Third Quarter....................................... $ 5.688 $ 2.844
Fourth Quarter...................................... $ 21.000 $ 2.125
</TABLE>
HOLDERS OF COMMON STOCK
As of February 16, 1999, there were approximately 4,850 beneficial
holders of the Company's common stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock and
currently intends to retain any future earnings to finance its operations and
the expansion of its business. Therefore, the payment of any cash dividends on
the common stock is unlikely in the foreseeable future. Any future determination
to pay cash dividends will be at the discretion of the Board of Directors and
will be dependent upon the Company's earnings, capital requirements and
financial condition and such other factors deemed relevant by the Board of
Directors.
SALES OF UNREGISTERED SECURITIES
See Note 9 to the Financial Statements included in Item 7 of Part II of
this Form 10-KSB with respect to sales of unregistered securities by the Company
during 1998. All of such sales were made pursuant to the exemption from
registration afforded by Section 4(2) of the Securities Act.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included in Item 7 of Part II of this Report.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 ("FISCAL 1998") AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997 ("FISCAL 1997")
The following table summarizes the Company's revenues, cost of sales,
and gross profit by division for fiscal 1998 and fiscal 1997, respectively:
<TABLE>
<CAPTION>
INTELLECTUAL ENTERTAINMENT
PROPERTIES RETAIL TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
FISCAL 1998
Net Revenues $2,337,019 $8,789,497 $11,126,516
Cost of Sales 1,191,261 4,796,122 5,987,383
---------- ---------- -----------
Gross Profit $1,145,758 $3,993,375 $ 5,139,133
========== ========== ===========
FISCAL 1997
Net Revenues $2,319,678 $7,971,769 $10,291,447
Cost of Sales 1,296,888 4,151,101 5,447,989
---------- ---------- -----------
Gross Profit $1,022,790 $3,820,668 $ 4,843,458
========== ========== ===========
</TABLE>
NET REVENUES
Net revenues (not including revenues attributable to the Company's 50%
interest in NetCo Partners) for fiscal 1998 increased by 8%, or $835,069, to
$11,126,516 from $10,291,447 for fiscal 1997. The increase in net revenues is
attributable to revenue growth in the Company's entertainment retail division,
coupled with a modest increase in net revenues in the intellectual properties
division. For 1998, revenues generated by the entertainment retail division
comprised 79% of the Company's total revenues, while revenues from the
intellectual properties division amounted to 21% of the total. By comparison,
for 1997, entertainment retail revenues amounted to 77% of the total and
intellectual properties revenues were 23% of the total.
GROSS PROFIT
Overall Company gross profit increased by 6%, or $295,675, to
$5,139,133 for fiscal 1998 from $4,843,458 in fiscal 1997. The increase in gross
profit reflects increases in gross profit for both the Company's entertainment
retail division and the intellectual properties division. As a percentage of net
revenues, gross profit decreased to 46% in fiscal 1998 from 47% in fiscal 1997,
reflecting a decrease in the margin for the entertainment retail division.
14
<PAGE>
INTELLECTUAL PROPERTIES DIVISION
The intellectual properties division generates revenues from several
different activities including book licensing and packaging, licensing, and
publishing MYSTERY SCENE MAGAZINE. The revenue breakdown from these activities
for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
$ % $ %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Book Licensing & Packaging $2,024,014 87% $2,028,911 87%
Licensing 248,478 10 205,761 9
Publishing 64,527 3 85,006 4
---------- --- ---------- ---
Total $2,337,019 100% $2,319,678 100%
========== === ========== ===
</TABLE>
It is important to note that revenues generated by NetCo Partners (in
which the Company has a 50% interest) are not included in the above revenues of
the intellectual properties division. Book licensing and packaging represents
87% of the revenues generated by the intellectual properties division in both
1998 and 1997. The Company's book licensing and packaging activities are
conducted through Tekno Books, its 51%-owned subsidiary. Tekno Books focuses on
developing and executing book projects, typically with best-selling authors, and
then licensing the books for publication with various publishers. Book licensing
and packaging revenues decreased by $4,897, or less than 1%, to $2,024,014 for
1998 from $2,028,911 for 1997, primarily reflecting the timing of revenue
recognition under the book licensing and packaging agreements, as cash advances
and royalty payments received during 1998 actually increased by 18% over the
prior year. The Company anticipates growth in the revenues generated by Tekno
Books in future years due to several contracts which were entered into during
1997 and projects that are currently in progress. These contracts include an
agreement with MGM Consumer Products (the "MGM Agreement") and an agreement with
The Classica Foundation (the "Tekno Classica Agreement"). Under the MGM
Agreement, Tekno Books has the exclusive rights to publish books based on the
past, present and future properties from the film and television show libraries
of Metro-Goldwyn-Mayer studios, United Artists Corporation, Orion Pictures
Corporation, and Goldwyn Entertainment, Inc. The first books developed pursuant
to the MGM Agreement are three books based on the television series POLTERGEIST:
THE LEGACY. Under the Tekno Classica Agreement, Tekno Books has the exclusive
use of the catalogue of Russian archives captured by the Soviets from the German
archives at the end of World War II. Tekno Books has a lengthy list of book
projects that it is currently researching for development under the Tekno
Classica Agreement.
Licensing revenues increased by 21%, or $42,717 to $248,478 in 1998
from $205,761 in 1997. Licensing revenues include advances and royalties under
the Company's various licensing agreements with HarperCollins, DAW Books, Warner
Books, Sierra On-Line, and various licensees for foreign publication of books.
The increase in revenues during 1998 pertains primarily to advances related to
books under the HarperCollins, Warner Books, and DAW Books contracts,
particularly for the ANNE MCCAFFREY'S ACORNA series of books, which has been
expanded to a five-book series with HarperCollins, and has been licensed
15
<PAGE>
for publication as audio books and in several foreign languages. A total of six
books based on the Company's intellectual properties were published during 1998.
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 18.
Publishing revenues decreased by 24%, or $20,479, to $64,527 in 1998
from $85,006 in 1997. The decrease in publishing revenues is related to the
Company's decision to discontinue its comic book publishing operation due to the
sustained losses incurred in the publication of comic books. The Company began
to reduce the number of comic book titles it published during 1996 and
completely ceased publication of all titles during the first quarter of 1997.
Publishing revenues during 1998 reflect revenues from publication of MYSTERY
SCENE MAGAZINE, a mystery-genre trade journal published by the Company's
50.5%-owned subsidiary, Fedora, Inc., while 1997 publishing revenues also
include minor residual revenues from the comic book business.
Gross profit for the intellectual properties division increased by 12%,
or $122,968, to $1,145,758 in 1998 from $1,022,790 in 1997. This increase in
gross profit is attributable to the Company's elimination of the comic book
publishing operation in 1997, which had historically generated a negative gross
margin for the Company, and to the success of the ANNE MCCAFFREY'S ACORNA
property. As a percent of revenues, gross profit for the intellectual properties
division increased to 49% from 44% in the prior year, reflecting the more
profitable continuing operations of book licensing and packaging and licensing.
While the Company was engaged in comic book publishing, it advanced 100% of the
costs associated with the development of its comic book titles, 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 writers' payments for
books and teleplays or scripts, and typically funds these costs from advance
payments received from publishers pursuant to licensing agreements.
The same holds true for the book licensing and packaging operation.
Production expenses to publish the books are borne by the publishers. The book
licensing and packaging operation typically secures the publishing agreements in
advance of determining amounts to be paid to authors and for permissions,
thereby ensuring a profit on the projects based on the up-front advances
received, and an ongoing royalty stream for future sales once the advances have
been earned. Tekno Books has a library of approximately 1,035 book titles which
it has produced. This library is a source of ongoing royalty revenues, as
royalties represent approximately one-third of the total revenues generated by
Tekno Books during 1998.
ENTERTAINMENT RETAIL
Net revenues for the Company's entertainment retail division increased
by 10%, or $817,728, to $8,789,497 for fiscal 1998 from $7,971,769 for fiscal
1997. Net revenues are derived from sales of entertainment-related products and
merchandise at the Company's mall-based stores and over the Internet, imputed
income from the ABC programming agreement, franchise fee income, and other
Internet related revenues. The composition of net revenues is as follows:
16
<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
$ % $ %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Retail Sales $6,059,385 69% $6,821,769 86%
ABC Advertising Income 2,130,112 24 1,150,000 14
Franchise Fee Income 350,000 4 -- --
Other Internet Revenues 250,000 3 -- --
---------- --- ---------- ---
Total $8,789,497 100% $7,971,769 100%
========== === ========== ===
</TABLE>
The Company had seven retail units in operation at December 31, 1998,
as compared to 34 retail units at December 31, 1997, reflecting the Company's
decision to exit the mall-based retail business. One additional store was closed
in early 1999, leaving the Company with six of its better locations, plus the
Internet studio store, at the present time. The Company currently intends to
sell the remaining six mall-based locations and focus its retail efforts
exclusively on e-commerce via its online studio store, BIGE.COM. Retail sales
decreased by $762,384, or 11%, to $6,059,385 for 1998 from $6,821,769 for 1997.
The decline in sales revenues from 1997 to 1998 is primarily attributable to the
closure of 29 retail locations throughout 1998. As there were only two stores
open for the full two-year period of 1997 and 1998, comparable store sales data
is not meaningful.
Net revenues also include imputed income from running ABC video clips
on the in-store television monitors and for promoting ABC on the Company's web
site in exchange for advertising air time on local ABC affiliate television
stations (see "ABC Programming Agreement" in Item 1. Description of Business).
The Company records the estimated fair value of the air time received from the
ABC affiliates as the value of the revenues earned by playing the ABC video
clips in its retail units and promoting ABC on its web site. This imputed income
amounted to $2,130,112 for 1998, of which $182,633 is attributable to the
Internet advertising and promotion and $1,947,479 is attributable to airing the
ABC video clips run on the in-store television monitors. The barter income for
1998 was higher than the $1,150,000 recorded in 1997 by $980,112, or 85%, as the
barter arrangement with ABC did not commence until mid-1997.
Revenues for the entertainment retail division also include $350,000 of
franchise fee income during fiscal 1998. This income represents the territorial
exclusivity fee that the Company received during the first quarter of 1998 from
the franchisee for the Phoenix, Arizona territory. Under the Company's agreement
with this franchisee, the franchisee must open at least one store by December
1999 and one store each year thereafter in order to preserve its exclusivity.
The Company is not obligated to provide any additional support to the franchisee
under this agreement.
Other Internet revenues consist of sponsorship fees received from the
company that hosted the Big Entertainment online studio store BIGE.COM when it
first launched in November 1998. The sponsorship fees represent payments
received by the Company in 1999 for traffic that was directed to the host's site
during the busy holiday shopping season on the Internet. The Company believes
that advertising and sponsorship fees are a critical component of its future
Internet operations. The Company is currently in discussions with other
potential sponsors including a major credit card company which may become the
preferred credit card for the Company's web site in exchange for a seven-figure
annual fee, although there can be no assurances that the Company will be
successful in entering into this sponsorship agreement or any others. Actual
revenues generated from product sales on the Company's Internet studio store
from its initial launch on November 26, 1998 through December 31, 1998 are
included in retail sales above; and barter income related to promotion of ABC on
the Company's web site in exchange for ABC affiliate stations airing commercials
about the Company's Internet studio store is included in ABC advertising income
above. The aggregate revenues attributable to the Company's Internet operation
(including products sold over the Internet, ABC barter income attributable to
the Internet, and other Internet revenues consisting of sponsorship fees) from
November 26, 1998 through December 31, 1998 amounted to $504,179. For the period
from launch of the site on November 26, 1998 through year-end 1998, the BIGE.COM
web site attracted approximately 308,000 unique visitors to the site.
17
<PAGE>
Gross profit for the entertainment retail division increased by 5%, or
$172,707, to $3,993,375 for fiscal 1998 from $3,820,668 for fiscal 1997. The
increase in gross profit was due to the impact of the ABC barter agreement, plus
the additional franchise fee and other Internet revenues, for which there were
no offsetting costs included in cost of sales. As a percentage of entertainment
retail division revenues, gross profit decreased to 45% for fiscal 1998, from
48% for fiscal 1997. Without the ABC barter income, the franchise fee income and
the other Internet revenues, the gross margin for the retail division decreased
from 39% in 1997 to 21% in 1998. This decline in gross margin is primarily
attributable to increased promotional activity, including mark-downs taken to
sell merchandise in the stores that were closing. In addition, in light of the
phase-out of its mall-based retail operations during 1998, the Company
established an inventory reserve totaling $232,383, which negatively impacted
gross profit and gross margin.
EQUITY IN EARNINGS OF NETCO PARTNERS
NetCo Partners began to recognize income from its contracts related to
NETFORCE beginning in 1997 as discussed below. NetCo Partners recognizes
revenues when the earnings process has been completed based on the terms of the
various agreements. When advances are received prior to completion of the
earnings process, NetCo Partners defers recognition of revenue until the
earnings process has been completed. The Company's 50% share in the earnings of
NetCo Partners amounted to $887,549 for 1998, as compared to $2,702,049 for
1997. The primary factor contributing to the decline in NetCo Partners' earnings
was the modification of its licensing arrangement with ABC, as discussed below.
On book projects, revenues are typically recognized upon delivery of the
manuscripts to the publishers. Another factor contributing to the decline in
earnings from 1997 to 1998 was the timing of the completion of the manuscripts.
Costs related to acquisition, development and sales of the intellectual
properties and their licensed products are expensed in proportion to the
revenues that have been recognized.
Revenues of NetCo Partners totaled $2,685,928 for 1998, as compared to
$6,551,470 for 1997. The breakdown of revenues is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
NETFORCE
Books - North America $ 3,139,213 $3,050,000
Books - Foreign 717,277 964,139
Audio Books -- 581,182
Television Mini-Series Before Adjustment 400,000 --
Other 6,000 350,000
----------- ----------
NETFORCE Subtotal Before Adjustment 4,262,490 4,945,321
TAD WILLIAM'S MIRRORWORLD 23,438 6,149
----------- ----------
Subtotal Before Adjustment 4,285,928 4,951,470
Impact of Adjustment for Modification
of Television Mini-Series Arrangement (1,600,000) 1,600,000
----------- ----------
Total $ 2,685,928 $6,551,470
=========== ==========
</TABLE>
As detailed above, NetCo Partners' revenues declined by $3,865,542, or
59%. The biggest change (a swing of $3.2 million) was related to the ABC
television mini-series. The licensing arrangement between
18
<PAGE>
NetCo Partners and ABC was modified during 1998. The mini-series arrangement
originally provided for a payment to NetCo Partners of $1.6 million should the
NETFORCE mini-series not air by May 1999 and a minimum guaranteed license fee in
excess of $1.6 million if it aired. NetCo Partners accrued the $1.6 million
payment in 1997, as this represented the minimum amount to be received by NetCo
Partners under the ABC mini-series agreement. Under the new arrangement with
ABC, NetCo Partners receives a $400,000 rights' fee, which was collected in
1998, and a profit participation in the mini-series in lieu of the original
license fee. The mini-series aired on ABC during February 1999. Accordingly, the
previously accrued payment was reversed during 1998, the rights' fee was
recorded as revenues, and any future revenues from the mini-series will be based
on a profit-sharing arrangement with ABC.
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
six original NETFORCE novels. The contract, with total maximum advances of
$22 million, calls for initial publication of the first book to coincide with
the airing of the ABC mini-series referred to above. The first book was
published in January 1999 and it has been on the New York Times bestsellers list
for eight consecutive weeks. The second book under this contract is scheduled to
be published in October 1999. The manuscripts for both of these books were
delivered to the publisher during 1997; however, there were contingencies in the
book licensing agreement whereby the advances could have been reduced if the ABC
television mini-series never aired. Accordingly, NetCo Partners recorded
$3,000,000 in advances on the first two books during 1997 (the minimum payable
regardless of the mini-series) and another $2,889,214 in revenues during the
fourth quarter of 1998, with the knowledge that the ABC mini-series had aired.
Additional revenues under the Berkley Books contract will be recognized as
manuscripts on the remaining four adult books are delivered and accepted by the
publisher. NetCo Partners receives advances under this contract based on
specific milestones throughout the publication process for each of the six
books. As of December 31, 1998, NetCo Partners has received $5,062,500 in gross
advances since inception of this contract, and such amounts have been
distributed to the Company and C.P. Group, its partners. This contract calls for
royalties on paperback sales to be earned by NetCo Partners at 15% of the
publisher's suggested retail price.
In April 1997, NetCo Partners also entered into a second agreement with
Berkley to publish up to 18 young adult novels based on NETFORCE. The contract,
with total maximum advances of $900,000, calls for initial publication of the
first book to coincide with the airing of the ABC mini-series referred to above.
The first two young adult books were published in January 1999. NetCo Partners
has delivered the manuscripts for the first six young adult books to the
publisher and has recognized revenues under this agreement totaling $250,000 for
1998 and $50,000 for 1997. An initial advance payment of $450,000 was received
by NetCo Partners and distributed during 1997, as part of NetCo Partners' normal
distributions to the Company and C.P. Group, its partners. This contract calls
for royalties on paperback sales of the young adult novels to be earned at 10%
of the publisher's suggested retail price.
Both of the Berkley contracts grant to Berkley only the North American
publishing rights to publish NETFORCE books. NetCo Partners has also licensed
the publication rights to NETFORCE in various countries throughout the world in
eight foreign languages. Acceptance of the manuscripts by Berkley, the North
American publisher, is deemed acceptance of the manuscripts by the foreign
publishers. Accordingly, NetCo Partners has recognized revenues related to the
first two adult novels and the first six young adult books, aggregating $717,277
for 1998 and $964,139 for 1997.
19
<PAGE>
NetCo Partners also entered into an agreement with Random House Audio
Publishing to license the audio book rights for the first two NETFORCE novels
for an aggregate consideration of $600,000. NetCo Partners recorded these
revenues during 1997, net of a discount for advances expected to be collected in
over 12 months. NetCo Partners has received $300,000 to date under this audio
book contract.
In April 1997, NetCo Partners entered into an agreement with the Dodge
division of Chrysler Corporation regarding placement of Chrysler and Dodge
products in the NETFORCE novels. An initial advance payment of $100,000 was
received by NetCo Partners and distributed during 1997 as part of NetCo
Partners' normal distributions to the Company and C.P. Group, its partners.
NetCo Partners also recognized as revenues during 1997 $250,000 that it
had received under an agreement with Playmates Toys, Inc. ("Playmates Toys") to
develop, manufacture and market a line of toys based on NETFORCE.
NetCo Partners has also entered into an agreement to license TAD
WILLIAMS' MIRRORWORLD to HarperCollins for publication as an illustrated novel.
This illustrated novel was published in June 1998 and is currently in its second
printing.
OPERATING EXPENSES
Operating expenses consist of selling, general and administrative
expenses, salaries and benefits, amortization of goodwill and intangibles, and a
reserve for closed stores and lease termination costs. Excluding the reserve
for closed stores and lease termination costs, which is discussed below,
operating expenses increased by 15%, or $1,678,581, to $13,023,202 for fiscal
1998 from $11,344,621 for fiscal 1997. Note that $980,112, or 58% of the
increase in fiscal 1998, represents non-cash advertising expense imputed under
the ABC barter agreement discussed below. Excluding the reserve for closed
stores and lease termination costs and the non-cash ABC advertising expense,
operating expenses increased by $698,469, or 7% in fiscal 1998. This $698,469
increase in operating expenses in fiscal 1998 as compared to fiscal 1997
reflects increases in selling, general and administrative expenses and salaries
and benefits of $747,554, or 13%, and $266,799, or 7%, respectively, which were
offset by a $315,884, or 91%, reduction in amortization of goodwill and
intangibles. The increases in selling, general and administrative expenses, and
salaries and benefits relate to the incremental costs for the five new in-line
studio stores opened in late 1997 and 1998 and start-up of the Internet studio
store in late 1998, which were only partially offset by the cost savings from
closing 29 retail kiosks throughout the year. The full favorable impact from
closing 29 kiosks will be realized during 1999. As previously mentioned,
operating expenses were also impacted by a $980,112 increase in non-cash
advertising expense under the ABC barter arrangement (see "ABC Programming
Agreement" in Item 1. Description of Business). The Company estimates the value
of the advertising air spots that it receives from the ABC affiliate television
stations and records this amount as advertising expense. The Company recorded
$2,130,112 under the ABC agreement during 1998, as compared to $1,150,000
recorded in 1997, as the advertisements on ABC did not begin to air until
mid-1997.
RESERVE FOR CLOSED STORES AND LEASE TERMINATION COSTS
The Company has aggressively pursued closure of its marginal
entertainment retail kiosks and has closed 29 kiosk locations during 1998.
Fifteen of the 29 mall leases were terminated at the expiration of the lease, or
at the mutual consent of the Company and lessor, at no additional cost to the
Company. The
20
<PAGE>
Company has reached agreement with certain of the other lessors to
terminate the leases based on a maximum rental payment stream to be paid out
over time, in most cases over four months. The Company is currently negotiating
with the remaining lessors to obtain assignment of and/or release from certain
of its lease obligations, which are typically short term in duration. The
Company is presently in discussions with parties who have expressed an interest
in purchasing the remaining mall-based retail store operations, including the
kiosks which are currently in storage. An aggregate charge in the amount of
$1,121,028 was recorded in fiscal 1998 consisting of $653,474 for the write-off
of 10 kiosks which the Company earmarked for abandonment, plus the write down of
other property and equipment of the entertainment retail division, and $467,554
for the estimated cost of the early lease terminations. In addition, in light of
the phase out of its mall-based retail stores, the Company established an
inventory reserve in the amount of $232,383; this reserve increased cost of
sales for 1998. In addition, in light of the phase out of its mall-based retail
stores, the Company established an inventory reserve in the amount of $232,383;
this reserve increased cost of sales for 1998. At December 31, 1998, the
remaining carrying value of the inventory and fixed assets of the entertainment
retail division (some of which will be utilized by the Internet e-commerce
store) is approximately $4,352,000.
INTEREST EXPENSE, NET
Net interest expense for fiscal 1998 was $818,849 as compared to
$323,118 for fiscal 1997, an increase of $495,731, or 153%, primarily
representing increased interest expense for the inventory line of credit, the
shareholder line of credit, and the capital leases entered into to finance the
cost of the mall-based studio stores.
DEFERRED TAX (EXPENSE) BENEFIT
During 1997, the Company recognized $1,407,600 of deferred tax benefit
as the Company believed that realization of a portion of its net operating loss
carryforward was likely to occur based on the Company's projections of taxable
income that would have been generated upon consummation of the Huge
Entertainment transaction, which is discussed in more detail in "Huge
Entertainment" included in Item 1. Description of Business. Huge Entertainment
was intended to be a pure-play content company that would focus on obtaining
additional intellectual properties and the development and licensing of
intellectual properties in multiple media formats. The original plan had been to
split the Company's business segments into separate entities by spinning off the
Company's intellectual properties to Huge Entertainment, because it was believed
that as separate entities the valuation of each would be greater than if they
continued as a combined entity. The Company still believes this to be the case.
However, in light of the Company's recent expansion into the Internet business,
the Company is currently evaluating various plans, including the possibility of
spinning off the Internet business into a separately traded public company, in
order to increase shareholder value and the Company does not presently intend to
proceed with the Huge Entertainment transaction. There can be no assurances that
the Company will successfully implement any of these plans. Therefore, the
Company reversed the realization of the deferred tax benefit during 1998.
NET LOSS
During 1998, the Company recorded several specifically identifiable
adjustments, which in the aggregate amount to $5,993,111. These adjustments
include reversal of the deferred tax benefit of $1,407,600 recorded in 1997,
which accounted for a swing in year-to-year net loss of $2,815,200, a decrease
in the equity in earnings of NetCo Partners of $1,824,500, stemming from
modification of NetCo Partners' licensing arrangement with ABC for the
mini-series based on NETFORCE to a profit sharing arrangement, establishment of
a reserve for closed stores and lease termination costs in the amount of
$1,121,028, and establishment of a $232,383 inventory reserve related to the
phase out of the Company's mall-based retail operations. Largely reflecting the
above
21
<PAGE>
items, the Company's net loss totaled $10,658,089 for fiscal 1998 as compared to
a net loss of $2,995,347 for fiscal 1997. Net loss per share for fiscal 1998 was
$1.47 as compared to a loss of $0.51 for fiscal 1997, representing a $0.96
increase in loss per share in 1998. The per share impact of the above-mentioned
items (the deferred tax benefit reversal, the decline in equity in earnings of
NetCo Partners, the reserve for closed stores and lease termination costs, and
the inventory reserve) on the 1998 loss per share is $0.80.
The Company has made several modifications to its initial business plan
in an effort to reverse its losses. During 1997, the Company stopped publishing
comic books, an activity that required a substantial amount of resources and had
not proven to be profitable as a result of a significant downturn in the comic
book industry. Essentially all of the overhead associated with comic book
publishing was eliminated effective with the second quarter of 1997. At the same
time, the Company decided to expand its retail operations with the development
of three prototype in-line studio stores. Substantial resources were devoted to
the development of the three prototype in-line studio stores which opened in the
fourth quarter of 1997 as the Company believed that the in-line studio store
concept would allow it to more quickly achieve economies of scale in its
entertainment retail division. Another two mall-based studio stores were opened
during 1998. The Company has since pursued closing its marginal retail store
locations, primarily its kiosks, and it has reduced the number of retail units
in operation from a high of 34 locations to six locations at the present time.
Unlike a typical retail store, the closed kiosks can be temporarily placed in
storage and later redeployed or sold. The Company is currently exploring a sale
of its remaining mall-based retail operations, including the kiosks that are
presently in storage.
The Company has curtailed its retail store expansion plans and
presently is focusing its efforts on development of its e-commerce Internet
business. The Company utilized its existing distribution center, certain
existing personnel, and information systems for the November 26, 1998 launch of
its Internet studio store, BIGE.COM, thereby realizing cost savings in
comparison to a traditional e-commerce launch. The Company plans to expand its
Internet operations, both through acquisitions and through internal development
measures, in order to create an Internet web site for the movie category with a
goal of generating significant advertising and e-commerce revenues on the site.
In addition, the Company continues to negotiate additional licensing agreements
on its base of intellectual properties, which while not capital intensive,
requires time from its senior executives. While the Company believes that these
measures will ultimately reverse its operating losses, there can be no
assurances that the revenues generated by the Internet operations and the
intellectual properties division will be sufficient to offset the associated
expenses incurred.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of
$729,334 compared to cash and cash equivalents of $887,153 at December 31, 1997.
The working capital deficit at December 31, 1998 was $1,327,453, as compared to
a deficit of $175,730 at December 31, 1997. Net cash used in operating
activities during fiscal 1998 was $5,605,491, primarily representing cash used
to fund the Company's pre-tax loss, net of non-cash expenses including
depreciation and amortization, a portion of the reserve for closed stores and
lease termination costs, and the inventory reserve. Net cash used in investing
activities was $648,431, representing capital expenditures and distributions to
minority interests. Net cash provided by financing activities amounted to
$6,096,109 during 1998, primarily representing proceeds from issuance of common
stock and preferred stock. The combined effect of the above was a net decrease
in cash and
22
<PAGE>
cash equivalents of $157,819 during 1998. Net cash used in operating activities
and investing activities during fiscal 1997 was $4,110,481 and $1,854,123,
respectively, and net cash provided by financing activities was $5,175,905. Cash
provided from financing activities during 1997 consisted primarily of proceeds
from the issuance of common and preferred stock, borrowings under the revolving
line of credit, and proceeds from issuance of a convertible debenture.
Tekno Simon, LLC ("Tekno Simon"), an affiliate of the Simon Property
Group and its Co-Chairman, Melvin Simon, has invested a total of $3,000,000 in
the Company. In 1995, Tekno Simon invested $1,000,000 in shares of the Company's
common stock. Pursuant to the Simon Stock Purchase Agreement, Tekno Simon
invested an additional $1,360,000 during 1995 and 1996 to purchase 217,600
shares of the Company's Series A Variable Rate Convertible Preferred Stock (the
"Series A Preferred Stock") and $640,000 during 1996 and 1997 to purchase
122,846 shares of the Company's Series B Variable Rate Convertible Preferred
Stock (the "Series B Preferred Stock"), of which $160,000 was funded in 1996 and
$480,000 was funded in 1997. See Note 9 to the Company's Financial Statements
included in Part II, Item 7 of this Form 10-KSB for a description of the terms
of the Series A Preferred Stock and Series B Preferred Stock.
In July 1997, the Company sold 1,000,002 shares of its common stock
through a private placement for $3,500,000. The proceeds to the Company from the
issuance of these shares amounted to $3,069,996, net of expenses. The shares
issued through this private placement were restricted from resale for six months
from the date of issuance; accordingly the shares were sold at a 20% discount to
the then current market price of the common stock reflecting the restrictions on
resale. In conjunction with this offering, the placement agent received warrants
to purchase 100,000 shares of common stock. The warrants expire five years from
the date of issuance and have an exercise price of $5.00 per share.
In August 1997, the Company issued a $650,000 4% convertible debenture
to a single institutional investor. During 1998, the holder of the debenture
converted the entire balance, plus accrued interest payable thereon, into
173,568 shares of the Company's common stock. In conjunction with the issuance
of the debenture, the buyer received warrants to buy 32,499 shares of common
stock at exercise prices ranging from $6.00 to $6.53 per share. The warrants
expire March 2, 2003.
In late 1997 and early 1998, the Company entered into long-term
equipment leases with two different leasing companies in order to finance the
construction build-out and fixtures and equipment for its three, new prototype
in-line studio stores. In late 1998, the Company entered into another lease with
one of these leasing companies to finance the construction build-out and
fixtures and equipment for one additional in-line studio store. The total
principal financed through these leasing transactions amounted to $1,827,730.
The lease terms range from 36 months to 60 months with a combined monthly rental
payment of approximately $50,000. In conjunction with the lease financing, the
Company issued five-year warrants to one of the leasing companies to acquire
7,231 shares of common stock for $6.56 per share.
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. As a result of the
phasing out of the Company's traditional retail business, the Company and
BankBoston have agreed to modify the terms of the credit facility. Under the
modified agreement, availability is calculated as a percentage of the cost of
retail inventories less certain allowances and reserves. This percentage, which
was 50% at December 31,
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1998, is being reduced by one percentage point each week beginning the third
week in January 1999, with the outstanding balance to be paid in full by June
30, 1999. Interest is payable monthly at the prime rate plus 1%, currently
8.75%. The credit facility includes an annual commitment fee of 1% and a monthly
facility fee of $2,500. BankBoston received five-year warrants to buy 30,000
shares of the Company's common stock at an exercise price of $9.68 per share
(see Note 10). As of December 31, 1998, the Company's outstanding balance on the
line of credit was $758,917, essentially utilizing the then available borrowing
base. At March 17, 1999, the Company's outstanding balance on the line of credit
was $395,718, again essentially utilizing the then available borrowing base. The
facility is secured by cash, inventory and accounts receivable of the Company's
entertainment retail division. All of the financial performance covenants were
eliminated from the credit facility as part of the modification agreement.
In March and April 1998, the Company issued 248,053 shares of common
stock to five accredited investors for gross proceeds of $1,037,500. Expenses
related to the issuance of these securities totaling $37,500 were charged to
additional paid-in capital. In conjunction with this stock issuance, the Company
issued five-year warrants to three of the investors to acquire 55,000 shares of
the Company's common stock at $4.66 per share. The holders of the above warrants
have the right, at any time during the one year period from the date said
warrants were issued, to exchange the warrants for an aggregate of 22,145 shares
of common stock.
During May 1998, the Company entered into a sale/leaseback transaction
with FINOVA Capital Corporation ("FINOVA") for 17 Entertainment Super-Kiosk
units. The terms of the 1998 sale/leaseback transaction are an aggregate sales
price of $600,674, which approximated 75% of the original invoice cost for the
units, a 42-month lease term, monthly payments approximating $18,300, and a $1
buy-out at the end of the lease term. The net proceeds to the Company after all
transaction costs were $582,640.
In June 1998, the Company entered into a private equity line of credit
agreement with two accredited investors and on January 7, 1999, this agreement
was amended to increase the number of shares that could be issued under the
equity line of credit. Pursuant to this agreement, as amended, these investors
issued irrevocable commitments to purchase 433,334 shares of common stock of the
Company over a one-year period. In conjunction with establishment of the equity
line of credit, the Company issued three-year warrants to these investors to
purchase 45,000 shares of the Company's common stock for an average price of
$2.89 per share. The exercise price of the warrants for 20,000 of the shares is
subject to reduction depending on the number of initial shares of the Company's
common stock that the investors still own six months subsequent to their initial
purchase. On June 30, 1998, these investors purchased an initial 100,000 shares
of the Company's common stock at the market price of $5.00 per share. On
November 24, 1998, the Company sold an additional 77,042 shares of common stock
to these investors for $6.49 per share. Gross proceeds of $1,000,000 from the
sale of these securities were received during 1998. Costs related to
establishment of the equity line of credit and for the issuance of the
securities pursuant to this line of credit totaling $99,855 were charged to
additional paid-in capital. In addition, the Company issued 28,000 shares of
common stock to the placement agent as part of this transaction. As of December
31, 1998, these investors remain obligated to purchase an additional 256,292
shares of the Company's common stock, all of which have been sold to these
investors during the first quarter of 1999 for gross proceeds of $2,609,320.
In July 1998, six members of the Company's Board of Directors
(including the Company's Chairman of the Board and Chief Executive Officer, the
Company's Vice Chairman and President, and
24
<PAGE>
the Chief Executive Officer of Tekno Books, the Company's 51%-owned subsidiary)
purchased an aggregate of 187,442 shares of the Company's common stock for $5.00
per share, the then market price of the stock. In conjunction with the private
placement of these shares, the investors received five-year warrants to purchase
an aggregate of 93,721 shares of the Company's Common stock at $5.00 per share.
In September and November, 1998, the Company sold 250 shares of its 7%
Series D Convertible Preferred Stock (the "Series D Preferred Stock") to two
accredited investors. The Company realized gross proceeds of $2,500,000 from
these private placements, less expenses and placement fees of $281,917. In
connection with this transaction, the Company also issued two five-year warrants
to each investor. The two warrants entitle the investors to purchase the number
of shares of common stock equal to the aggregate purchase price of shares of
Series D Preferred Stock acquired divided by the closing price of the common
stock on the trading date immediately before the date of purchase, multiplied by
20% and 30%, respectively, at exercise prices equal to 150% and 125%,
respectively, of such closing price, subject to certain adjustments. The value
of the warrants on the dates of issuance of $414,372, less expenses of $33,730,
has been deducted from the stated value of the Series D Preferred Stock and is
reflected as warrants outstanding. Commissions and cost of issuance have been
prorated between the Series D Preferred Stock and the warrants. The stock
purchase agreement also provides for the potential issuance of adjustment shares
of the Company's common stock to the holders of the Series D Preferred Stock
under certain limited conditions.
Holders of Series D Preferred Stock are entitled to cumulative
dividends at the annual rate of 7% payable on each conversion date. Each share
of Series D Preferred Stock is convertible by the holder into shares of common
stock based on an initial conversion price equal to 105% of the average of the
closing prices of the common stock for the five trading days ending on the
trading day immediately preceding the closing. All shares of the Series D
Preferred Stock shall be automatically converted into shares of the Company's
common stock on the earlier to occur of (i) September 30, 2001, (ii) the third
trading day immediately preceding the closing of the first sale under a bona
fide underwritten initial public offering of the common stock of Huge
Entertainment, Inc. with net proceeds to Huge Entertainment, Inc. (or any
successor of Huge Entertainment, Inc.) of at least $10,000,000, or (iii) the
10th trading day immediately preceding the closing of a transaction resulting in
a change of control of the Company. The Company has the option to redeem all or
any portion of the shares of Series D Preferred Stock that are outstanding at
the time for a cash redemption price per share which is equivalent to a 20%
premium over the value that the holder of the preferred shares would realize if
the preferred shares were converted to common stock at the time of redemption.
Upon any liquidation, dissolution or winding up of the Company, holders of
Series D Preferred Stock are entitled to payment of the $10,000 stated value for
each such share plus all due but unpaid dividends before any payment is made to
holders of common stock. The Series D Preferred Stock carries no voting rights
and ranks junior to the Series A, B and C Preferred Stock.
In November 1998, the Company sold 50 shares of its 7% Series D-2
Convertible Preferred Stock (the "Series D-2 Preferred Stock") to an accredited
investor. The Company realized gross proceeds of $500,000 from this private
placement, less expenses and placement fees of $68,239. In connection with this
transaction, the Company also issued two five-year warrants to the investor. The
warrants entitle the investor to purchase 25,000 shares of the Company's common
stock for $5.175 per share and 16,667 shares for $6.26 per share, both of which
were above market exercise prices at the time the warrants were issued. The
value of the warrants on the date of issuance of $116,941 has been deducted from
the stated value of the Series D-2 Preferred Stock and is reflected as warrants
outstanding.
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<PAGE>
Each share of Series D-2 Preferred Stock is convertible into shares of
common stock, based on the Series D-2 Preferred Stock's stated value per share
of $10,000 plus accrued but unpaid dividends at a conversion price of $5.00 per
share. Shares of Series D-2 Preferred Stock will be automatically converted into
shares of common stock on the earlier to occur of (i) November 18, 2001, (ii)
the third trading day immediately preceding the closing of the first sale under
a bona fide underwritten initial public offering of the common stock of Huge
Entertainment, Inc. with net proceeds to Huge Entertainment, Inc. (or any
successor of Huge Entertainment, Inc.) of at least $10,000,000 or (iii) the 10th
trading day immediately preceding the closing of a transaction resulting in a
change of control of the Company. Other terms of the Series D-2 Preferred Stock,
and of the purchase agreements relating to its sale, are substantially the same
as for the Series D Preferred Stock.
On August 21, 1998, the Company's Board of Directors approved a plan
for the repurchase of up to $1.0 million of the Company's common stock. Pursuant
to this plan, during 1998 the Company repurchased 42,850 shares of its common
stock for an aggregate consideration of $103,028, or an average purchase price
of $2.40 per share.
The success of the Company's operations in future years is dependent on
its ability to generate adequate revenue to offset operating expenses. Unless
otherwise noted, the proceeds from the financing transactions described above
were used for general corporate purposes. The Company's management expects to
require significant additional financing for the expansion of its Internet
business (including the expected cash outflows associated with the pending
acquisitions of CinemaSource and Hollywood Online) and to support working
capital requirements in future years.
The Company is currently exploring additional 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 can be
obtained 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 $5.5 million in order to
enable the Company to meet its working capital requirements during 1999;
provided, however, that this commitment will terminate in the event the Company
raises no less than $5.5 million, for purposes other than financing the
acquisition of CinemaSource, from other sources as well as from operating cash
flow generated by new businesses acquired. In the event that the Company raises
less than $5.5 million, the dollar amount of the commitment will be reduced on a
"dollar for dollar" basis to the extent of such additional funds raised by the
Company. 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.
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<PAGE>
YEAR 2000 ISSUES
The Company believes that due to the newness of the Company's Internet
operations, all Internet systems are currently year 2000 compliant and any new
systems acquired or developed to support expansion of the Company's Internet
operations will be year 2000 compliant. Major operating systems, including the
Company's financial systems and the systems used by Tekno Books, the Company's
book packaging and licensing operation, are year 2000 compliant already. As the
Company currently intends to phase out its mall-based retail operations,
preferably through a sale of the business, it is unlikely that the existing
retail systems will still be utilized by the Company at the turn of the century.
Nevertheless, efforts have been made to ensure that the systems used by the
retail operations will also be year 2000 compliant. With regard to the retail
systems, the Company's primary concern is with remediation of the software for
the point-of-sale registers in the stores. As the Company presently only
operates six stores, if it needed to replace the point-of-sale software and
registers, the cost is not expected to exceed $100,000. Other than the potential
cost to upgrade or replace the store point-of-sale software and hardware, the
Company is not presently aware of any significant expenditures which will be
necessitated in order to be ready for year 2000, beyond those already being
incurred, although there can be no assurances that significant expenditures may
not be required in the future. Significant vendors have been contacted to ensure
that their year 2000 issues will be resolved in a timely manner and will not be
disruptive to the Company's operations. As indicated above, the Company has
initiated, but not completed, its assessment of the impact of year 2000 on its
business; however, the year 2000 issue is not currently expected to have a
material impact on the Company's current or future business operations or
financial condition.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal and expects net revenues to be generally higher during the second and
fourth quarters of each fiscal year for its Tekno Books book licensing and
packaging operation as a result of the general publishing industry practice of
paying royalties semi-annually. The Company's entertainment retail business is
seasonal with the holiday season accounting for the largest percentage of annual
net sales. In addition, although not seasonal, the Company's intellectual
properties division and NetCo Partners both experience significant fluctuations
in their respective revenue streams, earnings and cash flow as a result of the
significant amount of time that is expended in the creation and development of
the intellectual properties and their respective licensing agreements. While
certain of the development costs are incurred as normal recurring operating
expenses, the recognition of licensing revenue is typically triggered by
specific contractual events which occur at different points in time rather than
on a regular periodic basis.
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ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants........................................................29
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997.................................30
Consolidated Statements of Operations for the Years Ended December 31, 1998
and 1997...............................................................................................31
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998 and 1997.......................................................................32
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998 and 1997..........................................................................................33
Notes to Consolidated Financial Statements................................................................34
</TABLE>
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Big Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of Big
Entertainment, Inc. (a Florida corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Big Entertainment, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 12, 1999 (except with respect to the matters discussed
in Note 17(b) and 17(c), as to which the date is March 30, 1999).
29
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<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 729,334 $ 887,153
Receivables, net 568,779 243,168
Merchandise inventories 1,176,356 2,417,224
Prepaid expenses 501,501 548,206
Other receivables 250,000 350,000
Other current assets 139,974 163,099
------------ ------------
Total current assets 3,365,944 4,608,850
PROPERTY AND EQUIPMENT, net 3,145,201 4,069,171
INVESTMENT IN NETCO PARTNERS 1,004,673 1,533,567
INTANGIBLE ASSETS, net 151,405 163,393
GOODWILL, net 306,377 325,817
OTHER ASSETS 596,221 531,523
DEFERRED TAX ASSET -- 1,407,600
------------ ------------
TOTAL ASSETS $ 8,569,821 $ 12,639,921
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,496,376 $ 2,108,202
Revolving line of credit 758,917 535,000
Accrued professional fees 192,151 205,313
Other accrued expenses 1,174,136 559,050
Deferred revenue 89,632 523,301
Loan from shareholder/officer 100,000 85,000
Current portion of capital lease obligations 882,185 768,714
------------ ------------
Total current liabilities 4,693,397 4,784,580
------------ ------------
CAPITAL LEASE OBLIGATIONS, less current portion 1,741,062 1,803,344
------------ ------------
DEFERRED REVENUE 376,860 315,783
------------ ------------
CONVERTIBLE DEBENTURE, net -- 542,250
------------ ------------
MINORITY INTEREST 235,067 90,111
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 539,127 shares authorized; none outstanding -- --
Series A variable rate convertible preferred stock, $6.25 stated value,
217,600 shares authorized, issued and outstanding.
Liquidation preference of $1,580,035. 1,360,000 1,360,000
Series B variable rate convertible preferred stock, $5.21 stated value,
142,223 shares authorized; 122,846 shares issued and outstanding.
Liquidation preference of $645,873. 640,000 640,000
Series C, 4% convertible preferred stock, $100 stated value,
100,000 shares authorized; 20,000 shares issued and outstanding,
Liquidation preference of $2,020,000. 2,000,000 2,000,000
Series D, 7% convertible preferred stock, $10,000 stated value,
1,000 shares authorized; 250 shares issued and outstanding,
Liquidation preference of $2,540,370. 1,837,441 --
Series D-2, 7% convertible preferred stock, $10,000 stated value,
50 shares authorized, issued and outstanding,
Liquidation preference of $504,219. 314,820 --
Common stock, $.01 par value, authorized 25,000,000 shares; issued and
outstanding 8,161,329 shares in 1998 and 6,896,340 shares in 1997. 81,613 68,963
Warrants outstanding 834,583 586,600
Deferred compensation (510,333) --
Additional paid-in capital 31,140,339 25,671,900
Accumulated deficit (36,175,028) (25,223,610)
------------ ------------
Total shareholders' equity 1,523,435 5,103,853
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,569,821 $ 12,639,921
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
30
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
NET REVENUES $ 11,126,516 $ 10,291,447
COST OF SALES 5,987,383 5,447,989
------------ ------------
Gross profit 5,139,133 4,843,458
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 8,840,049 7,112,383
Salaries and benefits 4,151,725 3,884,926
Amortization of goodwill and intangibles 31,428 347,312
Reserve for closed stores and lease termination costs 1,121,028 --
------------ ------------
Total operating expenses 14,144,230 11,344,621
------------ ------------
Operating loss (9,005,097) (6,501,163)
EQUITY IN EARNINGS OF NETCO PARTNERS 877,549 2,702,049
OTHER INCOME (EXPENSE):
Interest, net (818,849) (323,118)
Other, net 42,989 73,894
------------ ------------
Loss before minority interest and deferred tax (expense) benefit (8,903,408) (4,048,338)
MINORITY INTEREST (347,081) (354,609)
------------ ------------
Loss before deferred tax (expense) benefit (9,250,489) (4,402,947)
DEFERRED TAX (EXPENSE) BENEFIT (1,407,600) 1,407,600
------------ ------------
Net loss $(10,658,089) $ (2,995,347)
============ ============
Basic and diluted loss per common share $ (1.47) $ (0.51)
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
31
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
COMMON STOCK STOCK STOCK STOCK STOCK
STOCK SERIES A SERIES B SERIES C SERIES D SERIES D-2
-------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $ 58,706 $ 1,360,000 $ 160,000 $ 2,000,000 $ -- $ --
Issuance of common stock in private
placement 10,000 -- -- -- -- --
Issuance of preferred stock Series B to
Tekno Simon, LLC -- -- 480,000 -- -- --
Non-cash dividend - preferred stock 257 -- -- -- -- --
Cash dividend on preferred stock Series C -- -- -- -- -- --
Issuance of stock options and warrants
for services rendered -- -- -- -- -- --
Value of conversion feature of convertible
debentures -- -- -- -- -- --
Proceeds from the issuance of warrants -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ----------- --------- ----------- ----------- -----------
Balance - December 31,1997 68,963 1,360,000 640,000 2,000,000 -- --
Non-cash dividend - preferred stock 371 -- -- -- -- --
Cash dividend on preferred stock Series C -- -- -- -- -- --
Conversion of convertible debentures into
common stock 1,736 -- -- -- -- --
Issuance of stock options and warrants
for services rendered -- -- -- -- -- --
Employee stock bonuses 2,362 -- -- -- -- --
Issuance of preferred stock and warrants
in private placement -- -- -- -- 1,837,441 314,820
Issuance of common stock in private
placements 4,531 -- -- -- -- --
Issuance of common stock to the members
of the Company's Board of Directors
in a private placement 1,874 -- -- -- -- --
Shares repurchased (429) -- -- -- -- --
Stock options and warrants exercised 2,205 -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ----------- --------- ----------- ----------- -----------
Balance - December 31, 1998 $ 81,613 $ 1,360,000 $ 640,000 $ 2,000,000 $ 1,837,441 $ 314,820
======== =========== ========= =========== =========== ===========
<CAPTION>
ADDITIONAL
PAID-IN WARRANTS DEFERRED ACCUMULATED
CAPITAL OUTSTANDING COMPENSATION DEFICIT TOTAL
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $ 22,029,194 $ 576,600 $ -- $(21,992,633) $ 4,191,867
Issuance of common stock in private
placement 3,059,996 -- -- -- 3,069,996
Issuance of preferred stock Series B to
Tekno Simon, LLC -- -- -- -- 480,000
Non-cash dividend - preferred stock 141,452 -- -- (155,630) (13,921)
Cash dividend on preferred stock Series C -- -- -- (80,000) (80,000)
Issuance of stock options and
warrants for services rendered 225,758 -- -- -- 225,758
Value of conversion feature of convertible
debentures 215,500 -- -- -- 215,500
Proceeds from the issuance of warrants -- 10,000 -- -- 10,000
Net loss -- -- -- (2,995,347) (2,995,347)
------------ --------- ------------- ------------ ------------
Balance - December 31,1997 25,671,900 586,600 -- (25,223,610) 5,103,853
Non-cash dividend - preferred stock 169,629 -- -- (233,329) (63,329)
Cash dividend on preferred stock Series C -- -- -- (60,000) (60,000)
Conversion of convertible debentures into
common stock 663,953 -- -- -- 665,689
Issuance of stock options and warrants for
services rendered 73,587 -- -- -- 73,587
Employee stock bonuses 793,863 -- (510,333) -- 285,892
Issuance of preferred stock and warrants
in private placement -- 497,583 -- -- 2,649,844
Issuance of common stock in private
placements 1,895,614 -- -- -- 1,900,145
Issuance of common stock to the members
of the Company's Board of Directors
in a private placement 935,336 -- -- -- 937,210
Shares repurchased (102,599) -- -- -- (103,028)
Stock options and warrants exercised 1,039,056 (249,600) -- -- 791,661
Net loss -- -- -- (10,658,089) (10,658,089)
------------ --------- ------------- ------------ ------------
Balance - December 31, 1998 $ 31,140,339 $ 834,583 $ (510,333) $(36,175,028) $ 1,523,435
============ ========= ============= ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
32
<PAGE>
<TABLE>
<CAPTION>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,658,089) $(2,995,347)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,108,411 1,178,935
Equity in earnings of Netco Partners, net of return of invested capital 528,894 (1,332,256)
Issuance of compensatory stock options and warrants 73,587 225,758
Amortization of deferred compensation costs 285,892 --
Recognition of deferred gain (42,988) (40,389)
Deferred tax expense (benefit) 1,407,600 (1,407,600)
Amortization of deferred financing costs 164,474 25,426
Amortization of discount on convertible debentures 107,750 107,750
Inventory reserve 232,383 --
Assets written off - closed stores 601,539 --
Minority interest 347,081 354,609
Changes in assets and liabilities:
Receivables (225,611) (147,621)
Prepaid expenses 46,705 106,049
Merchandise inventories 1,008,485 (1,006,621)
Other current assets (10,240) (104,140)
Other assets (205,350) (295,687)
Accounts payable (611,826) 1,086,938
Accrued professional fees (13,162) 106,793
Deferred revenue (318,472) (38,982)
Other accrued expenses 567,446 65,904
------------ -----------
Net cash used in operating activities (5,605,491) (4,110,481)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (446,312) (1,585,211)
Return of capital from Tekno Books to minority partner (202,125) (268,912)
------------ -----------
Net cash used in investing activities (648,437) (1,854,123)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 223,917 535,000
Proceeds from shareholder/officer loan 3,794,500 1,112,000
Repayments of shareholder/officer loan (3,779,500) (1,027,000)
Net proceeds from the issuance of preferred stock 2,649,844 480,000
Proceeds from issuance of convertible debentures -- 650,000
Net proceeds from issuance of common stock 2,837,355 3,069,996
Proceeds from the issuance of warrants -- 10,000
Proceeds from exercise of stock options and warrants 791,661 --
Dividends on preferred stock (60,000) (80,000)
Payments to repurchase common stock (103,028) --
Proceeds under sale leasebacks 691,255 947,186
Repayments under capital lease obligations (949,895) (521,277)
------------ -----------
Net cash provided by financing activities 6,096,109 5,175,905
------------ -----------
Net decrease in cash and cash equivalents (157,819) (788,699)
CASH AND CASH EQUIVALENTS, beginning of period 887,153 1,675,852
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 729,334 $ 887,153
============ ===========
SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES:
Interest paid $ 539,687 $ 180,447
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
33
<PAGE>
BIG ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) BACKGROUND:
Big Entertainment, Inc. (the "Company") was incorporated in the State of Florida
on January 22, 1993. The Company is a diversified entertainment company, engaged
in the development and licensing of intellectual properties, the development and
licensing of books, and the operation of entertainment-related retail stores,
both on the Internet and in select malls throughout the country. The Company has
two operating divisions: the intellectual properties division and the
entertainment retail division.
The intellectual properties division owns or controls the exclusive rights to
certain original characters and concepts created by best-selling authors and
media celebrities, which it licenses across all media, including books, films
and television, multimedia software, toys, and other products. The Company
acquires the rights to its intellectual properties pursuant to agreements that
grant it, on an exclusive basis, all rights in the intellectual property itself,
as well as the right to use the creator's name in the title of the intellectual
property. The intellectual properties division also includes a 51%-owned book
licensing and packaging operation named Tekno Books which focuses on developing
and executing book projects, typically with best-selling authors, which books
are then licensed for publication to book publishers. Tekno Books generates
revenue from new book projects in the form of non-refundable advances paid by
publishers, and from royalties from its library of book titles.
In addition, the Company is a 50% partner in NetCo Partners. NetCo Partners was
formed in June 1995 as a joint venture between the Company and C.P. Group, Inc.,
a company in which best-selling author Tom Clancy is a 50% shareholder. NetCo
Partners is also engaged in the development and licensing of entertainment
properties.
The entertainment retail division operates BIGE.COM, an Internet studio store,
plus seven mall-based retail stores consisting of five in-line studio stores
located in New Jersey and California, one mini in-line store in the Mall of
America in Minnesota, and one Entertainment Super-Kiosk in Florida. The Company
has curtailed its retail store expansion plans and presently is focusing its
retail efforts on development of its e-commerce Internet business. See Note 11.
The Company plans to expand its Internet operations through the acquisition of
HOLLYWOOD.COM, a leading movie information web site, and CinemaSource, Inc.,
which management believes to be the nation's largest distributor of movie
showtimes and related movie information to the Internet industry. These
acquisitions are expected to close during the second quarter of 1999.
The Company has expended significant funds developing its Internet, intellectual
property, entertainment retail, and other businesses. Operating losses since
inception have resulted in an accumulated deficit of
34
<PAGE>
$36,175,028 at December 31, 1998. The success of the Company's operations in
future years is dependent on its ability to generate adequate revenue to offset
operating expenses. There can be no assurances that the Company will be able to
generate sufficient revenues from these activities to cover its costs and,
therefore, the Company may continue to incur losses.
The Company's management expects to require additional financing for the
expansion of its Internet business (including the expected cash outflows
associated with the pending acquisitions of Hollywood Online and CinemaSource as
discussed in Note 17) and to support working capital requirements in future
years. The Company is currently exploring additional financing alternatives to
allow the Company to finance such expansion. However, there can be no assurances
that such financing alternatives will be available to the Company or will be
implemented on terms favorable to the Company. In the event such financing is
not secured, the Company's Chairman of the Board and Chief Executive Officer and
the Company's Vice Chairman and President, have indicated their intention to
provide the Company, if required, with an amount not to exceed $5.5 million in
order to enable the Company to meet its working capital requirements during
1999; provided, however, that the commitment will terminate in the event the
Company raises no less than $5.5 million from other sources for purposes other
than to finance the acquisition of CinemaSource, as well as from operating cash
flow generated from new businesses acquired. In the event the Company raises
less than $5.5 million, the dollar amount of the commitment will be reduced on a
"dollar for dollar" basis to the extent of such additional funds raised by the
Company. The exact terms of any working capital provided to the Company will be
subject to negotiation with the Board of Directors.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, and its 51% and 50.5% owned subsidiaries, Tekno Books
and Fedora, Inc., respectively. All significant intercompany balances and
transactions have been eliminated in consolidation and a minority interest has
been established to reflect the outside ownership of Tekno Books and Fedora,
Inc. The Company's 50% ownership interest in NetCo Partners is accounted for
under the equity method of accounting.
ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates made by management include, but are not
limited to, the write down of the assets of its retail operations (see Note 11),
management's estimate of the allowance for doubtful accounts (see Note 13), and
the realizable value of intangible assets. Actual results could differ from
those estimates.
35
<PAGE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents. Interest bearing amounts
included in cash and cash equivalents were $109,979 and $103,839, at December
31, 1998 and 1997, respectively.
TRADE RECEIVABLES
Trade receivables consist of receivables from distributors of the Company's
publications and amounts due from publishers relating to signed contracts, to
the extent that the earnings process is complete and amounts are deemed
realizable. Trade receivables are net of an allowance for doubtful accounts of
$39,982 at December 31, 1998 and 1997.
MERCHANDISE INVENTORIES
Merchandise inventories consist of retail merchandise and are stated at the
lower of cost or market value. Cost is determined by the weighted average
method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided in amounts
sufficient to allocate the cost of depreciable assets to operations over their
estimated service lives, which range from 3 to 5 years, on a straight-line
basis. Leasehold improvements are amortized over the lesser of the terms of the
respective leases or the service lives of the improvements.
INTANGIBLE ASSETS AND GOODWILL
Purchase price allocations for the acquisition of Tekno Books and Fedora, Inc.
have been made in accordance with Accounting Principles Board ("APB") Opinion
No. 16. Pursuant to APB 16, acquired tangible assets have been recorded at
estimated fair value and acquired liabilities at the present value of amounts
due. The excess of the purchase price, including liabilities assumed, over the
value assigned to net tangible assets acquired has been allocated to either
specifically identified intangibles or goodwill.
"Intangible Assets" consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Book contracts acquired with Tekno Books $ -- $ 1,263,542
Patents and trademarks 203,368 203,368
----------- -----------
203,368 1,466,910
Less accumulated amortization (51,963) (1,303,517)
----------- -----------
$ 151,405 $ 163,393
=========== ===========
</TABLE>
Patents and trademarks are being amortized on a straight-line basis over 17
years. Book contracts, which were being amortized on a straight-line basis over
3 years, became fully amortized during 1997 and the balances were written off in
1998.
36
<PAGE>
Goodwill relating to the acquisition of Tekno Books and Fedora, Inc., amounting
to $388,783, is being amortized on a straight-line basis over 20 years.
Accumulated amortization of goodwill totaled $82,406 and $62,966 as of December
31, 1998 and 1997, respectively.
The Company continually evaluates the amounts of recorded goodwill and the
period over which it is amortized by consideration of events and circumstances
that occur subsequent to its acquisition.
LONG-LIVED ASSETS
The Company applies the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed
Of". Under the provisions of this statement, the Company has evaluated its
long-lived assets for financial impairment, and will continue to evaluate them
as events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying values of such
assets, the assets are adjusted to their fair values. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 1998 or 1997.
The Company evaluates the recoverability of long-lived assets held for sale by
comparing the asset's carrying amount with its fair value less cost to sell.
During 1998, the Company incurred an impairment charge for long-lived assets to
be disposed of as more fully described in Note 11.
REVENUE RECOGNITION
Licensing revenues in the form of non-refundable advances and other guaranteed
royalty payments are recognized when the earnings process has been completed,
which is generally upon the achievement of milestones in the
development/publishing of the property. Non-guaranteed royalties based on sales
of licensed products and on sales of books published directly by the Company are
recognized as revenues when earned based on royalty statements or other
notification of such amounts from the publishers.
Revenue relating to the Company's book packaging and licensing operation is
recognized when the earnings process is complete, typically when a publisher
accepts a book for publishing. Advances received from publishers are recorded as
deferred revenues until the book is accepted by the publisher. Revenues are
recorded net of agents' fees. In the book packaging and licensing division,
expenditures for co-editors and permission payments are also deferred and
recorded as prepaid expenses until the book is accepted by the publisher, at
which time such costs are expensed.
Revenue relating to sales at the Company's retail outlets is recognized at the
time of sale. Revenue relating to product sales over the Internet totalling
$71,546 for the period from November 26 through December 31, 1998 is recognized
at the time the order is filled and shipped.
Franchise fee revenue is recognized when all material services or conditions
relating to a franchise agreement have been substantially performed or
satisfied.
PRE-OPENING EXPENSES
Pre-opening expenses related to new store openings are expensed as incurred.
BARTER TRANSACTIONS
The Company records the exchange of air time given on the television monitors in
its retail stores and promotional space given on its web site for advertising
air time received on local ABC affiliate television stations at the estimated
fair value of the air time received from the ABC affiliates. The income and
expense are recorded in equal amounts at the time when the advertising air time
is received from ABC. The Company imputed revenues and selling, general and
administrative expenses of $2,130,112 in 1998 and $1,150,000 in 1997 relating to
the ABC Programming Agreement.
LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share", which requires companies to present basic and diluted
earnings per share ("EPS") instead of the primary and fully diluted EPS that was
previously required. The Company adopted SFAS No. 128 in 1997. Loss per
37
<PAGE>
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 as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net Loss $(10,658,089) $(2,995,347)
Preferred Stock Dividends (293,328) (236,299)
------------ -----------
Net Loss Available to Common Shareholders (10,951,417) (3,231,646)
Weighted Average Shares Outstanding 7,456,651 6,316,013
------------ -----------
Loss per Share, Basic and Diluted $ (1.47) $ (0.51)
============ ===========
</TABLE>
Common shares issuable upon conversion of convertible securities and upon
exercise of outstanding options and warrants were excluded from the calculation
of diluted loss per share in 1998 and 1997 because their impact was
anti-dilutive.
STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in
1996. SFAS No. 123 allows either adoption of a fair value method of accounting
for stock-based compensation plans or continuation of accounting under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations with supplemental disclosures. The Company has chosen to account
for all stock-based arrangements under which employees receive shares of the
Company's stock under APB 25 and make the related disclosures under SFAS No.
123. Pro forma loss per share, as if the fair value method had been adopted, is
presented in Note 10. Stock options and warrants granted to non-employees are
accounted for under the fair value method prescribed by SFAS No. 123.
POST-RETIREMENT BENEFITS
The Company does not currently provide post-retirement benefits for its
employees.
RECLASSIFICATIONS
Certain reclassifications were made to prior year statements to conform with the
current year's presentation.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, and accrued expenses approximate fair value due to the short maturity
of the instruments. The fair value of capital lease obligations is estimated
using an appropriate valuation method and approximates the carrying amount of
capital lease obligations in the accompanying consolidated balance sheets. The
carrying value of debt, including bank debt and the loan from
shareholders/officers, approximates fair value because the interest rate
reprices with changes in market rates.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", in 1998.
This Statement requires that all items that are required to be recognized under
accounting standards as components of
38
<PAGE>
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. Adoption
of this standard did not impact the Company's consolidated financial statements.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", in 1998. 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. Disclosure regarding the Company's
business segments is contained in Note 16.
(5) FRANCHISE FEE RECEIVABLE AND FRANCHISE FEE INCOME:
The Company entered into an amended franchise agreement in 1997, pursuant to
which a franchisee obtained the exclusive rights to open Big Entertainment
in-line studio stores in the Phoenix, Arizona market area in exchange for a
$350,000 territorial exclusivity fee, which was paid during the first quarter of
1998. In order for the franchisee to maintain its territorial rights, the
agreement requires the franchisee to open one store by December 31, 1999 and one
store each year thereafter. The agreement does not require any further
performance by the Company. The Company had the option, exercisable at any time
prior to December 31, 1998, to reacquire the rights to the Phoenix, Arizona
market, provided no such franchised units had already opened, by issuing the
franchisee 100,000 unregistered shares of the Company's common stock. The
Company did not exercise this option. Accordingly, net revenues for 1998 include
franchise fee income of $350,000. At December 31, 1997, the accompanying
consolidated balance sheet reflected the $350,000 franchise fee receivable in
other receivables and as deferred revenue.
(6) PROPERTY AND EQUIPMENT, NET:
Property and equipment (excluding equipment under capital leases) consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 186,460 $ 180,863
Entertainment Super-Kiosks 185,070 1,003,678
Equipment 217,835 212,853
Leasehold improvements 895,883 545,865
----------- -----------
1,485,248 1,943,259
Less: Accumulated depreciation and
amortization (627,453) (800,408)
----------- -----------
$ 857,795 $ 1,142,851
=========== ===========
</TABLE>
39
<PAGE>
Equipment under capital leases consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Equipment $ 2,329,147 $ 2,554,846
Entertainment Super-Kiosks 1,116,822 1,164,380
----------- -----------
3,445,969 3,719,226
Less: Accumulated depreciation (1,158,563) (792,906)
----------- -----------
$ 2,287,406 $ 2,926,320
=========== ===========
</TABLE>
Depreciation and amortization expense on property and equipment was $1,076,983
and $831,623 for the years ended December 31, 1998 and 1997, respectively.
(7) CAPITAL LEASE OBLIGATIONS:
Future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $1,126,738
2000 936,266
2001 656,689
2002 420,288
2003 77,020
Thereafter 464
----------
Minimum lease payments 3,217,465
Less amount representing interest (594,218)
----------
Present value of net minimum lease payments 2,623,247
Less current portion (882,185)
----------
Noncurrent portion $1,741,062
==========
</TABLE>
In February 1996, the Company entered into a sale and leaseback transaction (the
"1996 Sale-Leaseback"). Pursuant to the 1996 Sale-Leaseback, the Company sold 18
kiosks to the lessor for $1,080,000 (excluding transaction costs of
approximately $50,000, and fair value of warrants granted of $84,380) and
simultaneously leased the kiosks from the lessor for a term of 39 months with
aggregate rental payments of approximately $35,000 per month. Upon expiration of
the lease, the Company will have the option to repurchase the kiosks for their
fair market value, but in no event more than $108,000 in the aggregate. In May
1998, the Company entered into a second sale and leaseback transaction (the
"1998 Sale-Leaseback") with the same party for 17 additional kiosk units. The
terms of the 1998 Sale-Leaseback are an aggregate sales price of $600,674, which
approximated 75% of the original invoice cost of the units, a 42-month lease
term, monthly payments of approximately $18,300, and a $1 buy-out at the end of
the lease term. The net proceeds to the Company after all transaction costs were
$582,640. These sale-leaseback transactions do not include the underlying mall
leases for the sites of the Company's kiosks, with respect to which the Company
remains liable. As collateral security for these leases, the Company issued an
aggregate of 433,061 shares of its common stock which were placed in escrow (the
"Escrow
40
<PAGE>
Shares"). The escrow agent continues to hold 394,466 of the Escrow Shares and
the remaining 38,595 Escrow Shares have been returned to Company and cancelled.
In the event that the Company defaults under the agreements for the
Sale-Leaseback, the Escrow Shares held by the escrow agent will be released to
the lessor. While held in escrow, the Escrow Shares will be voted by the lessor
on all matters in accordance with the recommendations of management and neither
the escrow agent nor the lessor will have any dispositive rights with respect
thereto. As additional consideration for the 1996 Sale-Leaseback, the Company
issued to the lessor four-year warrants to purchase 26,739 shares of common
stock, at an exercise price of $8.08 per share. As additional consideration for
the 1998 Sale-Leaseback, the Company issued to the lessor five-year warrants to
purchase 5,203 shares of common stock of an exercise price of $5.775 per share.
(8) DEBT:
The Company's Chairman and Chief Executive Officer and the Company's Vice
Chairman and President have extended a $1.1 million unsecured line of credit
facility to the Company. The line of credit bears interest at the JP Morgan Bank
prime rate of interest, is prepayable at any time without penalty by the
Company, and is payable on demand of the holders. The outstanding balance under
this line of credit was $100,000 at December 31, 1998 and $85,000 at December
31, 1997. Interest expense on this line of credit amounted to $55,366 and
$19,313 for 1998 and 1997, respectively. The Company's Chairman of the Board and
Chief Executive Officer and the Company's Vice Chairman and President have
agreed to increase the credit facility that they provide to the Company to a
maximum of $5.5 million for 1999, upon terms to be agreed upon by these
executive officers and the Company's Board of Directors.
In August 1997, the Company issued a $650,000 4% convertible debenture to a
single institutional investor. The debenture was convertible by the holder into
shares of the Company's common stock. During 1998, the debenture holder
converted the entire $650,000 debenture plus accrued interest into a total of
173,568 shares of common stock. In conjunction with 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 was amortized as interest expense from the date of issuance through
April 1998.
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 mall-based component
of the Company's entertainment retail division, and the Company is guarantor. As
a result of the phasing out of the Company's traditional retail business, the
Company and BankBoston have agreed to modify the terms of the credit facility.
Under the modified agreement, availability is calculated as a percentage of the
cost of retail inventories less certain allowances and reserves. This
percentage, which was 50% at December 31, 1998, is being reduced by one
percentage point each week beginning the third week in January 1999, with the
outstanding balance to be paid in full by June 30, 1999. Interest is payable
monthly at the prime rate plus 1%. The credit facility includes an annual
commitment fee of 1% and a monthly facility fee of $2,500. BankBoston received
five-year warrants to buy 30,000 shares of the Company's common stock at an
exercise price of $9.68 per share (see Note 10). As of December 31, 1998, the
Company's outstanding balance on the line of credit was $758,917, essentially
utilizing the then available borrowing base. The facility is secured by cash,
inventory and accounts receivable of the Company's entertainment retail
division. All of the financial performance covenants were eliminated from the
credit facility as part of the modification agreement.
41
<PAGE>
(9) OFFERINGS OF SECURITIES:
In July 1997, the Company sold 1,000,002 shares of its common stock through a
private placement for $3,500,000. The proceeds to the Company from the issuance
of these shares amounted to $3,069,996, net of expenses. The shares issued
through this private placement were restricted from resale for six months from
the date of issuance; accordingly the shares were sold at a 20% discount to the
then current market price of the common stock reflecting the restrictions on
resale. In conjunction with this offering, the placement agent received warrants
to purchase 100,000 shares of common stock. The warrants expire five years from
the date of issuance and have an exercise price of $5.00 per share.
In March and April, 1998, the Company sold 248,053 shares of its common stock to
five accredited investors for gross proceeds of $1,037,500. In conjunction with
the sale of these shares, the Company issued five-year warrants to three
investors to purchase 55,000 shares of the Company's common stock at $4.66 per
share. Costs related to the issuance of these securities totaling $37,500 were
charged to additional paid-in capital. The holders of the above warrants have
the right at any time during the one year period from the date said warrants
were issued to exchange the warrants for an aggregate of 22,145 shares of common
stock.
On June 30, 1998, the Company entered into a private equity line of credit
agreement with two accredited investors and on January 7, 1999, this agreement
was amended to increase the number of shares that could be issued under the
equity line of credit. Pursuant to this agreement, as amended, these investors
issued irrevocable commitments to purchase 433,334 shares of common stock of the
Company over a one-year period. In conjunction with establishment of the equity
line of credit, the Company issued three-year warrants to these investors to
purchase 45,000 shares of the Company's common stock for an average price of
$2.89 per share. The exercise price of the warrants for 20,000 of the shares is
subject to reduction depending on the number of initial shares of the Company's
common stock that the investors still own six months subsequent to their initial
purchase. On June 30, 1998, these investors purchased an initial 100,000 shares
of the Company's common stock at the market price of $5.00 per share. On
November 24, 1998, the Company sold an additional 77,042 shares of common stock
to these investors for $6.49 per share. Gross proceeds of $1,000,000 from the
sale of these securities were received during 1998. Costs related to
establishment of the equity line of credit and for the issuance of the
securities pursuant to this line of credit totaling $99,855 were charged to
additional paid-in capital. In addition, the Company issued 28,000 shares of
common stock to the placement agent as part of this transaction. As of December
31, 1998, these investors remain obligated to purchase an additional 256,292
shares of the Company's common stock, all of which have been sold to these
investors during 1999 for gross proceeds of $2,609,320.
In July 1998, six members of the Company's Board of Directors (including the
Company's Chairman of the Board and Chief Executive Officer, the Company's Vice
Chairman and President, and the Chief Executive Officer of Tekno Books, the
Company's 51%-owned subsidiary) purchased an aggregate of 187,442 shares of the
Company's common stock for $5.00 per share, the then market price of the stock.
In conjunction with the private placement of these shares, the investors
received five-year warrants to purchase an aggregate of 93,721 shares of the
Company's Common stock at $5.00 per share.
On August 21, 1998, the Company's Board of Directors approved a plan for the
repurchase of up to $1.0 million of the Company's common stock. Pursuant to this
plan, during 1998 the Company repurchased
42
<PAGE>
42,850 shares of its common stock for an aggregate consideration of $103,028, or
an average purchase price of $2.40 per share.
In September and November 1998, the Company sold 250 shares of its 7% Series D
Convertible Preferred Stock (the "Series D Preferred Stock") to two accredited
investors. The Company realized gross proceeds of $2,500,000 from these private
placements, less expenses and placement fees of $281,917. In connection with
this transaction, the Company also issued two five-year warrants to each
investor. The two warrants entitle the investors to purchase the number of
shares of common stock equal to the aggregate purchase price of shares of Series
D Preferred Stock acquired divided by the closing price of the common stock on
the trading date immediately before the date of purchase, multiplied by 20% and
30%, respectively, at exercise prices equal to 150% and 125%, respectively, of
such closing price, subject to certain adjustments. The value of the warrants on
the dates of issuance of $414,372, less expenses of $33,730, has been deducted
from the stated value of the Series D Preferred Stock and is reflected as
warrants outstanding. Commissions and cost of issuance have been prorated
between the Series D Preferred Stock and the warrants. The stock purchase
agreement also provides for the potential issuance of adjustment shares of the
Company's common stock to the holders of the Series D Preferred Stock under
certain limited conditions.
Holders of Series D Preferred Stock are entitled to cumulative dividends at the
annual rate of 7% payable on each conversion date. Each share of Series D
Preferred Stock is convertible by the holder into shares of common stock based
on an initial conversion price equal to 105% of the average of the closing
prices of the common stock for the five trading days ending on the trading day
immediately preceding the closing. All shares of the Series D Preferred Stock
shall be automatically converted into shares of the Company's common stock on
the earlier to occur of (i) September 30, 2001, (ii) the third trading day
immediately preceding the closing of the first sale under a bona fide
underwritten initial public offering of the common stock of Huge Entertainment,
Inc. with net proceeds to Huge Entertainment, Inc. (or any successor of Huge
Entertainment, Inc.) of at least $10,000,000, or (iii) the 10th trading day
immediately preceding the closing of a transaction resulting in a change of
control of the Company. The Company has the option to redeem all or any portion
of the shares of Series D Preferred Stock that are outstanding at the time for a
cash redemption price per share which is equivalent to a 20% premium over the
value that the holder of the preferred shares would realize if the preferred
shares were converted to common stock at the time of redemption. Upon any
liquidation, dissolution or winding up of the Company, holders of Series D
Preferred Stock are entitled to payment of the $10,000 stated value for each
such share plus all due but unpaid dividends before any payment is made to
holders of common stock. The Series D Preferred Stock carries no voting rights
and ranks junior to the Series A, B and C Preferred Stock.
In November 1998, the Company sold 50 shares of its 7% Series D-2 Convertible
Preferred Stock (the "Series D-2 Preferred Stock") to an accredited investor.
The Company realized gross proceeds of $500,000 from this private placement,
less expenses and placement fees of $68,239. In connection with this
transaction, the Company also issued two five-year warrants to the investor. The
warrants entitle the investor to purchase 25,000 shares of the Company's common
stock for $5.175 per share and 16,667 shares for $6.26 per share, both of which
were above market exercise prices at the time the warrants were issued. The
value of the warrants on the date of issuance of $116,941 has been deducted from
the stated value of the Series D-2 Preferred Stock and is reflected as warrants
outstanding.
43
<PAGE>
Each share of Series D-2 Preferred Stock is convertible into shares of common
stock, based on the Series D-2 Preferred Stock's stated value per share of
$10,000 plus accrued but unpaid dividends at a conversion price of $5.00 per
share. Shares of Series D-2 Preferred Stock will be automatically converted into
shares of common stock on the earlier to occur of (i) November 18, 2001, (ii)
the third trading day immediately preceding the closing of the first sale under
a bona fide underwritten initial public offering of the common stock of Huge
Entertainment, Inc. with net proceeds to Huge Entertainment, Inc. (or any
successor of Huge Entertainment, Inc.) of at least $10,000,000 or (iii) the 10th
trading day immediately preceding the closing of a transaction resulting in a
change of control. Other terms of the Series D-2 Preferred Stock, and of the
purchase agreements relating to its sale, are substantially the same as for the
Series D Preferred Stock.
(10) STOCK OPTION PLANS:
1993 STOCK OPTION PLAN
Under the Company's 1993 Stock Option Plan (the "1993 Plan"), 1,500,000 shares
of the Company's common stock are reserved for issuance upon exercise of
options. The 1993 Plan is designed to serve as an incentive for retaining
qualified and competent consultants and employees. The Stock Option Committee of
the Company's Board of Directors (the "Committee") administers and interprets
the 1993 Plan and is authorized to grant options thereunder to all eligible
consultants, employees and officers of the Company.
The 1993 Plan provides for the granting of both "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code of 1986, as amended) and
nonqualified stock options. Options are granted under the 1993 Plan on such
terms and at such prices as determined by the Committee. Each option is
exercisable after the period or periods specified in the option agreement, but
no option can be exercised until six months after the date of grant, or after
the expiration of 10 years from the date of grant. Options granted under the
1993 Plan are not transferable other than by will or by the laws of descent and
distribution. The 1993 Plan also authorizes the Company to make loans to
employees to enable them to exercise their options. Such loans must (i) provide
for recourse to the optionee, (ii) bear interest at a rate no less than the rate
of interest payable by the Company to its principal lender at the time the loan
is made, and (iii) be secured by the shares of common stock purchased. No such
loans were made in either 1998 or 1997.
DIRECTORS STOCK OPTION PLAN
The Company has established the Directors Stock Option Plan for directors, which
provides for automatic grants to each director of options to purchase shares of
the Company's common stock having a market value at the time of grant equal to
$25,000 (i) upon a person's election as a director and (ii) each year thereafter
upon such person's reelection as a director of the Company, in both instances at
an exercise price equal to the fair market value of the common stock on the date
of the grant. A total of 100,000 shares of common stock have been reserved for
issuance upon exercise of options granted under the Directors Stock Option Plan.
Options granted under the Directors Stock Option Plan become exercisable in full
six months after the date of grant and expire five years after the date of
grant. The Board of Directors, at its discretion, may cancel all options granted
under the Directors Stock Option Plan that remain unexercised on the date of
consummation of certain corporate transactions described in the Directors Stock
Option Plan.
44
<PAGE>
A summary of stock option and warrant transactions for the years ended December
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS WARRANTS
------------------------ ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1996 775,141 $ 6.53 620,511 $ 8.20
Granted 193,484 5.66 169,731 6.12
Cancelled (14,284) 7.70 -- --
-------- -------- ---------- ---------
OUTSTANDING AT DECEMBER 31, 1997 954,341 6.34 790,242 7.76
Granted 138,780 5.55 760,148 5.05
Exercised (14,954) 5.81 (205,500) 3.43
Cancelled (98,849) 6.52 (120,000) 13.20
-------- -------- ---------- ---------
OUTSTANDING AT DECEMBER 31, 1998 979,318 $ 6.17 1,224,890 $ 5.99
======== ======== ========== =========
</TABLE>
At December 31, 1998, a total of 584,322 and 21,406 options were available for
future grant under the 1993 Plan and Directors Stock Option Plan, respectively.
Additionally, at December 31, 1998, 782,729 stock options and 1,224,890 warrants
were exercisable. As of the date of this report, options and warrants to
purchase 48,038 shares of the Company's common stock have been exercised during
1999, for which the Company has received aggregate proceeds of $145,959.
The weighted average fair value of options and warrants granted in 1998 and 1997
was $1.76 per share and $2.08 per share, respectively.
The exercise prices of some options differ from the market price of the stock on
the grant date. The following table summarizes weighted average exercise prices
and fair value of options and warrants granted whose exercise price equals,
exceeds or is less than the market price of the stock on the grant date:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Exercise Price Equals Market Price
Weighted average exercise price $ 5.66 N/A
Weighted average fair value 2.40 N/A
Exercise Price Exceeds Market Price
Weighted average exercise price 5.26 $ 6.41
Weighted average fair value 1.44 1.83
Exercise Price is Less Than Market Price
Weighted average exercise price 4.06 4.63
Weighted average fair value 2.84 2.67
</TABLE>
45
<PAGE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING EXERCISABLE
----------------------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .01 45,648 6.7 $ 0.01 45,648 $ 0.01
3.12- 5.99 939,131 4.7 5.00 798,130 4.99
6.00- 7.99 810,877 3.5 6.51 805,159 6.51
8.00-14.75 408,552 4.5 8.64 358,682 8.60
--------- ---------
.01-14.75 2,204,208 4.3 6.13 2,007,619 6.13
========= =========
</TABLE>
Had compensation cost for the 1993 Plan and the Directors Stock Option Plan been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C> <C>
Net loss As Reported $(10,658,089) $ (2,995,347)
Pro Forma (10,989,891) (3,336,373)
Basic and diluted As Reported (1.47) (0.51)
loss per share Pro Forma (1.51) (0.57)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
an option pricing model with the following weighted average assumptions used for
grants in 1998 and 1997: risk free interest rate of 4.9% and 5.7%, respectively;
expected lives of 2 years for two year options, 3 years for four year options
and 4 years for five and ten year options; and expected volatility ranging from
36.3% to 70.7% in 1998 and 37.0% in 1997.
In 1998 and 1997, the Company recorded selling, general and administrative
expense of $54,189 and $120,646, respectively, related to stock options granted
on various dates to non-employees of the Company. An additional $19,398 was
capitalized as debt issuance costs representing the value of 11,201 warrants
issued to the lessor and the leasing broker in connection with the 1998
Sale/Leaseback (See Note 7). An additional $53,749 was capitalized as debt
issuance costs during 1997 representing the value of 62,499 warrants issued in
conjunction with obtaining the bank line of credit and issuance of the
convertible debenture (See Note 8). Additionally, the Company increased its
investment in NetCo Partners by $51,363 in 1997 for 75,000 options previously
granted to an outside consultant hired by NetCo Partners.
(11) RESERVE FOR CLOSED STORES AND LEASE TERMINATION COSTS:
The Company has aggressively pursued closure of its marginal entertainment
retail kiosks and has closed 29 kiosk locations during 1998. Fifteen of the 29
mall leases were terminated at the expiration of the lease, or at the mutual
consent of the Company and lessor, at no additional cost to the Company. The
Company has
46
<PAGE>
reached agreement with certain of the other lessors to terminate the leases
based on a maximum rental payment stream to be paid out over time, in most cases
over four months. The Company is currently negotiating with the remaining
lessors to obtain assignment of and/or release from certain of its lease
obligations, which are typically short term in duration. The Company is
presently in discussions with parties who have expressed an interest in
purchasing the remaining mall-based retail store operations, including the
kiosks which are currently in storage. An aggregate charge in the amount of
$1,121,028 was recorded in fiscal 1998 consisting of $653,474 for the write-off
of 10 kiosks which the Company earmarked for abandonment, plus the write down of
other property and equipment of the entertainment retail division, and $467,554
for the estimated cost of the early lease terminations. In addition, in light of
the phase out of its mall-based retail stores, the Company established an
inventory reserve in the amount of $232,383; this reserve increased cost of
sales for 1998. At December 31, 1998, the remaining carrying value of the
inventory and fixed assets of the entertainment retail division (some of which
will be utilized by the Internet e-commerce store) is approximately $4,352,000.
(12) INCOME TAXES:
The Company is in a loss position for both financial and tax reporting purposes.
The Company follows SFAS No. 109, "Accounting for Income Taxes" which requires,
among other things, recognition of future tax benefits measured at enacted rates
attributable to deductible temporary differences between financial statement and
income tax bases of assets and liabilities and to tax net operating loss
carryforwards to the extent that realization of said benefits is "more likely
than not". The primary item giving rise to such deferred tax asset is a loss
carryforward of approximately $34,868,000 as a result of the operating losses
incurred for the period from inception (January 22, 1993) to December 31, 1998.
However, due to the uncertainty of the Company's ability to generate taxable
income in the future, and, to the extent taxable income is generated in the
future, the uncertainty as to the Company's ability to utilize its loss
carryforwards subject to the "ownership change" provisions of Section 382 of the
U.S. Internal Revenue Code, the Company had established a valuation allowance
for the full amount of the deferred tax asset in 1996. During 1997, based
primarily on taxable income that was expected to be generated upon consummation
of the Huge Entertainment transaction, the Company decreased the valuation
allowance by $1,407,600. The Company currently believes that consummation of the
Huge Entertainment transaction, which entailed a spin-off of the Company's
intellectual properties into a new entity that would also receive additional
intellectual properties contributed by others, is no longer probable. As a
result, the Company has re-established the valuation allowance to the full
amount of the deferred tax asset in 1998.
The loss carryforwards expire as follows:
<TABLE>
<S> <C>
2009 $ 528,000
2010 5,065,000
2011 7,990,000
2012 6,211,000
2013 4,456,000
2018 10,618,000
------------
$ 34,868,000
============
</TABLE>
47
<PAGE>
(13) NETCO PARTNERS:
In June 1995, the Company and C.P. Group, Inc. ("C.P. Group"), a company in
which Tom Clancy is a 50% shareholder, entered into an agreement to form NetCo
Partners (the "NetCo Joint Venture Agreement"). NetCo Partners is engaged in the
publishing and licensing of entertainment properties, including TOM CLANCY'S
NETFORCE.
The Company and C.P. Group are each 50% partners in NetCo Partners. C.P. Group
contributed to NetCo Partners all rights to TOM CLANCY'S NETFORCE, and the
Company contributed to NetCo Partners all rights to TAD WILLIAMS' MIRRORWORLD,
ARTHUR C. CLARKE'S WORLDS OF ALEXANDER, NEIL GAIMAN'S LIFERS, and ANNE
MCCAFFREY'S SARABAND.
The NetCo Joint Venture Agreement provides for an initial term (the "Development
Term") of 5 years during which the partners will jointly develop the contributed
properties. The Development Term may be extended by the mutual consent of the
partners and shall terminate upon 30 days notice to the Company by C.P. Group
should Mitchell Rubenstein cease to be Chief Executive Officer of the Company
and Laurie S. Silvers cease to be the President of the Company. Upon termination
of the Development Term, any undeveloped properties (excluding TOM CLANCY'S
NETFORCE which will remain owned 50% by the Company and 50% by C.P. Group) are
to be returned to their respective contributing partner and any properties in
development or already developed are to be properties of the joint venture which
shall continue until its bankruptcy, dissolution, or the sale of all or
substantially all of its assets.
Pursuant to the terms of the NetCo Partners Joint Venture Agreement, the Company
is responsible for developing, producing, manufacturing, advertising, promoting,
marketing and distributing NetCo Partners' illustrated novels and related
products and for advancing all costs incurred in connection therewith. All
amounts advanced by the Company to fund NetCo Partners' operations are treated
as capital contributions of the Company and the Company is entitled to a return
of such capital contributions before distributions of cash flow are split
equally between the Company and C.P. Group.
NetCo Partners has signed several significant licensing agreements for TOM
CLANCY'S NETFORCE. These agreements include two book licensing agreements for
North American rights to a series of adult and young adult books with the
Berkley Publishing Group, an agreement with ABC for production of TOM CLANCY'S
NETFORCE as a television mini-series, a product placement agreement with Dodge,
a division of Chrysler Corporation, for use of Dodge vehicles in the books, an
audio book agreement with Random House Audio Publishing, and licensing
agreements with various foreign publishers for rights to publish TOM CLANCY'S
NETFORCE books in the eight different languages. NetCo Partners has also entered
into a licensing agreement with HarperCollins for publication of TAD WILLIAMS'
MIRRORWORLD as an illustrated novel. These contracts typically provide for
payment of non-refundable advances to NetCo Partners upon achievement of
specific milestones, and for additional royalties based on sales of the various
products at levels in excess of the levels implicit in the non-refundable
advances. NetCo Partners recognizes revenue pursuant to these contracts when the
earnings process has been completed based on the terms of the various contracts.
48
<PAGE>
The Company records its investment in NetCo Partners under the equity method of
accounting, recognizing 50% of NetCo Partners' income or loss as Equity in
Earnings of NetCo Partners. Since NetCo Partners is a partnership, any income
tax payable is passed through to the partners. The revenues, gross profit and
net income of NetCo Partners for the fiscal years ended December 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues $2,685,928 $6,551,470
Gross Profit 2,052,907 5,477,625
Net Income 1,755,098 5,404,100
</TABLE>
During 1998, NetCo Partners and ABC modified their arrangement, which resulted
in a modification of revenues previously accrued in 1997 under the ABC
mini-series arrangement for NETFORCE. The mini-series arrangement originally
provided for a payment to NetCo Partners of $1.6 million should the NETFORCE
mini-series not air by May 1999 and a minimum guaranteed license fee if it
aired. ABC substantially completed production of the mini-series during 1998 (at
a sizeable cost which was funded entirely by ABC), and the mini-series aired on
ABC for four hours over two nights in February 1999. Under the new arrangement,
NetCo Partners received a $400,000 rights fee during 1998 and future profit
participation in the mini-series in lieu of the original guaranteed license fee.
Accordingly, in 1998 NetCo Partners reversed the $1.6 million fee recorded in
1997 and recognized the $400,000 rights fee. Future revenues under the ABC
mini-series arrangement will be based on profit participation.
As of December 31, 1998, NetCo Partners has $3,621,239 in accounts receivable.
Management of NetCo Partners believes that the receivables will be collected in
full and no reserves have been established.
NetCo Partners' deferred revenues, consisting of advances received but not yet
recognized as income, amounted to $1,918,986 as of December 31, 1998.
As of December 31, 1998, the Company has received cumulative profit
distributions from NetCo Partners since its formation totaling $2,791,574, in
addition to reimbursement of substantially all amounts advanced by the Company
to fund the operations of NetCo Partners.
49
<PAGE>
(14) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES-
The Company conducts its operations in various leased facilities, including
retail locations, under leases that are classified as operating leases for
financial statement purposes. Certain leases provide for payment of real estate
taxes, common area maintenance, insurance, and certain other expenses,
including, in some instances, contingent rentals based on sales. Lease terms
expire at various dates through the year 2008. Also, certain equipment used in
the Company's operations is leased under operating leases.
Operating lease commitments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 1,227,000
2000 1,113,000
2001 939,000
2002 763,000
2003 652,000
Thereafter 2,716,000
--------------
Total $ 7,410,000
==============
</TABLE>
The fixed operating lease commitments detailed above assume that the Company
continues the leases through their initial lease terms. Several leases for the
Company's retail mall locations contain clauses permitting and/or requiring the
Company to terminate the leases at earlier specified dates without penalty in
the event certain predetermined sales levels are not met. In addition, the
Company is currently negotiating the early termination of various operating
leases with an aggregate total commitment of approximately $2,757,000 included
above. The Company expects to negotiate termination and release from these
leases for approximately $269,000, which has been accrued at December 31, 1998
as part of the reserve for closed stores and lease termination costs. Rent
expense, including equipment rentals, was $1,804,734 and $1,694,381 during 1998
and 1997, respectively, and is included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.
EMPLOYMENT AGREEMENTS-
Effective July 1, 1998, the Company extended its employment agreements with each
of Mitchell Rubenstein, to serve as Chairman of the Board and Chief Executive
Officer, and Laurie Silvers, to serve as Vice Chairman of the Board and
President for an additional five-year term. Mitchell Rubenstein and Laurie
Silvers are also shareholders in the Company. The terms of each of the
employment agreements will automatically be extended for successive one-year
terms unless the Company or the executive gives written notice to the other at
least 90 days prior to the then scheduled expiration date. Each of the
employment agreements provides for an annual salary currently set at $237,000
(subject to cost-of-living increases), an annual bonus of an amount determined
by the Board of Directors (but not less than $25,000), and an automobile
allowance of $650 per month. Each employment agreement generally provides that
the executive will continue to receive his or her salary until the expiration of
the terms of the employment agreements if the executive's employment is
terminated by the Company for any reason other than death, disability or cause
(as defined in the employment agreements), or for a period of 12 months after
termination of the employment agreement as a result of the executive's
disability, and that the executive's estate will receive a lump-sum payment
equal to one year's base salary plus a pro rata portion of any bonus to which
the executive is entitled upon termination of the employment agreement
50
<PAGE>
by reason of the executive's death. A termination by the Company of the
employment of one of the executives will constitute a termination without cause
of the other executive for purposes of the employment agreements. Each
employment agreement also prohibits the executive from directly or indirectly
competing with the Company for one year after termination of the employment
agreement for any reason except the Company's termination of the executive's
employment without cause. If a Change of Control (as defined in the employment
agreements) occurs, the employment agreements provide for the continued
employment of the executives until the earlier of two years following the Change
of Control or the then scheduled expiration date of the term of employment. In
addition, following a Change of Control, if the executive's employment is
terminated by the Company other than for cause or by reason of the executive's
death or disability, or by the executive for certain specified reasons (such as
a reduction of the executive's compensation or diminution of the executive's
duties), the executive will receive a lump-sum cash payment equal to three times
the executive's then existing base salary and most recent annual bonus. Mitchell
Rubenstein and Laurie Silvers each received compensation for the years ended
December 31, 1998 and 1997 of $303,365 and $218,017, respectively, which is
included in salaries and benefits in the accompanying consolidated statements of
operations. The increase in compensation is primarily because both Mitchell
Rubenstein and Laurie Silvers waived a portion of the salary payable to them
pursuant to the terms of their employment agreements during 1997 and such
amounts were paid to them in 1998 in the form of a bonus.
CONSULTING AGREEMENTS-
The Company has entered into consulting agreements, with various experts, which
expire through March 2003. Under one such consulting arrangement which expired
during 1997, four of the these consultants (two of which are Directors of the
Company) had the option to receive either cash or stock options to purchase the
Company's common stock, exercisable for nominal consideration, in consideration
for services rendered. The number of shares under such options are determined
based on the fair market value of the Company's common stock at the date of
grant. During 1997 each of the four consultants received stock options with a
fair market value of $12,500, which is reflected as an addition to additional
paid-in-capital in the accompanying consolidated statements of shareholders'
equity. Total expenses relating to these agreements for the year ended December
31, 1997 was $50,000, and is included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.
SHAREHOLDER/DIRECTOR CONSULTING AGREEMENT-
The Company is obligated under a ten year consulting agreement, which expires
November 2003, to pay Martin Greenberg, the Chief Executive Officer of Tekno
Books (who is also one of its shareholders/directors), $30,000 per year for
services. The agreement can be terminated by either the Company or the
shareholder/director beginning in January 1998 or under certain other
conditions.
The Company is also obligated to pay Greenberg a fee as the exclusive packager
of all books based on the Company's intellectual properties. This packaging fee,
which is typically equal to 25% of the revenues from the books, is paid for the
procurement and delivery of all new text required by the publisher for the
books. During 1998, the Company accrued $61,672 in packaging fees pursuant to
this contract, of which $43,008 was paid and $18,664 remains payable at December
31, 1998.
LITIGATION-
The Company is a party to various legal proceedings arising in the ordinary
course of business, none of which are expected to have a material adverse impact
on the Company's financial condition or results of operations.
51
<PAGE>
(15) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1998 and 1997, the Company entered into capital lease transactions totaling
$309,829 and $966,475, respectively, for equipment.
In 1998, the Company recorded non-cash dividends on its Series A, B, C, D and
D-2 Convertible Preferred Stock in the amount of $233,329, of which $127,151 was
paid through the issuance of 37,100 shares of common stock and $106,178 was
accrued as dividends payable.
In 1998, the Company recorded the conversion of $650,000 of convertible
debentures, plus accrued interest, into 173,568 shares of common stock.
In 1998, the Company issued 236,230 shares of restricted common stock valued at
$796,225 at the time of issuance to officers and employees of the Company as an
incentive stock bonus, including 100,000 shares that vest evenly over 36 months
granted to each of Mitchell Rubenstein, Chairman and Chief Executive Officer,
and Laurie S. Silvers, Vice Chairman and President.
In 1997, the Company recorded dividends on Series A and B Convertible Preferred
Stock in the amount of $155,630, of which $141,709 was paid through the issuance
of 25,737 shares of common stock and $42,850 is accrued as dividends payable.
In 1997, the intrinsic value of the conversion feature of the $650,000
convertible debenture was calculated at $215,500 and recorded as additional
paid-in capital.
In 1997, a franchise fee receivable of $350,000 and deferred revenue of $350,000
were recorded. This fee was received in 1998 and recognized as income in 1998.
(16) SEGMENT REPORTING:
The Company has two reportable segments: entertainment retail and intellectual
properties. The entertainment retail segment operates retail studio stores,
retail kiosks, and an Internet e-commerce studio store that sell
entertainment-related merchandise. The intellectual properties segment owns or
controls the exclusive rights to certain original characters and concepts
created by best-selling authors and media celebrities, which it licenses across
all media, including books, film and television, multimedia software, toys and
other products.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on a comparison of actual profit or loss from operations before income
taxes, depreciation, interest, and nonrecurring gains and losses to budgeted
amounts.
52
<PAGE>
The Company does not have intersegment sales or transfers. The following table
illustrates the financial information regarding the Company's reportable
segments.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Entertainment Retail $ 8,789,497 $ 7,971,769
Intellectual Properties 2,337,019 2,319,678
----------- -----------
$11,126,516 $10,291,447
=========== ===========
GROSS PROFIT:
Entertainment Retail $ 3,993,375 $ 3,820,668
Intellectual Properties 1,145,758 1,022,790
----------- -----------
$ 5,139,133 $ 4,843,458
=========== ===========
DEPRECIATION EXPENSE:
Entertainment Retail $ 902,753 $ 668,906
Intellectual Properties 174,230 162,717
----------- -----------
$ 1,076,983 $ 831,623
=========== ===========
INTEREST, NET:
Entertainment Retail $ 634,186 $ 185,218
Intellectual Properties 184,663 137,900
----------- -----------
$ 818,849 $ 323,118
=========== ===========
OPERATING LOSS:
Entertainment Retail $(6,302,280) $(3,035,388)
Intellectual Properties (2,702,817) (3,465,775)
----------- -----------
$(9,005,097) $(6,501,163)
=========== ===========
CAPITAL EXPENDITURES:
Entertainment Retail $ 416,322 $ 1,519,887
Intellectual Properties 29,990 65,324
----------- -----------
$ 446,312 $ 1,585,211
=========== ===========
SEGMENT ASSETS:
Entertainment Retail $ 5,334,664 $ 7,122,240
Intellectual Properties 3,235,157 5,517,681
----------- -----------
$ 8,569,821 $12,639,921
=========== ===========
</TABLE>
(17) SUBSEQUENT EVENTS:
(a) HOLLYWOOD ONLINE:
On January 10, 1999, the Company entered into a definitive agreement to acquire
Hollywood Online Inc. ("Hollywood Online") from The Times Mirror Company ("Times
Mirror") for $31.0 million. Hollywood Online owns and operates HOLLYWOOD.COM, an
Internet web site for movies, which features an extensive collection of movie
and celebrity-related multimedia, including digitized video and audio clips,
trailers, soundtrack music, photographs, and interactive games. The broad range
of movie information includes current-release movie and video information, daily
Hollywood news, celebrity interviews, coverage of major movie premieres and film
festivals, a movie database, reviews, interactive forums and box-office charts.
53
<PAGE>
Pursuant to the merger agreement, a newly formed subsidiary of the Company will
merge with and into Hollywood Online and the Company will issue to Times Mirror
$31.0 million worth of consideration in the form of common and preferred stock,
and up to $1.0 million cash, such that Times Mirror will not own more than 19.9%
of the outstanding common stock of the Company after giving effect to the
merger. The common stock to be issued will be valued at $12.63953 per share for
purposes of this calculation, which represents the mean of the average closing
bid price for the Company's common stock for the 15 trading days ended January
6, 1999 and the average closing bid price for the Company's common stock for the
15 trading days beginning January 14, 1999. The residual balance will be issued
in the form of shares of a new series of 6% convertible preferred stock and/or
in cash not to exceed $1.0 million.
The Company anticipates seeking shareholder approval of this transaction and
closing on the transaction during the second quarter of 1999. Simultaneous with
execution of the merger agreement, each of Mitchell Rubenstein, Laurie S.
Silvers, Martin H. Greenberg, and Tekno Simon, LLC signed a voting agreement
pursuant to which they each separately agreed to vote their shares in favor of
the acquisition of Hollywood Online as described above. Such shareholders
collectively owned approximately 30% of the outstanding shares of the Company's
common stock at that time.
(b) CINEMASOURCE:
On March 29, 1999, the Company entered into a definitive agreement to purchase
the assets of CinemaSource, Inc. ("CinemaSource"), a privately held company, for
$6.5 million in cash and 436,191 shares of the Company's common stock.
Alternatively, the Company has the option to pay all cash for CinemaSource in an
amount equal to $6.5 million plus the product of 436,191 times the greater of
$12.50 or the average closing price for the Company's common stock for the ten
trading days ending on the second day preceeding consummation of the
CinemaSource acquisition.
Management believes that CinemaSource is the nation's largest distributor of
movie showtimes and related movie to the information to the Internet industry.
CinemaSource gathers movie data, including showtimes, synopses, photos and
trailers, from theaters across the country, and then sells this data, in a
compiled, organized manner, to both large and small media companies. The growth
in CinemaSource's business is in providing movie showtimes' data to Internet
companies, particularly the portals.
The acquisition of CinemaSource is expected to close during the second quarter
of 1999. The acquisition is subject to customary representations, warranties,
and due diligence (including receipt of audited financial statements for
CinemaSource for 1998 and 1997 that are satisfactory to the Company). In
addition, the Company may, at its option, condition the closing of the
CinemaSource acquisition on the Company's closing of the Hollywood Online
acquisition. As part of the asset purchase agreement, the Company has agreed to
make a loan to the seller to pay the taxes due on the portion of the purchase
price paid in the form of common stock (not to exceed 24% of the value of the
shares at the time of closing) since the shares of the Company's common stock to
be issued in this acquisition are restricted from resale for the first 12 months
following the closing of the transaction, and are subject to volume limitations
regarding resale thereafter.
(c) FINANCING AGREEMENT:
As more fully described in Note 1, the Company's Chairman of the Board
and Chief Executive Officer and the Company's Vice Chairman and President have
indicated their intention to provide the Company, if required, with an amount
not to exceed $5.5 million in order to enable the Company to meet its working
capital requirements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
54
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mitchell Rubenstein(1)(2)............................... 45 Chairman and Chief Executive Officer
Laurie S. Silvers(1)(3)................................. 47 Vice Chairman, President, and Secretary
Dr. Martin H. Greenberg................................. 58 Chief Executive Officer of Tekno Books and Director
Marci L. Yunes.......................................... 40 Chief Financial Officer
Dr. Lawrence Gould(1)(2)(3)............................. 68 Director
Harry T. Hoffman(2)(3).................................. 71 Director
E. Donald Lass.......................................... 61 Director
Jules L. Plangere, Jr................................... 78 Director
Deborah J. Simon........................................ 42 Director
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Compensation and Stock Option Committees.
(3) Member of the Audit Committee.
MITCHELL RUBENSTEIN is a founder of the Company and has served as its
Chairman of the Board and Chief Executive Officer since its inception in January
1993. Mr. Rubenstein was a founder of the Sci-Fi Channel, a 24-hour national
cable television network devoted to science fiction, fantasy and horror
programming, that was acquired by USA Network in March 1992. Mr. Rubenstein
served as President of the Sci-Fi Channel from January 1989 to March 1992 and
served as Co-Vice Chairman of the Sci-Fi Channel from March 1992 to March 1994.
Prior to founding the Sci-Fi Channel, Mr. Rubenstein practiced law for 10 years,
including as a partner with Rubenstein & Silvers, a law firm that specialized in
entertainment, cable television and broadcasting law, from 1981 to 1989. Mr.
Rubenstein also co-owned and served as an executive officer of several cable
television systems (including Flagship Cable Partners, which owned a cable
television system serving Boynton Beach and portions of Palm Beach County,
Florida) from 1983 to 1989. Mr. Rubenstein received a J.D. degree from the
University of Virginia School of Law in 1977 and a Masters in Tax Law from New
York University School of Law in 1979. Together
55
<PAGE>
with Ms. Silvers, Mr. Rubenstein was named Co-Business Person of the Year, City
of Boca Raton, Florida, in 1992. Mr. Rubenstein is married to Laurie S. Silvers.
LAURIE S. SILVERS is a founder of the Company and has served as its
Vice Chairman, President and Secretary since its inception in January 1993. Ms.
Silvers was a founder of the Sci-Fi Channel, of which she served as Chief
Executive Officer from January 1989 to March 1992 and Co-Vice Chairman from
March 1992 to March 1994. Prior to founding the Sci-Fi Channel, Ms. Silvers
practiced law for 10 years, including as a partner with Rubenstein & Silvers, a
law firm that specialized in entertainment, cable television and broadcasting
law, from 1981 to 1989. Ms. Silvers also co-owned and served as an executive
officer of several cable television systems (including Flagship Cable Partners,
which owned a cable television system serving Boynton Beach and portions of Palm
Beach County, Florida) from 1983 to 1989 and co-owned a television station from
1990 to 1991. Ms. Silvers received a J.D. degree from University of Miami School
of Law in 1977. Ms. Silvers has also served on the Board of Directors of the
Pine Crest Preparatory School, Inc. since 1993. She has been a member of the
Pine Crest Preparatory School, Inc. Board of Advisors (Boca Raton Campus) since
1987, and served as its Chairman from 1995 through 1997. Ms. Silvers has served
as a member of the executive advisory board of the School of Business of Florida
Atlantic University, and has been a member of the Economic Council of Palm Beach
County since 1995. Together with Mr. Rubenstein, Ms. Silvers was voted
Co-Business Person of the Year, City of Boca Raton, Florida, in 1992, and has
been a keynote speaker at various business symposia, including one held at
Harvard Business School. Ms. Silvers is married to Mitchell Rubenstein.
DR. MARTIN H. GREENBERG has served as a director of the Company since
July 1993, and as a consultant to the Company since February 1993. Since
December 1994, Dr. Greenberg has served as Chief Executive Officer of Tekno
Books, 51% of which is owned by the Company and 49% of which is owned by Dr.
Greenberg. Dr. Greenberg was President and a principal shareholder of Tomorrow,
Inc., a company engaged in book licensing and packaging, from 1990 until its
acquisition by the Company in 1994. See "Certain Relationships and Related
Transactions -- Tekno Books Acquisition." Dr. Greenberg is also co-publisher of
MYSTERY SCENE MAGAZINE, a mystery genre trade journal of which the Company owns
a majority interest. Dr. Greenberg is widely regarded as the leading anthologist
in trade publishing, and has served as editor or author of more than 700 books
in various genre, including science fiction, fantasy, mystery and adventure. Dr.
Greenberg also is the 1995 recipient of the Ellery Queen Award, presented by the
Mystery Writers of America for Lifetime Achievement. Dr. Greenberg is a former
Director of Graduate Studies at the University of Wisconsin - Green Bay.
MARCI L. YUNES joined the Company in August 1997 as its Chief Financial
Officer. From 1994 through 1997, Ms. Yunes served as Vice President and Chief
Financial Officer for Farm Stores, a 200-unit convenience store chain. From 1988
through 1994, Ms. Yunes was Vice President and Treasurer of Pueblo Xtra
International, Inc., an international supermarket and video store chain. Ms.
Yunes began her career as an auditor with Deloitte Haskins & Sells (now Deloitte
& Touche). She is a Certified Public Accountant and she holds a Masters in
Business Administration from Florida Atlantic University (1992) and a Bachelors
Degree in Accounting from the University of Florida (1979).
DR. LAWRENCE GOULD has served as a director of the Company since July
1993. From 1962 to 1982 Dr. Gould served as an executive officer of M/A-COM,
Inc., then a New York Stock Exchange listed company engaged in the manufacture
of electronic components and equipment for the defense and communications
industry, including as Chief Executive Officer (1975 to 1982), President (1969
to 1975) and Executive Vice President and Chief Operating Officer (1962 to
1969). He also served as Chairman of
56
<PAGE>
the Board of M/A-COM, Inc. from 1978 to 1982 and as a consultant to that company
from 1982 to 1990. Dr. Gould's primary business activities since 1990 have been
as Chairman of the Board and principal of several private companies, including
Gould Enterprises, Inc. (resort development) and Point Sebago Enterprises, Inc.
(management of the Point Sebago resort in Maine), since 1974. He has also served
as Chairman of the Board of Camp Sunshine, Inc. at Sebago Lake, a 501(c)(3)
non-profit corporation that provides a respite for families with a critically
ill child, since 1985.
HARRY T. HOFFMAN has served as a director of the Company since July
1993. From 1979 to 1991, Mr. Hoffman served as President and Chief Executive
Officer of Waldenbooks, Inc., a leading national retailer of books, magazines
and related items. From 1968 to 1978, he served as President and Chief Executive
Officer of Ingram Book Company, a national book wholesaler.
E. DONALD LASS has served as a director of the Company since July 1993.
In October 1997, he sold his family interest in New Jersey Press, Inc., which
owned two daily newspapers in New Jersey (the ASBURY PARK PRESS, the state's
second largest newspaper, and THE HOME NEWS & TRIBUNE). Prior to the sale, Mr.
Lass served as publisher of both newspapers and, since 1991, served as President
and Chief Executive Officer of New Jersey Press, Inc. The broadcasting assets
owned by New Jersey Press, Inc. - three radio stations in New Jersey and a
television station in Orlando, Florida - were split off into a new entity named
Press Communications. Mr. Lass is an investor in the broadcasting properties and
intends to invest in additional entertainment/media properties through the Lass
Family Trust. Mr. Lass is a graduate of Lafayette College (1960) and the
Columbia University Graduate School of Journalism (1961).
JULES L. PLANGERE, JR. has served as a director of the Company since
July 1993. Mr. Plangere is the former Chairman of the Board of New Jersey Press,
Inc. and its two subsidiary companies, Asbury Park Press, Inc. and Press
Broadcasting Co. Mr. Plangere held various positions with Asbury Park Press in
his 50-year career, including Production Manager from 1954 to 1974, President
and General Manager from 1974 to 1977, and Publisher and Chief Executive Officer
from 1977 to 1991. In addition, Mr. Plangere is a former member of the Board of
Directors of the New Jersey State Chamber of Commerce, a former member of the
Board of Directors of New Jersey Bell Telephone Co., the former Chairman of the
Board of Trustees of Monmouth University and a present Life Trustee, and the
former President of the New Jersey Press Association.
DEBORAH J. SIMON has served as a director of the Company since November
1995. Ms. Simon has held the position of Senior Vice President of Simon Property
Group, an Indianapolis-based real estate development and management firm that is
listed on the New York Stock Exchange, since 1991. Prior to that, Ms. Simon
served as Vice President -- Western Region Leasing of the Simon Property Group.
Prior to serving as a leasing representative, Ms. Simon served as director of
internal communications and assistant director of training at the Simon Property
Group. She also has been an independent producer, with several television
credits to her name. A native of Indianapolis, Ms. Simon attended the University
of Southern California. She is a member of the International Council of Shopping
Centers and is a graduate of that organization's leasing institute. She
currently serves on the Board of Directors of the Indianapolis Children's
Museum, Indiana Repertory Theatre, Indianapolis Museum of Art and Circle
Centre's Youth Investment Fund.
Pursuant to the Simon Stock Purchase Agreement, Tekno Simon, an
affiliate of the Simon Property Group, has the right to designate one nominee to
the Company's Board of Directors until such time as Tekno Simon holds less than
25% of the sum of (i) the shares of Series A Preferred Stock and Series B
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<PAGE>
Preferred Stock purchased pursuant to the Simon Stock Purchase Agreement (or
shares of common stock issued or issuable upon conversion thereof) and (ii) the
shares of common stock purchased by Tekno Simon in the Company's August 1995
private offering. Certain principal shareholders of the Company, including
Mitchell Rubenstein, Laurie S. Silvers, and Dr. Martin H. Greenberg, have agreed
to vote their shares of common stock in favor of the election of Tekno Simon's
nominee to the Board of Directors. Tekno Simon's current nominee on the Board of
Directors is Deborah J. Simon. See "Certain Relationships and Related
Transactions -- Preferred Stock Investment by Tekno Simon."
The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board. The Company's directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's outstanding common stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of common stock. Such persons are required by SEC regulation to
furnish the Company with copies of all such reports they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company or written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10% beneficial owners for the
year ended December 31, 1998 have been complied with.
58
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table sets forth the
aggregate compensation paid in 1998, 1997 and 1996 to the Chief Executive
Officer, the President, and the Chief Financial Officer, the only executive
officers of the Company whose total annual salary and bonus during 1998 exceeded
$100,000. The Chief Executive Officer and the President are sometimes referred
to herein as the "Named Executive Officers".
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------- --------------------------------
OTHER RESTRICTED SHARES
ANNUAL STOCK UNDERLYING
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#)
------------------ ---- ------- ------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mitchell Rubenstein, 1998 235,793 67,572 7,800(1) 306,200(2) -
Chief Executive Officer 1997 185,217 25,000 7,800(1) - 37,500(5)
1996 208,811 25,000 7,800(1) - 75,000(5)
Laurie S. Silvers, 1998 235,793 67,572 7,800(1) 306,200(2) -
President 1997 185,217 25,000 7,800(1) - 37,500(5)
1996 208,811 25,000 7,800(1) - 75,000(5)
Marci L. Yunes, 1998 112,000 - - 54,464(4) -
Chief Financial Officer (3) 1997 38,769 - - - 50,000(5)
</TABLE>
- ------------
(1) Represents a car allowance paid to the Named Executive Officer.
(2) Represents 100,000 shares of restricted common stock granted to the Named
Executive Officers, which vest equally over 36 months beginning July 1,
1998. The value of the 100,000 shares of restricted common stock as of
December 31, 1998 was $1,400,000.
(3) Ms. Yunes joined the Company as its Chief Financial Officer on August 18,
1997.
(4) Represents 10,500 shares of common stock granted to Ms. Yunes at the time
such shares were issued. The value of the 10,500 shares of common stock as
of December 31, 1998 was $147,000.
(5) Represents options granted under the Company's 1993 Stock Option Plan (the
"1993 Plan").
EMPLOYMENT AGREEMENTS. Effective July 1, 1993, the Company entered into
five-year employment agreements with each of Mitchell Rubenstein, the Company's
Chairman and Chief Executive Officer, and Laurie S. Silvers, the Company's Vice
Chairman and President. Effective July 1, 1998, the Company extended each of
these employment agreements for an additional five-year term. The terms of each
of the employment agreements are automatically extended for successive one-year
terms unless the Company or the Named Executive Officer gives written notice to
the other at least 90 days prior to the then-scheduled expiration date. Each of
the employment agreements provides for an
59
<PAGE>
annual salary currently set at $237,000 (subject to automatic cost-of-living
increases), an annual bonus in an amount determined by the Board of Directors
(but not less than $25,000) and an automobile allowance of $650 per month.
During 1997 the Named Executive Officers elected to waive a portion of their
base salary.
Each employment agreement provides that each of the Named Executive
Officers will continue to receive his or her salary until the expiration of the
term of the employment agreements if the Named Executive Officer's employment is
terminated by the Company for any reason other than death, disability or Cause
(as defined in the employment agreements), or for a period of 12 months after
termination of the employment agreement as a result of the Named Executive
Officer's disability, and that the Named Executive Officer's estate will receive
a lump sum payment equal to one year's base salary plus a pro rata portion of
any bonus to which the Named Executive Officer is entitled upon termination of
the employment agreement by reason of the Named Executive Officer's death.
The term "Cause" is defined in the employment agreements to mean (a) a
Named Executive Officer's act or omission which constitutes a willful and
material breach of such Named Executive Officer's employment agreement which is
not cured within 30 days after such Named Executive Officer's receipt of notice
of such breach, (b) a Named Executive Officer's fraud, embezzlement or
misappropriation of the Company's assets or property, or (c) a Named Executive
Officer's conviction for a criminal act that is a felony. A termination by the
Company of one of the Named Executive Officer's employment without Cause will
constitute a termination without Cause of the other Named Executive Officer for
purposes of the employment agreements. Each employment agreement also prohibits
the Named Executive Officer from directly or indirectly competing with the
Company for one year after termination of the employment agreement for any
reason except the Company's termination of the Named Executive Officer's
employment without Cause.
If a Change of Control (as defined in the employment agreements)
occurs, the employment agreements provide for the continued employment of the
Named Executive Officers until the earlier of two years following the Change of
Control or the then-scheduled expiration date of the term of employment. The
term "Change of Control," as used in the employment agreements, is defined to
mean (a) any person's or group's acquisition of 20% or more of the combined
voting power of the Company's outstanding securities, or (b) in the event of any
cash tender or exchange offer, merger or other business combination, sale of
assets or contested election, the persons who were directors of the Company
prior to such transaction ceasing to constitute a majority of the Board of
Directors following the transaction. In addition, following a Change in Control,
if the Named Executive Officer's employment is terminated by the Company other
than for Cause or by reason of the Named Executive Officer's death or
disability, or by the Named Executive Officer for certain specified reasons
(such as a reduction of the Named Executive Officer's compensation or diminution
of the Named Executive Officer's duties), the Named Executive Officer will
receive a lump sum cash payment equal to three times the Named Executive
Officer's then-existing base salary and most recent annual bonus.
OPTION GRANTS IN LAST FISCAL YEAR. No individual grants of stock
options were made during the fiscal year ended December 31, 1998 to the
executive officers named above.
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<PAGE>
STOCK OPTION EXERCISES DURING 1998 AND STOCK OPTIONS HELD AT END OF
1998. The following table indicates the total number of shares acquired on
exercise of stock options during 1998 and the value realized therefrom, as well
as the total number and value of exercisable and unexercisable stock options
held by each executive officer as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED VALUE ------------------------------ -----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mitchell Rubenstein - $ - 166,875 18,125 $ 1,200,450 $ 108,750
Laurie S. Silvers - $ - 166,875 18,125 $ 1,200,450 $ 108,750
Marci L. Yunes 12,500 $ 93,525 - 37,500 $ - $ 318,075
</TABLE>
STOCK OPTION PLAN. Under the 1993 Plan, 1,500,000 shares of common
stock are reserved for issuance upon exercise of options. The 1993 Plan is
designed to serve as an incentive for retaining qualified and competent
consultants and employees. The Stock Option Committee of the Company's Board of
Directors (the "Committee") administers and interprets the 1993 Plan and is
authorized to grant options thereunder to all eligible consultants and
employees, including officers of the Company.
The 1993 Plan provides for the granting of both "incentive stock
options" (as defined in Section 422 of the Code) and nonqualified stock options.
Options are granted under the 1993 Plan on such terms and at such prices as
determined by the Committee. Each option is exercisable after the period or
periods specified in the option agreement, but no option can be exercised until
six months after the date of grant or more than 10 years from the date of grant.
Options granted under the 1993 Plan are not transferable other than by will or
by the laws of descent and distribution. The 1993 Plan also authorizes the
Company to make loans to optionees to enable them to exercise their options.
Such loans must provide for recourse to the optionee, be interest-bearing and be
secured by the shares of common stock purchased.
Except for certain options granted pursuant to the consulting
agreements (see "Certain Relationships and Related Transactions -- Consulting
Agreements"), the exercise price of all options granted under the 1993 Plan will
not be less than 85% of fair market value of common stock on the date of grant.
As of March 17, 1999, options to purchase 634,964 shares of common
stock were outstanding under the 1993 Plan and options to purchase 74,562 shares
of common stock issued under the 1993 Plan had been exercised.
LONG-TERM INCENTIVE AND PENSION PLANS. The Company does not have any
other long-term incentive or pension plans.
COMPENSATION OF DIRECTORS. Directors of the Company who are neither
employees nor consultants ("non-employee directors") are compensated at the rate
of $1,000 for each meeting of the Board of Directors attended, and all directors
are reimbursed for travel and lodging expenses in
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<PAGE>
connection with their attendance at meetings. The Company has established for
the non-employee directors the Director's Stock Option Plan (the "Directors
Plan"), which provides for automatic grants to each non-employee director of
options to purchase shares of common stock having a market value at the time of
grant equal to $25,000 (i) upon a person's election as a director and (ii) each
year thereafter upon such person's reelection as a director of the Company, in
both instances at an exercise price equal to the fair market value of the common
stock on the date of the grant. A total of 100,000 shares of common stock have
been reserved for issuance upon exercise of options granted under the Directors
Plan. Options to issue 78,594 shares of common stock have been issued under the
Directors Plan. Options granted under the Directors Plan become exercisable six
months after the date of grant and, except as otherwise approved by the Board,
expire five years after the date of grant. The Board of Directors, in its
discretion, may cancel all options granted under the Directors Plan that remain
unexercised on the date of consummation of certain corporate transactions
described in the Directors Plan. The Directors Plan will terminate in July 2003
unless sooner terminated under the provisions thereof. As of March 17, 1999,
options to purchase shares of common stock have been issued to the Company's
current directors under the Directors Plan as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES SUBJECT EXERCISE EXPIRATION
NAME OF DIRECTOR TO OPTIONS PRICE GRANT DATE DATE
---------------- -------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Dr. Lawrence Gould 3,125 $8.00 11/1/93 11/1/03
4,762 $5.25 8/23/96 8/23/01
4,107 $5.13 3/2/98 3/2/03
5,719 $5.0625 7/2/98 7/2/03
Harry T. Hoffman 3,125 $8.00 11/1/93 11/1/03
4,762 $5.25 8/23/96 8/23/01
4,107 $5.13 3/2/98 3/2/03
5,719 $5.0625 7/2/98 7/2/03
E. Donald Lass 4,107 $5.13 3/2/98 3/2/03
5,719 $5.0625 7/2/98 7/2/03
Jules L. Plangere, Jr. 4,107 $5.13 3/2/98 3/2/03
5,719 $5.0625 7/2/98 7/2/03
Deborah J. Simon 4,166 $6.00 11/8/95 11/8/05
4,762 $5.25 8/23/96 8/23/01
4,107 $5.13 3/2/98 3/2/03
5,719 $5.0625 7/2/98 7/2/03
</TABLE>
See "Certain Transactions -- Consulting Agreements" for a description
of consulting agreements between the Company and certain of its directors.
62
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. All
compensation decisions during 1998 were made by the Compensation Committee,
which consisted of Mitchell Rubenstein and two independent directors, Harry T.
Hoffman and Dr. Lawrence Gould.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of March 17, 1999 by (i)
each of the shareholders of the Company who owns more than 5% of the outstanding
shares of common stock, (ii) each director of the Company, (iii) the Named
Executive Officers of the Company, and (iv) all directors and executive officers
of the Company as a group. Except as otherwise indicated, the Company believes
that all beneficial owners named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF NUMBER OF SHARES BENEFICIAL
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OWNERSHIP
- ------------------- ------------------ --------------
<S> <C> <C>
Mitchell Rubenstein(2).................................. 2,168,153 23.5%
Laurie S. Silvers(2).................................... 2,168,153 23.5%
Gannett Co., Inc.(3).................................... 758,229 8.4%
Tekno Simon, LLC(4)..................................... 580,517 6.3%
Auric Partners Limited Partnership(5)................... 500,000 5.6%
Dr. Martin H. Greenberg(6).............................. 333,200 3.7%
Dr. Lawrence Gould(7)................................... 92,713 1.0%
Harry T. Hoffman(8)..................................... 17,713 *
Jules L. Plangere, Jr.(9)............................... 96,590 1.1%
E. Donald Lass(10)...................................... 66,590 *
Deborah J. Simon(8)(11)................................. 18,754 *
Marci L. Yunes.......................................... 20,500 *
All directors and executive officers of the Company as a
group (nine persons)(11)(12).......................... 2,814,213 29.8%
</TABLE>
- ------------
* Less than 1%
(1) Except as noted in this footnote, the address of each beneficial owner is
in care of the Company at 2255 Glades Road, Suite 237 West, Boca Raton,
Florida 33431. The business address of Gannett Co., Inc. is 1100 Wilson
Boulevard, Arlington, VA 22234. The business address of Tekno Simon, LLC is
115 W. Washington Street, Indianapolis, Indiana 46204. The business address
of the Amway Corporation is 7575 East Fulton Road, Ada, Michigan 49355.
(2) All such shares owned by Mr. Rubenstein and Ms. Silvers are held by them as
tenants by the entirety. Includes an aggregate of 333,750 shares of common
stock issuable pursuant to stock
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<PAGE>
options and 15,000 shares of common stock issuable pursuant to warrants
held by Mr. Rubenstein and Ms. Silvers that are currently exercisable.
(3) Includes 100,000 shares of common stock issuable pursuant to currently
exercisable stock options.
(4) Includes 217,600 shares of Series A Preferred Stock and 122,846 shares of
Series B Preferred Stock. The Series A Preferred Stock and Series B
Preferred Stock vote together with the common stock as a single class
(except as required by law), with the Series A Preferred Stock and Series B
Preferred Stock having one vote per share.
(5) As per Schedule 13G filed on January 15, 1999, by Amway Corporation as
General Partner of Auric Partners Limited Partnership.
(6) Includes (i) 91,667 shares of common stock owned by Dr. Greenberg's spouse,
(ii) 33,403 shares of common stock issuable pursuant to stock options that
are currently exercisable or are exercisable within 60 days of the date
above, and (iii) 13,721 shares of common stock issuable pursuant to
currently exercisable warrants.
(7) Includes (i) 17,713 shares of common stock issuable pursuant to currently
exercisable stock options and (ii) 25,000 shares of common stock issuable
pursuant to currently exercisable warrants.
(8) Represents shares of common stock issuable pursuant to currently
exercisable stock options.
(9) Includes (i) 21,590 shares of common stock issuable pursuant to currently
exercisable stock options and (ii) 25,000 shares of common stock issuable
pursuant to currently exercisable warrants.
(10) Includes (i) 21,590 shares of common stock issuable pursuant to currently
exercisable stock options and (ii) 15,000 shares of common stock issuable
pursuant to currently exercisable warrants.
(11) Does not include the shares of common stock, Series A Preferred Stock and
Series B Preferred Stock owned by Tekno Simon, LLC, with respect to which
Ms. Simon disclaims beneficial ownership. Tekno Simon is controlled by
Melvin Simon, Deborah J. Simon's father.
(12) Includes 464,513 shares of common stock issuable pursuant to options that
are currently exercisable or are exercisable within 60 days of the date
above, and 93,721 shares of common stock issuable pursuant to currently
exercisable warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ORGANIZATION OF THE COMPANY
In connection with the organization of the Company, the subscription
agreements entered into with Mitchell Rubenstein, Laurie S. Silvers, Dr. Martin
H. Greenberg, James R. Fisher and Louis Taylor grant each of such persons
certain "piggyback" registration rights under the Securities Act of 1933, as
amended (the "Securities Act") for the shares issued to them pursuant to such
agreements. Pursuant to such registration rights, each of these individuals is
entitled, subject to certain exceptions, to have all or part of their shares of
the Company's common stock included, at the Company's expense, in any
registration statement filed by the Company under the Securities Act.
GANNETT CO., INC./ASBURY PARK PRESS
In 1995, the Company granted Asbury Park Press an option to purchase
100,000 shares of common stock at a price of $6.13 per share (the "Asbury
Option"). The Asbury Option is exercisable until July 2000. In October 1997,
Gannett Co., Inc. ("Gannett") acquired 100% of the outstanding stock of Asbury
Park Press.
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<PAGE>
During 1998, The Company entered into a web site affiliation agreement
with USA Today Information Network ("USA Today"), a subsidiary of Gannett. Under
this agreement, the Company became the exclusive vendor of movie studio-licensed
merchandise on USATODAY.COM, USA Today's web site. USA Today agreed to
continuously promote the Company's Internet studio store on its home page and on
other pages throughout the USA Today web site throughout the term of the
agreement. In consideration of the exclusive arrangement, the Company agreed to
pay USA Today a percentage of the net transaction revenues generated by
customers who access the Company's web site through the USA Today site, with a
minimum transaction guarantee. The Company currently has no other outstanding
agreements with Gannett, or its wholly-owned subsidiary Asbury Park Press, other
than certain "piggyback" registration rights granted to it in connection with
the purchase of its shares of the Company's common stock.
TEKNO BOOKS
During the fourth quarter of 1994, the Company acquired a controlling
interest in the book licensing and packaging business (now called Tekno Books)
conducted by Dr. Martin H. Greenberg, a director of the Company, and Tomorrow,
Inc., a corporation owned by Dr. Greenberg and his wife, Rosalind Greenberg (the
"Tekno Books Acquisition"). The total purchase price was $1,600,000, $500,000 of
which was paid in cash and the balance of which was paid in shares of the
Company's common stock valued at the then-current market price. As a result of
this acquisition, the book licensing and packaging business formerly conducted
by Dr. Greenberg and Tomorrow, Inc. is now held in Tekno Books, 51% of which is
owned by the Company and 49% of which is owned by Dr. Greenberg. Dr. Greenberg
serves as Chief Executive Officer of Tekno Books.
The Tekno Books Acquisition was effected through the following
transactions: (i) a newly formed subsidiary of the Company merged with Tomorrow,
Inc., whereupon Dr. Greenberg and his wife, Rosalind Greenberg, the sole
shareholders of Tomorrow, Inc., received an aggregate of 183,334 shares of
common stock in exchange for their shares; (ii) following the merger, Tomorrow,
Inc. (which was then a wholly-owned subsidiary of the Company) and Dr. Greenberg
formed a partnership ("Tekno Books"), to which Tomorrow, Inc. contributed all of
its assets in exchange for a 34.375% interest and Dr. Greenberg contributed
substantially all of his rights, including royalties and other income, to
market, sell and distribute books, magazines and other publications packaged,
printed, produced, published and/or otherwise created by him or pursuant to any
contract between him and any author or collaborator in exchange for a 65.625%
interest; and (iii) the Company purchased from Dr. Greenberg a 16.625% interest
in Tekno Books for $500,000 cash. The Company also agreed to repurchase up to
50,000 of the shares of common stock issued to Dr. Greenberg and his wife in the
Tekno Books Acquisition at a price of $6.00 per share if either (i) the Company
raised in excess of $1,000,000 in capital through the sale of its securities
prior to September 9, 1995 and they so elect, or (ii) they otherwise request the
Company to do so at certain times prior to May 1996. The Greenbergs did not
exercise such rights and such rights have expired.
CONSULTING AGREEMENTS
In 1993, the Company entered into a consulting agreement with Dr.
Martin H. Greenberg pursuant to which Dr. Greenberg agreed to render advisory
and consulting services to the Company, including identifying best-selling
authors to create characters for the Company and negotiating agreements with
such authors, arranging for the publication of prose novels and anthologies for
children
65
<PAGE>
and adults based on the Company's characters, and attending trade shows and
conventions on the Company's behalf. The consulting agreement will expire in
November 2003, unless terminated earlier, which termination may take place only
under certain conditions. Pursuant to the consulting agreement, in November 1993
Dr. Greenberg began receiving consulting fees of $30,000 per year and was
granted an option to purchase 6,250 shares of common stock at an exercise price
of $8.00 per share. In connection with the Tekno Books Acquisition, the
consulting agreement was amended on December 9, 1994 (i) to provide that Dr.
Greenberg will have the exclusive right to package novelizations based on the
Company's entertainment properties, and (ii) in lieu of future annual stock
option grants to which Dr. Greenberg was entitled under the original agreement,
to grant Dr. Greenberg options to purchase 17,778 shares of common stock at an
exercise price of $8.4375 per share.
In 1993, the Company entered into consulting agreements with each of
Messrs. Jules L. Plangere, Jr., E. Donald Lass, Robert E. McAllan and Alfred D.
Colantoni (individually, a "Consultant" and collectively, the "Consultants"),
pursuant to which each Consultant agreed, in his individual capacity, to render
advisory and consulting services to the Company with respect to the publishing,
communications and printing industries. Throughout the term of these consulting
agreements, each of the consultants was an executive officer of Asbury Park
Press, and Messrs. Plangere and Lass served as directors of the Company. In
consideration for their services, each Consultant receives at the end of each
six-month period during the term of the agreements $12,500, at the option of the
Consultant, in cash or in stock options exercisable for nominal consideration,
to purchase a number of shares of common stock having a market value at the time
of payment equal to $12,500. The consulting agreements were scheduled to expire
in July 1995. In May 1995, the Company extended the term of the consulting
agreements for a two-year period, provided that all subsequent compensation
thereunder shall be payable solely in stock options. The consulting agreements
expired in 1997 and have not been renewed by mutual agreement of the parties.
AUGUST 1995 PRIVATE OFFERING
Pursuant to registration rights granted in connection with a 1995
private offering, the Company has registered the 650,000 shares of common stock
sold therein for resale under the Securities Act by the holders thereof. Asbury
Park Press and Tekno Simon each invested in the private offering $1,000,000 for
160,000 shares of common stock. Contemporaneously with the private offering, the
Company also entered into an agreement to sell to two investors, for $250,000
and $249,600, respectively, immediately exercisable four-year warrants to
purchase an aggregate of 240,000 shares of common stock at an exercise price of
$6.25 per share. One of the two investors exercised the option to purchase
120,000 shares of common stock during 1998.
INVESTMENTS BY AFFILIATE OF THE SIMON PROPERTY GROUP
Pursuant to a 1995 stock purchase agreement with Tekno Simon, an
affiliate of the Simon Property Group, and its Co-Chairman, Melvin Simon, Tekno
Simon invested $2,000,000 in shares of the Company's Series A Preferred Stock
and Series B Preferred Stock.
The Series A Preferred Stock has a stated value of $6.25 per share and
accrues non-cash dividends, payable quarterly in shares of common stock based on
prevailing market prices for the common stock. The dividends accrue on the
stated value of the outstanding shares of the Series A Preferred Stock at a
variable rate equal to a specified bank prime rate (7.75% as of the date
hereof).
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<PAGE>
During the two-year period commencing on November 28, 1995, the Series A
Preferred Stock was convertible at the option of the holder into shares of
common stock on a one-for-one basis. This conversion option was not exercised.
The Series A Preferred Stock is redeemable at any time after November 28, 1997
at the Company's option for $7.1875 per share in cash. Except as otherwise
required by law, the holders of the Series A Preferred Stock will be entitled to
vote together with the holders of common stock on all matters, with each share
of Series A Preferred Stock having one vote. The Series A Preferred Stock will
have a liquidation preference of $7.1825 per share over the common stock. The
holders of the Series A Preferred Stock have certain demand and "piggyback"
registration rights to have such shares and the shares of common stock issued
upon conversion thereof or as dividends thereunder registered by the Company for
sale by such holders under the Securities Act.
The terms of the Series B Preferred Stock are identical to those of the
Series A Preferred Stock, except the Series B Preferred Stock contains a
purchase price adjustment provision, based on the market price of the common
stock at the time of each funding. The Series B Preferred stock has a stated
value of $5.21, after giving effect to the purchase price adjustment provision.
Pursuant to the Simon Stock Purchase Agreement, Tekno Simon has the
right to designate one nominee to the Company's Board of Directors until such
time as Tekno Simon holds less than 25% of the sum of (i) the shares of Series A
Preferred Stock purchased pursuant to the stock purchase agreement (or shares of
common stock issued or issuable upon conversion thereof), and (ii) the shares of
common stock purchased by Tekno Simon in 1995. Certain principal shareholders of
the Company, including Mitchell Rubenstein, Laurie S. Silvers and Dr. Martin H.
Greenberg, have agreed to vote their shares of common stock in favor of the
election of Tekno Simon's nominee to the Board of Directors. Tekno Simon's
current nominee on the Board of Directors is Deborah J. Simon.
The Simon Property Group and other affiliates of Tekno Simon are party
to leases with the Company for the Company's Entertainment SuperoKiosk in
Florida, its mini in-line store at the Mall of America, plus one additional
lease for a kiosk space in Indiana that the Company has vacated. The Company is
also a party to leases with other major mall developers that are not affiliates
of Tekno Simon, as the Company is under no obligation to enter into leases
exclusively with the Simon Property Group and other affiliates of Tekno Simon.
INVESTMENT BY THE COMPANY'S DIRECTORS
In July 1998, six members of the Company's Board of Directors
(including the Company's Chairman of the Board and Chief Executive Officer, the
Company's Vice Chairman and President, and the Chief Executive Officer of Tekno
Books, the Company's 51%-owned subsidiary) purchased an aggregate of 187,442
shares of the Company's Common stock for $5.00 per share, the then market price
of the stock. In conjunction with the private placement of these shares, the
investors received five-year warrants to purchase an aggregate of 93,721 shares
of the Company's common stock at $5.00 per share.
LINE OF CREDIT
Pursuant to a promissory note, the Company's Chairman of the Board and
Chief Executive Officer and the Company's Vice Chairman and President extended
to the Company a $1.1 million unsecured line of credit facility providing for
interest only payments calculated at the JP Morgan Bank prime rate of interest;
prepayable at any time without penalty by the Company; and payable on demand
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<PAGE>
of the holders. The outstanding balance under this line of credit was $100,000
at December 31, 1998 and as of March 17, 1999, the balance had been repaid in
full.
APPROVAL OF AFFILIATED TRANSACTIONS
All existing transactions between the Company and its directors,
executive officers and principal shareholders are and all such future
transactions will be on terms no less favorable than could be obtained from
unaffiliated third parties and have been and will be approved by a majority of
the independent, disinterested directors of the Company.
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<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
<TABLE>
<CAPTION>
PAGE NUMBER OR
INCORPORATED BY
EXHIBIT DESCRIPTION REFERENCE FROM
- ----------- ----------- ---------------
<S> <C> <C>
3.1 Articles of Incorporation as amended (14)
3.2 Bylaws (2)
4.1 Form of Common Stock Certificate (2)
4.2 Rights Agreement dated as of August 23, 1996 between
the Company and American Stock Transfer & Trust
Company, as Rights Agent (3)
4.3 Articles of Amendment to Articles of Incorporation of
the Company for Designation of Preferences, Rights
and Limitation of 7% Series D Convertible Preferred
Stock (14)
4.4 Articles of Amendment to Articles of Incorporation
dated November 25, 1998 (15)
10.1 Executive Compensation Plans and Arrangements (1)
(a) Employment Agreement between the Company and
Mitchell Rubenstein (2)
(b) Extension and Amendment Agreement between the
Company and Mitchell Rubenstein entered into as
of July 1, 1998 (14)
(c) Employment Agreement between the Company and
Laurie S. Silvers (2)
(d) Extension and Amendment Agreement between the
Company and Laurie Silvers entered into as of
July 1, 1998 (14)
(e) 1993 Stock Option Plan, as amended effective July
2, 1998 (14)
(f) Directors Stock Option Plan, as amended effective
July 2, 1998 (14)
(g) Promissory Note dated March 18, 1997 between the
Company as borrower and Mitchell Rubenstein and
Laurie S. Silvers as lenders (9)
(h) Form of Indemnification Agreement between the
Company and each of its Directors and Officers (2)
10.2 Consulting Agreement dated February 7, 1993, between
the Company and Dr. Martin H. Greenberg, and
Amendment dated as of July 14, 1993 (2)
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<PAGE>
10.3 Form of Consulting Agreement between the Company and
each of Jules L. Plangere, Jr., E. Donald Lass,
Robert E. McAllan and Alfred D. Colantoni (1)(2)
10.4 Sublease and Assignment Agreement dated June 1, 1993,
between Titan I Corp. and the Company (2)
10.5 Form of Agreement between the Company and authors (2)
10.6 Amendment No. 2 to Consulting Agreement, between the
Company and Martin H. Greenberg (1)(4)
10.7 Agreement dated April 24, 1995 with Warner Books (5)
10.8 Agreement dated April 27, 1995 with Miramax Films (5)
10.9 NetCo Partners Joint Venture Agreement dated June 29,
1995 with C.P. Group, Inc. (5)
10.10 Preferred Stock Purchase Agreement dated November 8,
1995 between the Company and Tekno Simon LLC (6)
10.11 Registration Rights Agreement dated November 8, 1995
with Tekno Simon, LLC (6)
10.12 Voting Agreement dated November 8, 1995 with Tekno
Simon, LLC (6)
10.13 Franchise Agreement with Martin Ergas (7)
10.14 Amendment to Franchise Agreement with Martin Ergas (11)
10.15 Master Equipment Lease Agreement with Financing for
Science International, Inc. (7)
10.16 Agreement dated February 22, 1996 with Alliance
Communications (7)
10.17 Amendment dated as of October 15, 1996 to Preferred
Stock Purchase Agreement dated November 8, 1995 (8)
10.18 Preferred Stock Purchase Agreement dated as of
December 20, 1996 between the Company and Auric
Partners Limited (8)
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<PAGE>
10.19 Form of Stock Purchase Agreement between the Company
and Individual Investors (12)
10.20 Master Agreement of Terms and Conditions for Lease
dated as of November 13, 1997 between TLP Leasing
Programs, Inc. and Big Entertainment, Inc. (11)
10.21 Master Equipment Lease Agreement No. 0039 Dated
October 20, 1997 between Big Entertainment, Inc. and
Phoenix Leasing Incorporated (11)
10.22 Loan and Security Agreement dated as of December 30,
1997 between BankBoston Retail Finance Inc. and Tekno
Comix, Inc. (10)
10.23 Master Note dated December 30, 1997 between Tekno
Comix, Inc., as Borrower, and BankBoston Retail
Finance Inc., as Lender (10)
10.24 Unlimited Guaranty dated December 30, 1997 between
Big Entertainment, Inc. and BankBoston Retail Finance
Inc. (10)
10.25 First Amendment to Preferred Stock Purchase Agreement
dated as of February 17, 1998 between the Company and
Auric Partners Limited (11)
10.26 Private Equity Line of Credit (13)
10.27 First Amendment to Private Equity Line of Credit *
10.28 Convertible Preferred Stock Purchase Agreement dated
as of September 30, 1998 (14)
10.29 Convertible Preferred Stock Purchase Agreement dated
as of November 6, 1998 (14)
10.30 Second Amendment to Preferred Stock Purchase
Agreement between the Company and Auric Partners
Limited entered into as of October 28, 1998 (14)
10.31 Convertible Preferred Stock Purchase Agreement dated
as of November 18, 1998 (15)
10.32 Agreement and Plan of Merger dated as of January 10,
1999, by and among (16) The Times Mirror Company,
Hollywood Online Inc., the Company and Big
Acquisition Corp. (16)
10.33 Asset Purchase Agreement dated March 29, 1999 by and
among the Company, CinemaSource, Inc., Brett West and
Pamela West *
21.1 Subsidiaries of the Company *
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<PAGE>
23.1 Consent of Arthur Andersen LLP *
27.1 Financial Data Schedule (for SEC use only) *
</TABLE>
- ------------
* Filed as an exhibit to this Form 10-KSB.
(1) Management compensation plan or arrangement.
(2) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 33-69294).
(3) Incorporated by reference from the exhibit filed with the Company's Current
Report on Form 8-K dated August 23, 1996.
(4) Incorporated by reference from the exhibit filed with the Company's Report
on Form 8-K (Event of December 13, 1994).
(5) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995, as
amended.
(6) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995,
as amended.
(7) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (No. 333-1224)
(8) Incorporated by reference from the exhibit filed with the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
(9) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB/A for the quarter ended September 30, 1997.
(10) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form S-3 (No. 333-38219).
(11) Incorporated by reference from the exhibit filed with the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997.
(12) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998.
(13) Incorporated by reference from the exhibit filed with Amendment Number 1 to
the Company's Registration Statement on Form S-3 (No. 333-57855).
(14) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998.
(15) Incorporated by reference from the exhibit filed with the Company's
Registration statement on Form S-3 (No. 333-68209).
(16) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 11, 1999.
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BIG ENTERTAINMENT, INC.
Date: March 31, 1999 By:/S/ MITCHELL RUBENSTEIN
----------------------------------------
Mitchell Rubenstein,
Chairman of the Board and
Chief Executive Officer
(Principal executive officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
<TABLE>
<S> <C>
Date: March 31, 1999 /S/ MITCHELL RUBENSTEIN
-----------------------------------------------------
Mitchell Rubenstein, Chairman of the Board
and Chief Executive Officer
Date: March 31, 1999 /S/ MARCI L. YUNES
-------------------------------------------------------
Marci L. Yunes, Chief Financial Officer
(Principal financial and accounting officer)
Date: March 31, 1999 /S/ LAURIE S. SILVERS
-------------------------------------------------------
Laurie S. Silvers, Vice Chairman of the Board,
President and Secretary
Date: March 31, 1999 /S/ MARTIN H. GREENBERG
-------------------------------------------------------
Martin H. Greenberg, Director
Date: March 31, 1999 /S/ HARRY T. HOFFMAN
-------------------------------------------------------
Harry T. Hoffman, Director
Date: March 31, 1999 /S/LAWRENCE GOULD
-------------------------------------------------------
Lawrence Gould, Director
Date: March 31, 1999 /S/ JULES L. PLANGERE, JR.
-------------------------------------------------------
Jules L. Plangere, Jr., Director
Date: March 31, 1999 /S/ E. DONALD LASS
-------------------------------------------------------
E. Donald Lass, Director
Date: March 31, 1999 /S/ DEBORAH J. SIMON
-------------------------------------------------------
Deborah J. Simon, Director
</TABLE>
73
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.27 First Amendment to Private Equity Line of Credit
10.33 Asset Purchase Agreement dated March 29, 1999 by
and among the Company, CinemaSource, Inc., Brett
West and Pamela West.
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
74
EXHIBIT 10.27
FIRST AMENDMENT
TO
PRIVATE EQUITY LINE OF CREDIT AGREEMENT
THIS FIRST AMENDMENT TO PRIVATE EQUITY LINE OF CREDIT AGREEMENT (the
"Amendment") is made and entered into as of the 7th day of January, 1999 among
Big Entertainment, Inc. (the "Company"), AMRO International, S.A. ("AMRO") and
John P. O'Shea ("O'Shea," and together with AMRO, the "Investor").
R E C I T A L S:
1. The Company, AMRO and O'Shea are parties to a Private Equity Line of
Credit Agreement dated as of June 15, 1998 (the "Agreement"), pursuant to which
the Investor invested $1,000,000 in shares of the Company's Common Stock.
2. The parties desire to set forth their agreements as to certain
modifications to the terms of the Agreement, as well as to the Registration
Rights Agreement dated as of June 15, 1998 among the Company, AMRO and O'Shea
(the "Registration Rights Agreement"), as 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, AMRO and
O'Shea hereby agree as follows:
1. AGGREGATE PURCHASE PRICE.
(a) The "Aggregate Purchase Price" defined in the first
recital paragraph and the "Commitment Amount" defined
in Section 1.6 of the Agreement shall be increased to
reflect the actual aggregate purchase price of the
total number of shares of Common Stock purchased
under the Agreement, which number of shares shall not
exceed the number of shares of Common Stock
registered from time to time by the Company pursuant
to the Registration Rights Agreement for resale by
the Investor and not yet sold by the Investor (the
"Total Registered Shares").
(b) All references in the Registration Rights Agreement
to the aggregate purchase price or aggregate amount
invested by the Investor shall be increased to
reflect the actual aggregate purchase price of the
Total Registered Shares.
2. ASSIGNMENT BY O'SHEA. Notwithstanding anything in Section 11.1 of
the Agreement to the contrary, O'Shea may assign to AMRO all of his rights and
obligations under the Agreement and this Amendment with the Company's prior
written consent, which consent shall not be unreasonably withheld.
3. DEFINED TERMS. Unless otherwise defined herein, all capitalized
terms shall have the meanings ascribed to them in the Agreement.
4. VALIDITY OF AGREEMENT. Except to the extent specifically amended
herein, all of the terms of the Agreement shall remain unmodified.
<PAGE>
5. GOVERNING LAW. This Amendment shall be enforced, governed and
construed in all respects in accordance with the internal laws, and not the laws
pertaining to conflicts or choice of laws, of the State of New York.
6. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which may be considered one and the same agreement and each
of which shall be deemed an original.
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
officers or for themselves, have executed this Amendment as of the date first
written above.
COMPANY:
BIG ENTERTAINMENT, INC.
By: /S/ MITCHELL RUBENSTEIN
---------------------------------------
Mitchell Rubenstein, Chairman of the
Board and Chief Executive Officer
AMRO:
AMRO INTERNATIONAL, S.A.
By: /S/ M. KLEE
---------------------------------------
Name: M. Klee
Title:
/S/ JOHN P. O'SHEA
---------------------------------------
John P. O'Shea
2
EXHIBIT 10.33
ASSET PURCHASE AGREEMENT
BY AND AMONG
BIG ENTERTAINMENT, INC.,
CINEMASOURCE, INC.,
BRETT WEST
AND
PAMELA WEST
Dated as of March 29, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I ACQUISITION AND TRANSFER OF ASSETS................................................1
Section 1.1. Assets to be Acquired........................................................1
Section 1.2. Excluded Assets..............................................................2
Section 1.3. Assumed and Excluded Liabilities.............................................3
Section 1.4. Accounts Receivable and Accounts Payable.....................................3
ARTICLE II CONSIDERATION.....................................................................4
Section 2.1. Amount and Form of Consideration.............................................4
Section 2.2. Allocation of Purchase Price.................................................4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER..........................................5
Section 3.1. Organization.................................................................5
Section 3.2. Authorization of Agreement...................................................5
Section 3.3. Consents and Approvals; No Violation.........................................6
Section 3.4. Title to Assets..............................................................6
Section 3.5. No Indebtedness..............................................................7
Section 3.6. Results of Operations........................................................7
Section 3.7. Litigation, etc..............................................................7
Section 3.8. Compliance with Law..........................................................7
Section 3.9. Employee Benefits and Related Matters........................................7
Section 3.10. Certain Agreements...........................................................8
Section 3.11. Real Property................................................................9
Section 3.12. Intangible Property..........................................................9
Section 3.13. Taxes.......................................................................10
Section 3.14. Permits.....................................................................12
Section 3.15. Related Parties; Related Party Transactions.................................12
Section 3.16. Options.....................................................................13
Section 3.17. Year 2000...................................................................13
Section 3.18. Absence of Changes or Events................................................13
Section 3.19. Investor Representations....................................................13
Section 3.20. Exemption from Registration; Restricted Securities..........................13
Section 3.21. Brokers.....................................................................13
</TABLE>
i
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<TABLE>
<S> <C>
ARTICLE III-A REPRESENTATIONS AND WARRANTIES OF THE SELLER PARTIES....................................14
Section 3A.1. Authorization of Agreement..................................................14
Section 3A.2. Consents and Approvals; No Violation........................................15
Section 3A.3 Investor Representations....................................................15
Section 3A.4 Exemption from Registration; Restricted Securities..........................15
Section 3A.5 Brokers.....................................................................15
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER..........................................16
Section 4.1. Organization................................................................16
Section 4.2. Authorization of Agreement..................................................16
Section 4.3. Consents and Approvals; No Violations.......................................16
Section 4.4. Litigation..................................................................17
Section 4.5. Capital Stock of Buyer......................................................17
Section 4.6. SEC Reports; Financial Statements...........................................18
Section 4.7. Absence of Changes or Events................................................18
Section 4.8. Brokers.....................................................................19
ARTICLE V COVENANTS OF SELLER AND SHAREHOLDER..............................................19
Section 5.1. Delivery of Year-End Audited Financial Statements...........................19
Section 5.2. Access to Information.......................................................20
Section 5.3. Exclusivity.................................................................20
Section 5.4. Conduct of Business.........................................................21
Section 5.5. Public Announcements; Confidential Information..............................23
Section 5.6. No Breach of Representations and Warranties.................................23
Section 5.7. Updating Information........................................................23
Section 5.8. Restrictions on Transfer of Stock Consideration.............................23
Section 5.9. Employment Agreement........................................................24
Section 5.10. Bulk Sales Law Compliance...................................................24
Section 5.11. Indemnification Pledge Agreement, Escrow Agreement..........................24
Section 5.12. Consents....................................................................25
Section 5.13. Further Actions.............................................................25
ARTICLE VI COVENANTS OF BUYER...............................................................25
Section 6.1. No Breach of Representations and Warranties.................................25
Section 6.2. Confidentiality.............................................................25
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 6.3. Non-Competition Agreement; Indemnification Pledge
Agreement; Escrow Agreement.................................................26
Section 6.4. Employment Agreement........................................................26
Section 6.5. Tax Loan....................................................................26
Section 6.6. Employee Matters............................................................26
Section 6.7. Public Announcement.........................................................26
Section 6.8. Consents and Conditions.....................................................26
Section 6.9. Further Actions.............................................................27
ARTICLE VII CONDITIONS PRECEDENT TO buyer's OBLIGATIONS......................................27
Section 7.1. Conditions..................................................................27
ARTICLE VIII CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS.....................................29
Section 8.1. Conditions..................................................................29
ARTICLE IX THE CLOSING......................................................................30
Section 9.1. Closing Date................................................................30
Section 9.2. Proceedings at the Closing..................................................30
Section 9.3. Deliveries by Seller to Buyer...............................................31
Section 9.4. Deliveries by Buyer to Seller...............................................31
ARTICLE X ADDITIONAL POST-CLOSING COVENANTS................................................32
Section 10.1. Further Assurances..........................................................32
Section 10.2. Seller to Change Name.......................................................32
Section 10.3. Preservation of Corporate Records...........................................33
Section 10.4. Confidentiality.............................................................33
ARTICLE XI INDEMNIFICATION..................................................................33
Section 11.1. Indemnification.............................................................33
Section 11.2. Procedures for Indemnification..............................................35
Section 11.3. Determination of Damages and Related Matters................................37
Section 11.4. Payments to Indemnified Party...............................................38
Section 11.5. Exclusive Remedy............................................................38
ARTICLE XII TERMINATION......................................................................39
Section 12.1. Termination.................................................................39
Section 12.2. Liabilities After Termination...............................................39
ARTICLE XIII MISCELLANEOUS....................................................................39
Section 13.1. Survival of Representations and Warranties..................................39
Section 13.2. Entire Agreement............................................................40
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Section 13.3. Governing Law; Construction.................................................40
Section 13.4. Transfer Taxes..............................................................40
Section 13.5. Expenses....................................................................40
Section 13.6. Notices.....................................................................41
Section 13.7. Severability................................................................41
Section 13.8. Binding Effect; No Assignment...............................................42
Section 13.9. Amendments..................................................................42
Section 13.10. Counterparts................................................................42
</TABLE>
iv
<PAGE>
SCHEDULES
1.1(a) Assigned Contracts
1.2 Certain Excluded Assets
2.2 Allocation of Purchase Price
3.3(a) Consents and Approvals
3.3(b) Violations
3.4 Title to Assets
3.5 Liabilities
3.7 Litigation, etc.
3.8 Compliance with Law
3.9(a) Employment and Other Agreements
3.9(b) Employee Benefits
3.10 Certain Agreements
3.11(b) Real Property
3.12 Intangible Property
3.13 Taxes
3.14 Permits
3.18 Absence of Changes of Events Related to Seller
4.4 Litigation
4.7 Absence of Changes or Events Related to Buyer
4.5(a) Capital Stock
v
<PAGE>
EXHIBITS
Exhibit A Form of Additional Financial Representations
Exhibit B Form of Non-Competition Agreement
Exhibit C Form of Indemnification Pledge Agreement
Exhibit D Terms of Employment Agreement
Exhibit E Form of Note
Exhibit F Form of Tax Loan Pledge Agreement
Exhibit G Form of Opinion of Seller's Counsel
Exhibit H-1 Form of Opinion of Buyer's Counsel
Exhibit H-2 Form of Opinion of Buyer's Special Counsel
Exhibit I Form of Bill of Sale and Assignment and Assumption
Agreement
Exhibit J Form of Assignment Agreement
vi
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of March 29, 1999, by and among BIG
ENTERTAINMENT, INC., a Florida corporation ("BUYER"), CINEMASOURCE, INC., a
Connecticut corporation ("SELLER"), and, with respect to certain provisions
hereof, Brett West (the "SHAREHOLDER") and Pamela West (together with the
Shareholder, the "SELLER PARTIES").
W I T N E S S E T H :
WHEREAS, upon the terms and subject to the conditions hereinafter set
forth, Seller desires to sell, assign and transfer to Buyer, and Buyer desires
to purchase and acquire from Seller, all of Seller's right, title and interest
in the Assets (as defined herein);
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereto hereby agree as follows:
ARTICLE I
ACQUISITION AND TRANSFER OF ASSETS
Section 1.1. ASSETS TO BE ACQUIRED.
(a) Upon the terms and subject to the conditions hereinafter set forth,
Seller shall sell, assign, transfer, convey and deliver to Buyer, and Buyer
shall purchase, acquire and accept from Seller (the "ACQUISITION"), free and
clear of all Liens (as defined in Section 1.1(b) below), all right, title and
interest of Seller in, to and under all of the assets, properties, rights,
contracts, claims, operations and business of Seller (collectively, the
"ASSETS") (but excluding the Excluded Assets, as defined in Section 1.2 below),
whether or not appearing on the books of Seller, including, without limitation,
the following:
(i) all of Seller's (A) contracts or license agreements with
licensees of movie showtimes data (the "LICENSE AGREEMENTS"), (B)
contracts or license agreements related to obtaining movie showtimes
data (the "PROCUREMENT AGREEMENTS"), (C) leases, rental agreements and
other contracts and agreements, all of which contracts, leases and
other agreements referred to in this clause (i) (collectively, the
"ASSIGNED CONTRACTS") are listed on SCHEDULE 1.1(A) hereto;
(ii) all of the furniture, supplies, computers, office
equipment, fixtures and other fixed assets owned by Seller (the "FIXED
ASSETS");
<PAGE>
(iii) each trademark, trade name, logo, service mark, brand
mark, brand name, computer program, domain name, database, patent,
industrial design and copyright owned or used by Seller, a list of all
registrations thereof and pending applications therefor, inventions,
drawings, customer lists, proprietary know-how or information owned or
used by Seller and each contract, license or other agreement relating
thereto (including, without limitation, the name "CinemaSource" and all
rights relating to the use of such name and any logos or characters
developed by or on behalf of Seller for use in connection with Seller's
business) (collectively, the "INTANGIBLE PROPERTY");
(iv) all trade accounts receivable of Seller;
(v) all papers, databases, computer programs, disks, software,
and other books, records, documents and materials owned by Seller (the
"BOOKS AND RECORDS");
(vi) all assets of Seller (other than Excluded Assets) as to
which Buyer assumes any liability;
(vii) all rights of Seller under or pursuant to all
warranties, representations and guarantees made by suppliers,
manufacturers and contractors in connection with any of the foregoing
Assets; and
(viii) all goodwill relating to the foregoing Assets.
(b) For the purposes of this Agreement, "LIEN" shall mean any lien,
pledge, mortgage, deed of trust, security interest, claim, lease, charge,
option, right of first refusal, easement or other real estate declaration,
covenant, condition, restriction or servitude, transfer restriction under any
shareholder or similar agreement, or encumbrance.
Section 1.2. EXCLUDED ASSETS. Notwithstanding anything in Section 1.1 to
the contrary, the parties hereto expressly agree that Seller is not hereunder
selling, assigning, transferring, conveying or delivering to Buyer, and Buyer is
not purchasing, acquiring or accepting, the following assets, rights and
properties (collectively, the "EXCLUDED ASSETS"):
(i) any cash, bank deposits or similar cash items of Seller;
(ii) any insurance policies, bonds, letters of credit or other
similar items, or any cash surrender value in regard thereto;
(iii) any claim, right or interest in or to any refund for
federal, state or local franchise, income or other taxes or fees of any
nature whatsoever for periods on or prior to the Closing Date (as
defined in Section 9.1 below) and any interest (or similar amount)
thereon;
2
<PAGE>
(iv) any of Seller's corporate books and records of internal
proceedings or tax records, and any books and records that Seller is
required by law to retain (the "CORPORATE RECORDS"), but Buyer shall
have access to the same to the extent permitted by Section 10.3 below;
(v) any employment, consulting or similar agreement except for
any agreements that constitute Assigned Contracts; and
(vi) any assets described on SCHEDULE 1.2 hereto.
Section 1.3. ASSUMED AND EXCLUDED LIABILITIES.
(a) Buyer shall not assume or be bound by any obligations, liabilities
(including without limitation, liabilities in respect of Taxes (as defined in
Section 3.13(a) below) and "employee benefit plans" (as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended) or any other
pension plans or employee benefit arrangements) or commitments of Seller or any
of its affiliates of any kind, character or description, whether absolute,
accrued, known, unknown, asserted, unasserted, due or to become due, contingent
or otherwise ("LIABILITIES"), in connection with the Assets or otherwise, other
than the following:
(i) obligations and liabilities arising after the Closing Date
under the Assigned Contracts in respect of the period following such
Closing Date; and
(ii) all trade accounts payable arising in the ordinary course
of business of Seller (which shall not include any expenses incurred by
Seller in connection with this Agreement or any of the transactions
contemplated hereby) (the liabilities described in paragraphs (i) and
(ii) being referred to collectively as the "ASSUMED LIABILITIES").
With respect to any nonincome Tax imposed on a periodic basis that relates to a
period straddling the Closing Date, such Tax shall be prorated to the Closing
Date, and the portion allocable to the period prior to the Closing Date shall be
promptly paid or reimbursed by Seller, and the portion allocable to the period
after the Closing Date shall be promptly paid or reimbursed by Buyer. All other
Liabilities of Seller shall remain the sole responsibility of Seller.
Section 1.4. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE.
(a) Within 45 days after the Closing, Buyer shall cause to be prepared
and delivered to Seller and Shareholder a written accounting of the dollar
amount of all trade accounts receivable and trade accounts payable included
within the Assets and Liabilities acquired or assumed by Buyer in the
Acquisition. Seller shall notify Buyer within fifteen (15) days after receipt of
such accounting if it objects to any of the information contained thereon. If
Seller shall not have objected to the accounting within
3
<PAGE>
such fifteen-day period, the information contained thereon shall be deemed to be
accurate and the accounting delivered to Seller and Shareholder by Buyer shall
be deemed to be final. Buyer and Seller agree to negotiate in good faith to
resolve any disagreement with respect to the accounting.
(b) To the extent the final accounting indicates that the dollar amount
of the trade accounts receivable acquired by Buyer exceeded the dollar amount of
the trade accounts payable assumed by Buyer, Buyer shall be entitled to keep 50%
of such excess and shall pay the remaining 50% of such excess to Seller in cash
within five (5) days after the accounting is deemed final or Buyer and Seller
agree that it is final. To the extent the final accounting indicates that the
dollar amount of the trade accounts payable assumed by Buyer exceeded the dollar
amount of the trade accounts receivable acquired by Buyer, Seller shall, and
Shareholder shall cause Seller to, pay the amount of such excess to Buyer in
cash within five (5) days after the accounting is deemed final or Buyer and
Seller agree that it is final.
ARTICLE II
CONSIDERATION
Section 2.1. AMOUNT AND FORM OF CONSIDERATION.
(a) The aggregate consideration (the "CONSIDERATION") to be paid on the
Closing Date by Buyer to Seller for the Assets shall consist of the following:
(i) at the election of Buyer, either:
(A) (x) $6,500,000 in cash, plus (y) 436,191 fully
paid and nonassessable shares of the common stock, $.01 par
value per share (the "COMMON STOCK"), of Buyer (the "STOCK
CONSIDERATION"); or
(B) (x) $6,500,000 in cash, plus (y) the product of
436,191 and the greater of (1) $12.50 and (2) the average of
(a) $12.50 and (b) the average closing sale price of the
Common Stock for the ten trading days ending on the second
trading day preceding the Closing Date as reported by the
Nasdaq Stock Market, Inc. (the amount of cash paid by Buyer
pursuant to clause (A) or (B) is referred to herein as the
"CASH CONSIDERATION"); plus
(ii) the assumption by Buyer of the Assumed Liabilities.
Section 2.2. ALLOCATION OF PURCHASE PRICE. The Consideration and other
relevant items shall be allocated among the Assets acquired hereunder by Buyer
in accordance with the requirements of Section 1060 of the Internal Revenue Code
of 1986, as amended (the "CODE"). Buyer shall provide Seller with a draft of
such allocation within 90 days after the Closing Date. Seller shall notify Buyer
within thirty (30) days of
4
<PAGE>
receipt of such draft allocation of any objection Seller may have thereto.
Seller and Buyer agree to resolve any disagreement with respect to such
allocation in good faith consistent herewith. Seller and Buyer each agree to
report and file all Tax Returns (as defined in Section 3.13(a)) (including
amended Tax Returns and claims for refund) consistent with such allocation, and
shall take no position contrary thereto or inconsistent therewith (including,
without limitation, in any audits or examinations by any taxing authority or any
other proceedings). Seller and Buyer shall cooperate in the filing of any forms
(including Form 8594) with respect to such allocation, including any amendments
to such forms required with respect to any adjustment to the Consideration,
pursuant to this Agreement. Notwithstanding any other provisions of this
Agreement, the foregoing agreement shall survive the Closing Date without
limitation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
Section 3.1. ORGANIZATION. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Connecticut, and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
All of the outstanding capital stock of Seller is owned beneficially and of
record by the Shareholder.
Section 3.2. AUTHORIZATION OF AGREEMENT. Seller has full corporate
power and authority to execute and deliver this Agreement and each other
agreement, document, instrument or certificate contemplated by this Agreement or
to be executed by Seller in connection with the consummation of the transactions
contemplated by this Agreement (all such other agreements, documents,
instruments and certificates are hereafter collectively referred to as the
"SELLER DOCUMENTS") and to perform fully its obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement and each
of the Seller Documents have been duly and validly authorized and approved by
the Board of Directors and shareholders of Seller and by all other necessary
corporate action on behalf of Seller. This Agreement has been, and on or prior
to the Closing each of the Seller Documents will be, duly and validly executed
and delivered by Seller and (assuming the due authorization, execution and
delivery by the other parties hereto and thereto) this Agreement constitutes,
and each of the Seller Documents when so executed and delivered will constitute,
the legal, valid and binding obligation of Seller, enforceable against Seller in
accordance with its respective terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
5
<PAGE>
Section 3.3. CONSENTS AND APPROVALS; NO VIOLATION. (a) Except as set
forth on SCHEDULE 3.3(A) hereto, no filing with, notification to or consent,
authorization, waiver, approval, order, license, certificate or Permit of, any
Government Body (as defined in Section 3.17 below) is necessary for Seller's
execution, delivery or performance of this Agreement or any of the Seller
Documents or the consummation by Seller of the transactions contemplated by this
Agreement and the Seller Documents. For purposes of determining whether a filing
is required pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of
1976, 15 U.S.C. ss. 18a, and the Rules promulgated thereunder, 16 C.F.R. ss.ss.
801.1 Et seq., and based on the definitions set forth therein, the Acquired
Person within which Seller is included does not have total assets or annual net
sales of $10,000,000 or more.
(b) Except as set forth on SCHEDULE 3.3(B) hereto, none of the
execution and delivery by Seller of this Agreement and the Seller Documents, the
consummation of the transactions contemplated hereby or thereby or compliance by
Seller with any of the provisions hereof or thereof will (i) conflict with or
result in any breach of any provision of the Certificate of Incorporation or
By-laws of Seller, (ii) violate any order, injunction, judgment, decree, ruling,
writ, assessment or arbitration award (each, an "ORDER") or statute, rule or
regulation of any Government Body by which Seller or any of its properties or
assets is bound, (iii) conflict with, violate, result in the breach or
termination of, or (with or without due notice or the lapse of time or both)
constitute a default or give rise to any "takeback" right or right of
termination or acceleration or right to increase the obligations under or
otherwise modify any of the terms, conditions or provisions of any Assigned
Contract or other contract, agreement instrument or obligation listed on
SCHEDULE 3.10 hereto or which would be required to be listed on SCHEDULE 3.10
hereto to make the representations and warranties in Section 3.10(a) accurate,
or (iv) result in the creation of any Lien upon any of the Assets other than (i)
Liens for Taxes that are not yet due and payable, (ii) mechanics, materialmen's
or other like liens arising in the ordinary course of business and (iii)
purchase money liens and liens securing rental payments under capital leases
(collectively, "PERMITTED LIENS").
Section 3.4. TITLE TO ASSETS. (a) Except as set forth on SCHEDULE 3.4
hereto, Seller has good and marketable title to all of the Assets, free and
clear of all Liens (except for Permitted Liens). Upon the sale, assignment,
transfer and conveyance of the Assets to Buyer hereunder, there will be vested
in Buyer good and marketable title to such Assets, free and clear of all Liens
(except for Permitted Liens) other than those placed thereon by Buyer.
(b) Other than the Assets and the Excluded Assets, there are no other
tangible or intangible assets, rights, properties or agreements that are used in
the ownership or operation of the Assets or the business of CinemaSource or that
are material to the ownership or operation of the Assets or the business of
CinemaSource.
Section 3.5. NO INDEBTEDNESS. Seller has no indebtedness for borrowed
money.
6
<PAGE>
Section 3.6. RESULTS OF OPERATIONS. Seller's annual running revenue and
annual running operating cash flow, based on actual figures for the month of
January 1999 determined in accordance with generally accepted accounting
principles (i.e., multiplying January's amounts by twelve), were no less than
$1.7 million and $700,000, respectively. Such amounts are before giving effect
to distributions to the Shareholders, but after giving effect to reimbursements
to the Shareholders of operating expenses of Seller funded by the Shareholders.
The foregoing revenue and operating cash flow amounts for the month of January
do not include any extraordinary or non-recurring sources of revenue (it being
understood that Seller makes no representation that such revenue sources will
continue after the date hereof) or any revenues resulting from contracts that
were not negotiated and entered into by Seller on an arm's length basis.
Section 3.7. LITIGATION, ETC. There is no judicial, administrative or
arbitral action, suit, proceeding (public or private), claim or governmental
proceeding (each, a "LEGAL PROCEEDING") pending or, to the knowledge of Seller,
threatened that questions the validity of this Agreement, the Seller Documents
or any action taken or to be taken by Seller or the Shareholders in connection
with the consummation of the transactions contemplated hereby or thereby. Except
as set forth on SCHEDULE 3.7 hereto, (i) no investigation or review by any
Government Body with respect to Seller is pending or, to the knowledge of
Seller, threatened, nor has any Government Body indicated to Seller an intention
to conduct the same, (ii) there is no Legal Proceeding pending or, to the
knowledge of Seller, threatened against or affecting Seller or its assets at law
or in equity, or before any Government Body (and, to the knowledge of Seller,
there is no basis for any such Legal Proceeding not so set forth which, if
adversely determined, could adversely affect Seller or Buyer) and (iii) there is
no outstanding or, to the knowledge of Seller, threatened Order of any
Government Body against, affecting or naming Seller or affecting any of the
Assets. Except as set forth on SCHEDULE 3.7 hereto, during the three years
preceding the date of this Agreement, no Legal Proceeding has been commenced or,
to the knowledge of Seller, threatened in writing against or affecting Seller or
its assets at law or in equity, or before any Government Body. On and after the
date hereof until the Closing, Seller will notify Buyer of the existence or
threat of any investigation, review, Legal Proceeding or Order which would be
required to be disclosed on SCHEDULE 3.7.
Section 3.8. COMPLIANCE WITH LAW. Except as set forth on SCHEDULE 3.8
hereto, Seller has not violated or failed to comply in any material respect with
any statute, law, ordinance, regulation, rule or Order of any Government Body.
Section 3.9. EMPLOYEE BENEFITS AND RELATED MATTERS.
(a) Except as set forth on SCHEDULE 3.9(A) hereto, Seller is not a
party to any employment, compensation, consulting, severance or indemnification
agreement with any party or any other agreement with a present or former
employee of Seller that provides for severance payments or stay bonuses
contingent upon a change in control of Seller or a sale of its business or
assets. Seller is in compliance in all material respects with all laws relating
to the employment of labor, including all laws relating to wages,
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hours, the Workers' Adjustment Retraining Notification Act and any similar state
or local "mass layoff" or "plant closing" law, collective bargaining,
discrimination, civil rights, safety and health and workers' compensation.
(b) SCHEDULE 3.9(B) sets forth each employee pension, retirement,
profit sharing, stock bonus, stock option, stock purchase, incentive, deferred
compensation, medical, dental, vision, life insurance, accidental death and
dismemberment insurance, business travel insurance, vacation pay, salary
continuation, sick pay, disability, severance, golden parachute or other plan,
fund, program, policy, contract or arrangement providing employee benefits that
is maintained or contributed to by Seller (the "PLANS"). Seller has delivered to
Buyer true, correct and complete copies of each Plan (or, in the case of any
unwritten Plans, descriptions thereof). There are no pending, or to the
knowledge of Seller, threatened suits, actions, proceedings, or claims (except
claims for benefits payable in the normal operation of the Plans) against any
Plan by any employee or other beneficiary covered under any such Plan or
otherwise involving any Plan.
Section 3.10. CERTAIN AGREEMENTS.
(a) Except as set forth on SCHEDULE 1.1(A) hereto or SCHEDULE 3.10
hereto, neither Seller nor any of its properties or assets is a party to or
bound by any (i) License Agreement, (ii) Procurement Agreement, (iii) lease or
rental agreement, (iv) contract granting a right of first refusal or for the
acquisition, sale or lease of any assets of Seller, (v) mortgage, pledge,
conditional sales contract, security agreement or other similar contract with
respect to any property of Seller, (vi) loan agreement, credit agreement,
promissory note, guarantee, subordination agreement, letter of credit or other
similar type of contract, (vii) collective bargaining agreement or other
contract or agreement with any labor union or (viii) any other material
contract. Except as set forth on SCHEDULE 3.10 hereto, Seller has delivered to
Buyer true, correct and complete copies of the Assigned Contracts, including all
amendments, modifications, supplements, side letters or consents affecting the
obligations of any party thereunder. Neither Seller nor any of its properties or
assets is a party to or bound by any agreement or contract relating to online
movie ticketing.
(b) Except as set forth on SCHEDULE 3.10 hereto, to Seller's knowledge,
each Assigned Contract is valid and enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity). Seller is not in material breach of or in material default under any
Assigned Contract and, to Seller's knowledge, there has not occurred any event
which, after the giving of notice or lapse of time or both, would constitute a
default under or result in a breach of an Assigned Contract by any party subject
thereto. Except as set forth in SCHEDULE 3.10, no previous or current party to
any Assigned Contract (i) has given notice of or made a claim with respect to
any breach or default under any Assigned Contract or (ii) has given notice of
termination or non-
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renewal of any Assigned Contract. Except as set forth in SCHEDULE 3.10 hereto,
each of the Assigned Contracts is freely transferable by Seller to Buyer and no
third party consents are required for such transfer.
(c) The License Agreements represent at least 100 separate revenue
sources, including different geographic markets and end users as separate
revenue sources. A list of Seller's revenue sources is attached as SCHEDULE
3.10(C) hereto.
Section 3.11. REAL PROPERTY.
(a) Seller does not now own and has not ever owned any real property.
(b) Other than the indenture of lease, dated November 18, 1996 (the
"LEASE"), between Seller, as lessee, and Stonehouse Commons Investment Group,
L.L.C. (as successor to Canaan Woodland I Limited Partnership), as lessor
("LESSOR"), and except as set forth on SCHEDULE 3.11(B) hereto, Seller is not
now and has never been a party to any lease, sublease, license, sublicense or
other agreement or arrangement with respect to any real property, and has not
used or occupied, does not use or occupy, and does not have any right to use or
occupy, now or in the future, any real property.
(c) The office space that is the subject of the Lease is not subject to
any lease, sublease, license or other agreement granting to any other
corporation, partnership, limited liability company, person or other entity or
group (a "PERSON") any right to the use, occupancy or enjoyment of such property
or any part thereof.
(d) The Lease covers the entire estate it purports to cover and, upon
the consummation of the transactions contemplated hereby and assuming the
consent of Lessor to the assignment of the Lease to Buyer is obtained, will
entitle Buyer to the use, occupancy and possession of the real property
specified in the Lease and for the purposes such property is now being used. No
previous or current party to the Lease has given notice of or made a claim with
respect to any breach or default thereunder.
Section 3.12. INTANGIBLE PROPERTY. (a) SCHEDULE 3.12 hereto sets forth
a list of each material item of Intangible Property, including a list of all
customers of Seller, and indicates, with respect to each item of Intangible
Property, the owner thereof and, if applicable, the name of the licensor and
licensee thereof. Except as set forth on SCHEDULE 3.12, each of the foregoing
assets listed on such Schedule as being owned by Seller is owned by Seller free
and clear of any and all Liens and is in good standing and no other person or
entity has any claim of ownership or right of use with respect thereto. To
Seller's knowledge, except as set forth on SCHEDULE 3.12 hereto, the use,
modification, compilation, reproduction, public display or performance, or
distribution of the foregoing by Seller does not, and the use, modification,
compilation, reproduction, public display or performance, or distribution
thereof by Buyer immediately after the Closing will not, conflict with, infringe
upon, violate or interfere with or constitute an appropriation of any right,
title, interest or goodwill, including, without limitation, any intellectual
property right, trademark, trade name, service mark, brand mark, brand name,
computer program,
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domain name, database, patent, industrial design, copyright or any pending
application therefor of any other person or entity and except as set forth on
SCHEDULE 3.12 hereto, there have been no claims made and Seller has not received
any notice or otherwise acquired any knowledge that any of the foregoing is
invalid or conflicts with the asserted rights of any other person or has not
been used or enforced or has been failed to be used or enforced in a manner that
would result in the abandonment, cancellation or unenforceability of any of the
Intangible Property. Except as set forth on SCHEDULE 3.12, no past or present
officer, employee or consultant of Seller has any claim of ownership or right of
use with respect to any item of Intangible Property.
(b) Notwithstanding anything in Section 3.12(a) to the contrary, on and
after the closing, except with respect to the representation and warranty set
forth in Section 3.12(d), Seller disclaims and Buyer assumes, all risks with
respect to Buyer's use, reuse, modification, compilation, collection,
reproduction, public display or performance, or distribution of the movie
showtime data, radio programming data or musical event data, including any
claims that the use, modification, compilation, collection, reproduction, public
display or performance, or distribution of the showtime data, radio programming
data and musical event data conflict with, infringe upon, violate or interfere
with or constitute an appropriation of any right, title, interest or goodwill,
including, without limitation, any intellectual property right, trademark, trade
name, service mark, brand mark, brand name, computer program, domain name,
database, patent, industrial design, copyright, or any pending application
thereof of any other person or entity. Any claims arising out of the foregoing
and brought against Buyer shall not give rise to a claim by Buyer against Seller
for indemnity, breach of warranty, or otherwise.
(c) Except as set forth on SCHEDULE 3.12 hereto, Seller is not a party
to or bound by any contract, license or other agreements relating to the
Intangible Property.
(d) The software applications (including those referred to by Seller as
"web crawlers") used by or on behalf of Seller for the collection, compilation
or reproduction of data published on the World Wide Web do not by themselves or
together with other software applications, collect, compile or reproduce any
data or information other than movie showtimes and related factual information
that is in the public domain (such as the type of sound delivery technology
available for a particular movie).
Section 3.13. TAXES. (a) For purposes of this Agreement:
(i) "TAX" or "TAXES" shall mean all taxes, charges, fees,
imposts, levies or other assessments by any taxing authority, including
all net income, gross receipts, capital, sales, use, ad valorem, value
added, transfer, franchise, profits, inventory, capital stock, license,
withholding, payroll, employment, social security, unemployment,
excise, severance, stamp, occupation, property and estimated taxes,
customs duties, fees, assessments and charges of any kind whatsoever,
and all interest, penalties, fines or additions to tax imposed by any
taxing authority which relate in any way to the assessment of
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collection of any taxes or the filing of any Tax Return, and shall
include any transferee or successor liability in respect of Taxes
(whether by contract or otherwise).
(ii) "TAX RETURN" means any return (including any
consolidated, combined or unitary return in which Seller is, or was,
included or includible), declaration, report, claim for refund,
separate election or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendment thereof.
(b) Except as set forth on SCHEDULE 3.13(B) hereto, Seller has (w)
filed when due or will file when due (taking into account extensions) with the
appropriate federal, state, local, foreign and other taxing authorities, all Tax
Returns required to be filed by it or on its behalf, all of which Tax Returns
were true or will be true, complete and correct as of the time of filing, (x)
paid when due and payable (and, until the Closing Date, will timely pay) all
required Taxes (except for Taxes which are being contested in good faith, as set
forth on SCHEDULE 3.13(B), and for which adequate reserves have been established
in accordance with GAAP, and (y) established (and through and including the
Closing Date will establish) reserves that are adequate for the payment of all
Taxes not yet due and payable with respect to the results of operations through
the Closing Date.
(c) To the knowledge of Seller, there are no Taxes assessed or asserted
or claimed in writing to be due by any taxing authority or otherwise in respect
of any Tax Returns filed by Seller or on Seller's behalf, and no issues have
been raised (and are currently pending) by any taxing authority in connection
with any such Tax returns.
(d) Seller has duly and timely withheld and paid over to the
appropriate taxing authorities all Taxes and other amounts required to be so
withheld and paid over for all periods under all applicable laws in connection
with amounts paid or owing to any employee, independent contractor,
subcontractor, lender, stockholder or other third party or other personnel
supplied by any third party.
(e) To the knowledge of Seller, there is no audit, examination,
deficiency, or refund proceeding pending with respect to any Taxes or Tax
Returns of Seller, and no taxing authority has given written notice of the
commencement of any audit, examination or deficiency proceeding with respect to
any Taxes or Tax Returns of Seller.
(f) Set forth on SCHEDULE 3.13(F) is a complete list of all federal,
state, local, and foreign Tax Returns filed by, or on behalf of, Seller for
taxable periods commencing on or after January 1, 1995, and all jurisdictions in
which Seller is currently subject to tax.
(g) Set forth on SCHEDULE 3.13(G) is a complete list of all bulk sales
or similar notices required to be filed (whether by Buyer or Seller), in
connection with the transactions contemplated herein, with any taxing authority
with respect to the Assets.
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(h) Except as set forth in SCHEDULE 3.13(H), none of the Assigned
Contracts contain any Tax sharing, Tax indemnification or similar agreements.
(i) Except as set forth in SCHEDULE 3.13(I), none of the Assets are (i)
property required to be treated as being owned by another Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect immediately prior to the enactment of the Tax Reform Act of 1986;
(ii) "tax-exempt use property" within the meaning of Section 168(h)(l) of the
Code; (iii) tax exempt bond financed property within the meaning of Section
168(g) of the Code, or (iv) property used "predominantly outside of the United
States" within the meaning of Section 168(g)(4).
(j) Seller (and any predecessor of Seller) has since its inception been
and will be, up to and including the Closing Date, an S Corporation within the
meaning of Section 1361 of the Code and under all corresponding provisions of
applicable state and local Tax laws to the extent they recognize S corporation
status.
(k) Seller is not a "foreign person" within the meaning of Section 1445
of the Code.
Section 3.14. PERMITS. SCHEDULE 3.14 hereto sets forth a list of all
material approvals, authorizations, consents, franchises, licenses, permits or
certificates (collectively, "PERMITS") granted by any government or governmental
or regulatory body thereof or political subdivision thereof, whether federal,
state, local or foreign, or any agency or instrumentality thereof, or any court
or arbitrator (public or private) (each, a "GOVERNMENT BODY") and applications,
if any, for any of the foregoing, held by Seller. Seller is the holder of all
Permits necessary or appropriate to enable it to continue to conduct its
business in all material respects as presently conducted. Each of the Permits is
in full force and effect.
Section 3.15. RELATED PARTIES; RELATED PARTY TRANSACTIONS. Except for
the transactions contemplated hereby, neither Seller nor any shareholder of
Seller owns any direct or indirect interest of any kind in, or controls or is a
director, officer, employee or partner of, or consultant to, or lender to or
borrower from or has the right to participate in the profits of, any Person
which is (A) a competitor, supplier, customer, landlord, tenant, creditor or
debtor of Seller, (B) engaged in a business related to the business of Seller,
(C) participating in any transaction to which Seller is a party, or (D) a party
to any contract, agreement, indenture, note, bond, loan, instrument, lease,
conditional sale contract, mortgage, license, franchise, insurance policy,
commitment or other arrangement or agreement with Seller.
Section 3.16. OPTIONS. There are no outstanding securities of Seller
convertible into or evidencing the right to purchase or subscribe for any shares
of capital stock of Seller and there are no outstanding or authorized options,
warrants, calls, subscriptions, rights, commitments or any other agreements of
any character obligating
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Seller to issue any shares of its capital stock or any securities convertible
into or evidencing the right to purchase or subscribe for any shares of such
stock.
Section 3.17. YEAR 2000. Each computer program used by Seller in its
business is Year 2000 Compliant or will be Year 2000 Compliant in sufficient
time to avoid any material disruption to Seller's business. "YEAR 2000
COMPLIANT" means that such program is capable of managing and manipulating data
involving dates after the year 1999 without any functional or data abnormality
and without inaccurate results related to such dates.
Section 3.18. ABSENCE OF CHANGES OR EVENTS. Except as set forth on
SCHEDULE 3.18, since December 31, 1998, no event or circumstance has occurred
that has had, or is reasonably likely to have, a material adverse effect on the
business, assets, properties, liabilities, financial condition or results of
operations of Seller, other than events or circumstances relating to the economy
in general or the media industry in general and not specifically relating to
Seller. Except as set forth on SCHEDULE 3.18 hereto, since December 31, 1998,
Seller has conducted its business only in the ordinary course.
Section 3.19. INVESTOR REPRESENTATIONS. The shares of Common Stock
received by Seller pursuant to this Agreement will be acquired for Seller's own
account and not with a view to or in connection with the sale or distribution of
any part thereof except for distributions to the Shareholder.
Section 3.20. EXEMPTION FROM REGISTRATION; RESTRICTED SECURITIES.
Seller understands that the shares of Common Stock received by Seller pursuant
to this Agreement will not be registered under the Securities Act on the ground
that the sale provided for in this Agreement is exempt from registration under
the Securities Act, and that the reliance of Buyer on such exemption is
predicated in part on Seller's representations set forth in this Agreement. The
certificates representing the shares of Common Stock issued to Seller pursuant
to this Agreement will bear an appropriate legend reflecting such exempt
issuance without registration. Seller understands that the shares of Common
Stock received by Seller pursuant to this Agreement are restricted securities
within the meaning of Rule 144 under the Securities Act.
Section 3.21. BROKERS. No broker, finder or investment banker is
entitled to any brokerage fee, finder's fee or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Seller.
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ARTICLE III-A
REPRESENTATIONS AND WARRANTIES OF THE SELLER PARTIES
The Seller Parties hereby, jointly and severally, represent and warrant
to Buyer as follows:
Section 3A.1. AUTHORIZATION OF AGREEMENT. This Agreement has been, and
on or prior to the Closing each other agreement, document, instrument or
certificate contemplated by this Agreement to be executed by either of the
Seller Parties on or prior to the Closing Date (all such other agreements,
documents, instruments and certificates are hereafter collectively referred to
as the "SHAREHOLDER DOCUMENTS") in connection with the transactions contemplated
by this Agreement will be, duly and validly executed and delivered by the Seller
Parties and (assuming the due authorization, execution and delivery by the other
parties hereto and thereto) this Agreement constitutes, and each of the
Shareholder Documents when so executed and delivered will constitute, the legal,
valid and binding obligation of the respective Seller Parties executing such
agreements, enforceable against the Seller Parties in accordance with its
respective terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally and subject, as to enforceability, to general
principles of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity).
Section 3A.2. CONSENTS AND APPROVALS; NO VIOLATION. (a) No filing with,
notification to or consent, authorization, waiver, approval, order, license,
certificate or Permit of, any Government Body is necessary for the Seller
Parties' execution, delivery or performance of this Agreement or any of the
Shareholder Documents or the consummation by the Seller Parties of the
transactions contemplated by this Agreement and the Shareholder Documents.
(b) None of the execution and delivery by the Seller Parties of this
Agreement and the Shareholder Documents, the consummation of the transactions
contemplated hereby or thereby or compliance by the Seller Parties with any of
the provisions hereof or thereof will (i) violate any Order or statute, rule or
regulation of any Government Body by which either of the Seller Parties or any
of their properties or assets is bound, (ii) conflict with, violate, result in
the breach or termination of, or (with or without due notice or the lapse of
time or both) constitute a default or give rise to any "takeback" right or right
of termination or acceleration or right to increase the obligations under or
otherwise modify any of the terms, conditions or provisions of any note, bond,
mortgage, license, franchise, Permit, indenture, contract, agreement or other
instrument or obligation to which either of the Seller Parties is a party, or by
which either of the Seller Parties or any of their properties or assets is or
may be bound, or (iii) result in the creation of any Lien upon any of the
Assets.
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Section 3A.3 INVESTOR REPRESENTATIONS. The shares of Common Stock
received by Seller pursuant to this Agreement and distributed to the Shareholder
will be acquired for the Shareholder's own account and not with a view to or in
connection with the sale or distribution of any part thereof.
Section 3A.4 EXEMPTION FROM REGISTRATION; RESTRICTED SECURITIES. The
Shareholder understands that the shares of Common Stock received by Seller
pursuant to this Agreement and distributed to the Shareholder will not be
registered under the Securities Act on the ground that the sale provided for in
this Agreement is exempt from registration under the Securities Act, and that
the reliance of Buyer on such exemption is predicated in part on the
Shareholder's representations set forth in this Agreement. The certificates
representing the shares of Common Stock issued to Seller pursuant to this
Agreement will bear an appropriate legend reflecting such exempt issuance
without registration. The Shareholder understands that the shares of Common
Stock received by Seller pursuant to this Agreement and distributed to the
Shareholder are restricted securities within the meaning of Rule 144 under the
Securities Act.
Section 3A.5 BROKERS. No broker, finder or investment banker is
entitled to any brokerage fee, finder's fee or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Seller Parties.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
Section 4.1. ORGANIZATION. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida and
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted.
Section 4.2. AUTHORIZATION OF AGREEMENT. Buyer has full corporate power
and authority to execute and deliver this Agreement and each other agreement,
document, instrument or certificate contemplated by this Agreement or to be
executed by Buyer in connection with the consummation of the transactions
contemplated hereby and thereby (all of such agreements, documents, instruments
and certificates required to be executed by Buyer being hereinafter referred to,
collectively, as the "BUYER DOCUMENTS"), and to perform fully its obligations
hereunder and thereunder. The execution, delivery and performance by Buyer of
this Agreement and each Buyer Document have been duly authorized by the Board of
Directors of Buyer and by all other necessary corporate action on the part of
Buyer. This Agreement has been, and at or prior to the Closing, each of the
Buyer Documents will be, duly and validly executed and delivered by Buyer and
(assuming the due authorization, execution and delivery by the other parties
hereto and thereto) this Agreement constitutes, and each of the Buyer Documents
when so executed
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and delivered will constitute, the legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its respective terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity).
Section 4.3. CONSENTS AND APPROVALS; NO VIOLATIONS.
(a) Assuming the accuracy of Seller's representation and warranty set
forth in the last sentence of Section 3.3(a) hereof, except for filings,
notifications, authorizations, consents and approvals as may be required under
federal and state securities or blue sky laws, no filing with, notification to
or consent, authorization, waiver, approval, order, license, certificate or
Permit of, any Government Body is necessary for Buyer's execution, delivery or
performance of this Agreement or any of the Buyer Documents or the consummation
by Buyer of the transactions contemplated by this Agreement and the Buyer
Documents.
(b) None of the execution and delivery by Buyer of this Agreement or
the Buyer Documents, the consummation of the transactions contemplated hereby or
thereby or compliance by Buyer with any of the provisions hereof or thereof will
(i) conflict with or result in any breach of any provision of the Articles of
Incorporation or By-laws of Buyer, (ii) violate any Order or statute, rule or
regulation of any Government Body by which Buyer or any of its properties or
assets is bound, or (iii) conflict with, violate, result in the breach or
termination of, or (with or without due notice or the lapse of time or both)
constitute a default or give rise to any "takeback" right or right of
termination or acceleration or right to increase the obligations under or modify
any of the terms, conditions or provisions of any note, bond, mortgage, license,
franchise, Permit, indenture, agreement or other instrument or obligation to
which Buyer is a party, or by which Buyer or any of its properties or assets is
or may be bound.
Section 4.4. LITIGATION. There are no Legal Proceedings pending or, to
the knowledge of Buyer, threatened that question the validity of this Agreement,
the Buyer Documents or any action taken or to be taken by Buyer in connection
with the consummation of the transactions contemplated hereby or thereby. On and
after the date hereof until the Closing, Buyer will notify Seller of the
existence or threat of any such Legal Proceeding. Except as set forth on
SCHEDULE 4.4 hereto or as disclosed in the Buyer SEC Reports (as defined in
Section 4.6), there are no Legal Proceedings pending against or affecting Buyer
or its assets at law or in equity, which, if adversely determined, could
adversely affect Buyer.
Section 4.5. CAPITAL STOCK OF BUYER.
(a) The authorized capital stock of Buyer consists of (i) 25,000,000
shares of Common Stock, of which, as of the date hereof, 8,929,281 shares of
Common
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Stock were issued and outstanding (each together with a Common Stock purchase
right (the "BUYER RIGHTS") issued pursuant to the Rights Agreement, dated as of
August 23, 1996 by and between Buyer and American Stock Transfer & Trust
Company), and 394,466 shares of Common Stock were issued and held as collateral
for lease obligations of Buyer; and (ii) one million shares of Preferred Stock
("BUYER PREFERRED STOCK"), designated as follows: (A) 217,600 shares of Series A
Variable Rate Convertible Preferred Stock, $6.25 stated value per share, all of
which shares, as of the date hereof, are issued and outstanding, (B) 142,223
shares of Series B Variable Rate Convertible Preferred Stock, $5.21 stated value
per share, of which, as of the date hereof, 122,846 shares are issued and
outstanding, (C) 100,000 shares of 4% $100 Series C Convertible Preferred Stock,
$100 stated value per share, of which, as of the date hereof, no shares are
issued and outstanding, (D) 1,000 shares of 7% Series D Convertible Preferred
Stock, $10,000 stated value per share, of which, as of the date hereof, 250
shares are issued and outstanding and (E) 50 shares of 7% Series D-2 Convertible
Preferred Stock, $10,000 stated value per share, all of which shares, as of the
date hereof, are issued and outstanding. All of the outstanding shares of Common
Stock are, duly authorized and validly issued and outstanding, fully paid and
nonassessable. Except for the outstanding shares of the Common Stock and the
Buyer Preferred Stock, as of the date hereof, there are no shares of capital
stock or other equity securities of Buyer outstanding. The shares of Common
Stock have not been issued in violation of, and none of the shares of Common
Stock is subject to any preemptive or subscription rights. As of the date
hereof, except as set forth on SCHEDULE 4.5(A) and except for the Buyer Rights
and the Buyer Preferred Stock, there are no outstanding warrants, options,
"phantom" stock rights, agreements, convertible or exchangeable securities or
other commitments (other than this Agreement) pursuant to which Buyer is or may
become obligated to issue, sell, purchase, return or redeem any shares of
capital stock or other securities of Buyer, and no equity securities of Buyer
are reserved for issuance for any purpose. Other than this Agreement and except
as set forth on SCHEDULE 4.5(A), the shares of Common Stock are not subject to
any voting trust agreement or other contract, agreement, arrangement, commitment
or understanding, including any such agreement, arrangement, commitment or
understanding restricting or otherwise relating to the voting, registration,
dividend rights or disposition of the shares of Common Stock or any other
securities exchangeable or exercisable for or convertible into Common Stock or
any other capital stock of Buyer.
(b) The Common Stock constitutes the only class of equity securities or
Buyer or its subsidiaries registered or required to be registered under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT").
Section 4.6. SEC REPORTS; FINANCIAL STATEMENTS.
(a) Buyer has filed all required forms, reports and documents required
to be filed by it ("BUYER SEC REPORTS") with the Securities and Exchange
Commission ("SEC"), each of which has complied as to form in all material
respects with all applicable requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), and the Exchange Act, each as in effect on the
dates such forms, reports and documents
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were filed. None of the Buyer SEC Reports contained, as of their respective
dates (or, if amended or superseded by a filing prior to the date of this
Agreement or the Closing Date, as of the date of such filing), any untrue
statement of a material fact or omitted to state a material fact required to be
stated or incorporated by reference therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements of Buyer included
in the Buyer SEC Reports were prepared in accordance with generally accepted
accounting principles ("GAAP") and present fairly the consolidated financial
position of Buyer and its consolidated subsidiaries as of the dates thereof and
their consolidated results of operations and changes in financial position for
the periods then ended.
(b) Buyer has heretofore made available or promptly will make available
to Seller a complete and correct copy of any amendments or modifications to any
Buyer SEC Reports that are required to be filed with the SEC but have not yet
been filed with SEC.
Section 4.7. ABSENCE OF CHANGES OR EVENTS. Except as disclosed in the
Buyer SEC Reports or on SCHEDULE 4.7 hereto, since December 31, 1998, no event
or circumstance has occurred that has had, or is reasonably likely to have, a
material adverse effect on the business, assets, properties, liabilities,
financial condition or results of operations of Buyer and its subsidiaries taken
as a whole, other than events or circumstances relating to the economy in
general or the entertainment, media or Internet industry in general and not
specifically relating to Buyer. The parties hereto acknowledge and agree that if
the condition to Buyer's obligation to consummate the Acquisition set forth in
Section 7.1(vi) has not been satisfied as of the Closing Date and Buyer elects
to waive such condition and consummate the Acquisition, the failure of such
condition to be satisfied shall in no event be deemed to have, or be reasonably
likely to have, a material adverse effect on the business, assets, properties,
liabilities, financial condition or results of operations of Buyer and its
subsidiaries taken as a whole.
Section 4.8. BROKERS. No broker, finder or investment banker is
entitled to any brokerage fee, finder's fee or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Buyer.
ARTICLE V
COVENANTS OF SELLER AND SHAREHOLDER
Section 5.1. DELIVERY OF YEAR-END AUDITED FINANCIAL STATEMENTS.
(a) As soon as practicable and in any event not later than April 30,
1999, Seller shall deliver to Buyer (i) the audited balance sheets of Seller and
the notes thereto at each of December 31, 1997 and December 31, 1998, and the
audited statements of income, shareholders' equity and cash flows and the notes
thereto of Seller for the
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years ended December 31, 1997 and December 31, 1998 (collectively, the "AUDITED
FINANCIAL STATEMENTS"), which shall be prepared by Reynolds & Rowella in
accordance with GAAP and (ii) the unaudited balance sheets of Seller and the
notes thereto at December 31, 1996, and the unaudited statements of income,
shareholders' equity and cash flows and the notes thereto of Seller for the year
ended December 31, 1996 (collectively, the "UNAUDITED FINANCIAL STATEMENTS" and,
together with the Audited Financial Statements, the "FINANCIAL STATEMENTS"),
which shall be prepared by Seller in accordance with GAAP. The Financial
Statements shall, in the opinion of the management of Seller, include all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of Seller's financial position and the results of its operations
and cash flows as of the dates thereof and for the periods covered thereby. The
financial statements delivered pursuant to this Section 5.1 shall be accompanied
by (i) a certificate of the president and the chief financial officer of Seller
confirming that such financial statements have been prepared as described above
and containing the additional representations and certifications set forth on
EXHIBIT A and (ii) a written statement of Reynolds & Rowella consenting to the
inclusion by Buyer of the Audited Financial Statements in any report or other
document filed by Buyer with the SEC.
(b) Seller shall cause to be made available to Buyer, simultaneously
with the delivery of the Audited Financial Statements, the work papers (the
"WORK PAPERS") of Reynolds & Rowella or any other accountants with respect to
the audits performed of the Audited Financial Statements and any special
memoranda or correspondence prepared in connection with the same in order that
Buyer may make such reasonable review, examination and investigation of the
business of Seller as Buyer may reasonable desire.
(c) Buyer shall have ten (10) days from the date the Financial
Statements are delivered and the Work Papers are made available to Buyer to
review the Financial Statements. If the Financial Statements are not
satisfactory to Buyer in its discretion, Buyer shall provide written notice to
Seller to such effect and shall have the right to terminate this Agreement;
PROVIDED, HOWEVER, that if Buyer does not, within such ten (10) day period,
provide such written notice to Seller, the Financial Statements shall be deemed
to be acceptable to Buyer and Buyer shall have no further rights to terminate
the Agreement pursuant to this Section 5.1(c).
Section 5.2. ACCESS TO INFORMATION. From the date of this Agreement
until the Closing Date, Seller shall permit Buyer and its representatives,
including, without limitation, its legal counsel and accountants, to conduct an
appropriate due diligence examination and investigation with respect to Seller.
Seller will reasonably cooperate with Buyer's diligence, and such cooperation
will include, without limitation, the following:
(i) providing Buyer and its representatives with reasonable
access to all data, records and other information that they may request
in connection with their evaluation of the transactions contemplated by
this
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Agreement (including, without limitation, lists of contact persons,
marketing information, and records of negotiations with existing and
prospective customers);
(ii) allowing Buyer and its representatives to conduct a
complete business, financial and legal review of all aspects of Seller;
(iii) affording Buyer and its representatives the opportunity
to discuss the affairs, finances, operations and accounts of Seller
with Seller's officers, directors, agents and other appropriate
personnel;
(iv) facilitating conversations between Buyer and its
representatives and representatives of the other parties to the
Assigned Contracts; and
(v) delivering to Buyer a true, correct and complete copy of
each Assigned Contract not delivered to Buyer prior to the date of this
Agreement, including all amendments, modifications, supplements, side
letters or consents affecting the obligations of any party thereunder.
Section 5.3. EXCLUSIVITY. From the date of this Agreement until the
termination of this Agreement in accordance with its terms, neither Seller nor
the Shareholder shall, nor shall Seller permit its officers, directors,
employees, affiliates, representatives or agents to (including, without
limitation, investment bankers, financial advisors, attorneys, brokers and other
advisors) (collectively, the "REPRESENTATIVES"), directly or indirectly do any
of the following:
(i) discuss, negotiate, undertake, authorize, recommend,
propose or enter into, either as the proposed surviving, merged,
acquiring or acquired corporation, any transaction (an "ACQUISITION
TRANSACTION") involving any disposition or other change of ownership or
control of a substantial portion of Seller's stock or assets or any
assumption by Seller of substantial liabilities, including, without
limitation, any joint venture or partnership involving any of the
foregoing (other than the transaction contemplated in this Agreement);
(ii) facilitate, encourage, solicit or initiate or in any way
engage in discussions, negotiations or submissions of proposals or
offers in respect of an Acquisition Transaction (other than the
transaction contemplated in this Agreement);
(iii) furnish or cause to be furnished to any Person (other
than Buyer or its representatives) any information concerning the
business, operations, properties or assets of Seller in connection with
an Acquisition Transaction; or
(iv) otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt by any
other Person to do or seek any of the foregoing.
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Seller shall inform Buyer by telephone, within 24 hours, of Seller's receipt of
any proposal or bid (including the terms thereof and the Person making such
proposal or bid) in respect of any Acquisition Transaction other than the
transaction described in this Agreement. Seller shall, immediately upon
execution of this Agreement, instruct its Representatives to cease all further
activities with respect to the sale of Seller or Seller's assets, including,
without limitation, the dissemination of information.
Section 5.4. CONDUCT OF BUSINESS. (a) From the date of this Agreement
until the earlier of the Closing Date or the Termination Date (as defined in
Section 12.1 below) Seller:
(i) shall not modify or amend any Assigned Contract in any
material respect or assign, transfer or terminate any Assigned
Contract;
(ii) shall not enter into any agreement, contract or
arrangement with any person of the type included in the Assigned
Contracts, except for agreements, contracts or arrangements entered
into in the ordinary course of business, consistent with past practice,
and, in any event, shall not enter into any agreement, contract or
arrangement relating to online movie ticketing;
(iii) shall use its reasonable best efforts to preserve its
present relationships with Persons having business dealings with
Seller;
(iv) shall (A) maintain the books, accounts and records of
Seller in the ordinary course of business consistent with past
practices, (B) collect all trade accounts receivable and shall pay all
trade accounts payable in the ordinary course of business consistent
with past practices, and (C) comply in all material respects with all
contractual and other obligations applicable to the operations of
Seller;
(v) shall not subject any of the properties or assets (whether
tangible or intangible) of Seller to any Lien other than liens arising
by operation of law in the ordinary course of business and liens
arising under equipment leases entered into in the ordinary course of
business;
(vi) shall not incur any indebtedness for borrowed money;
(vii) shall not sell, assign, transfer, convey, lease or
otherwise dispose of any of the properties or assets of Seller except
for distributions of cash to the Shareholder;
(viii) shall not acquire any properties or assets except in
the ordinary course of business, consistent with past practice;
(ix) shall not cancel or compromise any debt or claim or waive
or release any right of Seller;
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(x) shall not grant any officer or employee of Seller any
increase in compensation or benefits or any rights to receive severance
payments or other benefits upon a termination of employment;
(xi) shall not terminate any officer or employee of Seller,
induce or attempt to induce any officer or employee of Seller to leave
the employ of Seller or in any way interfere adversely with the
relationship between any such employee and Seller;
(xii) shall not introduce any change with respect to the
operation of Seller; and
(xiii) shall operate only in the ordinary course of business.
The foregoing shall not restrict Seller from canceling any agreement not
included in the Assets.
(b) Each of the Seller Parties agrees that it shall not take any
action, and shall not permit any event to occur, that would cause Seller to
violate any of the covenants set forth in Section 5.4(a).
Section 5.5. PUBLIC ANNOUNCEMENTS; CONFIDENTIAL INFORMATION. Seller
agrees that it shall not issue any press release or make any public statement,
announcement or filing concerning this Agreement or any aspect of the
transactions contemplated hereby or otherwise furnish or make available to any
person any of the terms and conditions of this Agreement or any of the
transactions contemplated hereby or any information disclosed by Buyer in
connection herewith, except as may be required by applicable law or with the
prior written consent of Buyer. Seller agrees that it shall not issue any such
release or make any such statement, announcement or filing required by
applicable law except after prior consultation with Buyer.
Section 5.6. NO BREACH OF REPRESENTATIONS AND WARRANTIES. Seller agrees
that it shall not take any action, and shall use its reasonable commercial
efforts not to permit any event to occur, which would result in any of the
representations and warranties of Seller contained in this Agreement (including
EXHIBIT A hereto) not being true and correct in any material respect on and as
of the Closing Date with the same force and effect as if such representations
and warranties had been made on and as of the Closing Date.
Section 5.7. UPDATING INFORMATION. Seller shall promptly deliver to
Buyer any information concerning events subsequent to the date of this Agreement
which is necessary to supplement the representations and warranties contained
herein (including in EXHIBIT A hereto), including the Schedules hereto, or the
information delivered by Seller pursuant to any of the covenants contained
herein, in order that such representations and warranties (including such
Schedules) or the information so delivered be complete and accurate in all
material respects, it being understood and agreed that the delivery of such
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information shall not in any manner constitute a waiver by Buyer of any of the
conditions precedent to the Closing hereunder, including, without limitation,
the conditions contained in Section 7.1. To the extent that, notwithstanding the
delivery of such information, Buyer decides to waive any part of the condition
set forth in 7.1(i) and close the Acquisition, the written information provided
pursuant to this Section 5.7 will be deemed to have amended the Schedules
hereto, to have qualified the representations and warranties contained in
Articles III and III-A above, and to have cured any misrepresentation or breach
of warranty that otherwise might have existed hereunder by reason of the
delivery of such information except, in each case, to the extent Seller or
either of the Seller Parties had actual knowledge of such information on the
date of this Agreement.
Section 5.8. RESTRICTIONS ON TRANSFER OF STOCK CONSIDERATION. (a)
Seller and the Shareholder shall not, directly or indirectly, sell, transfer any
beneficial interest in, pledge, hypothecate or otherwise dispose, or offer to
sell, transfer any beneficial interest in, pledge, hypothecate or otherwise
dispose (collectively, "TRANSFER"), any shares of Common Stock constituting the
Stock Consideration during the 12-month period following the Closing Date.
Seller and the Shareholder shall not, individually or in the aggregate, Transfer
more than 10% of the shares of Common Stock issued as part of the Stock
Consideration on the Closing Date during any calendar quarter following the
one-year anniversary of the Closing Date; PROVIDED that if less than 10% of the
shares of Common Stock issued as part of the Stock Consideration are Transferred
during any such calendar quarter, the number of shares that were eligible for
Transfer but were not Transferred may be sold in any subsequent quarter so long
as Seller and the Shareholder do not, in the aggregate, sell more than 20% of
the shares of Common Stock constituting the Stock Consideration during any
calendar quarter. Notwithstanding the foregoing, (i) Seller may distribute the
Stock Consideration to the Shareholder at any time, (ii) the Shareholder may
pledge the Stock Consideration to the Buyer pursuant to the Tax Loan Pledge
Agreement (as defined in Section 6.5) and the Indemnification Pledge Agreement
(as defined in Section 6.3) and (iii) at any time after December 31, 2000,
Shareholder may give any portion of the Stock Consideration that is not then
pledged under either the Tax Loan Pledge Agreement or the Indemnification Pledge
Agreement to any member of his immediate family; PROVIDED that thereafter the
restriction on Transfer of more than 10% of the shares of Common Stock during
any calendar quarter described above shall apply to Transfers by the Shareholder
and by such family member on an aggregate basis, and, prior to receiving any
shares of Common Stock from Shareholder, such family member shall agree in
writing, for the benefit of Buyer and in form and substance reasonably
satisfactory to Buyer, to be bound by such transfer restrictions.
(b) Notwithstanding anything to the contrary in this Section 5.8, this
Section 5.8 shall not restrict any Transfer in connection with a merger, stock
purchase, reorganization or other transaction pursuant to which shareholders of
Buyer generally have the opportunity to sell or exchange all or a portion of
their Common Stock. The restrictions on Transfer in this Section 5.8 shall in
any event expire on the fourth anniversary of the Closing Date.
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Section 5.9. EMPLOYMENT AGREEMENT. At the Closing, Shareholder shall
enter into an employment agreement with Buyer on the terms set forth in EXHIBIT
D hereto and otherwise reasonably satisfactory to Shareholder and Buyer.
Section 5.10. BULK SALES LAW COMPLIANCE. Following the execution of
this Agreement, Seller and Buyer shall cooperate to take all action necessary to
permit Buyer to comply with all applicable bulk sales or bulk transfer or
similar laws, including under applicable Tax laws (collectively "BULK SALES
LAWS"). Seller shall promptly provide Buyer with copies of any and all notices
or other documents or correspondence that it receives from any Government Body
or other Person relating to the bulk sales process. In the event of any
objection or dispute by any creditor or taxing authority relating to any such
bulk sales notice, Seller shall take all action reasonably necessary to
eliminate such objection or dispute (PROVIDED, HOWEVER, that the foregoing shall
not be deemed to prevent Seller from contesting any such dispute in good faith).
Section 5.11. INDEMNIFICATION PLEDGE AGREEMENT, ESCROW AGREEMENT. At
the Closing, (i) to the extent any of the Consideration consists of Stock
Consideration, Shareholder shall enter into an indemnification pledge agreement,
substantially in the form of EXHIBIT C hereto (the "INDEMNIFICATION PLEDGE
AGREEMENT") with Buyer or (ii) to the extent all of the Consideration consists
of Cash Consideration, Seller and Shareholder shall enter into an escrow
agreement with Buyer providing for the deposit into escrow of $1,000,000 of the
Consideration on the Closing Date, which escrow agreement shall contain terms
comparable to those in the Indemnification Pledge Agreement and shall otherwise
be reasonably satisfactory to Buyer, Seller and Shareholder (the "ESCROW
AGREEMENT").
Section 5.12. CONSENTS. Seller shall use its diligent, good faith
efforts to obtain, at the earliest practicable date, all consents and approvals
required to consummate the transactions contemplated by this Agreement.
Section 5.13. FURTHER ACTIONS. Seller agrees to execute and deliver
such instruments and promptly take such other actions as may reasonably be
required to consummate the transactions contemplated hereby in accordance with
the terms hereof.
ARTICLE VI
COVENANTS OF BUYER
Section 6.1. NO BREACH OF REPRESENTATIONS AND WARRANTIES. Buyer agrees
that it shall not take any action, and shall use its reasonable commercial
efforts not to permit any event to occur, which would result in any of the
representations and warranties of Buyer contained in this Agreement not being
true and correct in any material respect on and as of the Closing Date with the
same force and effect as if such representations and warranties had been made on
and as of the Closing Date.
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Section 6.2. CONFIDENTIALITY. Buyer agrees that until the Closing Date,
it shall not disclose or use, and it shall cause its Representatives not to
disclose or use, any Confidential Information (as defined below) with respect to
Seller furnished, or to be furnished, by Seller or its Representatives to Buyer
or its Representatives in connection with the transactions contemplated hereby
and the due diligence investigation performed by Buyer and its Representatives
other than in connection with its evaluation and consummation of the
transactions contemplated hereby; PROVIDED, HOWEVER, that disclosure of such
information may be made (i) to Representatives of Buyer, (ii) to the extent the
same shall be or shall have otherwise become publicly available other than as a
result of a disclosure by Buyer or its Representatives, (iii) to the extent
required to be disclosed by law or during the course of or in connection with
any litigation or other proceeding, (iv) to the extent it is obtained by Buyer
from a source other than Seller or its Representatives, provided that such
source was not then bound by a duty of confidentiality to Seller or another
party with respect to the information, (v) to the extent required to be
disclosed by Buyer in filings with the Securities and Exchange Commission or
(vi) with the written consent of Seller. As used herein, "CONFIDENTIAL
INFORMATION" means any information relating to Seller provided to Buyer or its
Representatives by Seller or its Representatives. If this Agreement is
terminated pursuant to Section 12.1 hereto, Buyer shall promptly return to
Seller all Confidential Information in its possession.
Section 6.3. NON-COMPETITION AGREEMENT; INDEMNIFICATION PLEDGE
AGREEMENT; ESCROW AGREEMENT. At the Closing, Buyer shall enter into (i) a
non-competition agreement, substantially in the form of EXHIBIT B hereto (the
"NON-COMPETITION AGREEMENT"), with Seller and the Seller Parties, (ii) to the
extent any of the Consideration consists of Stock Consideration, the
Indemnification Pledge Agreement with the Shareholder and (iii) to the extent
all of the Consideration consists of Cash Consideration, the Escrow Agreement
with Seller and the Shareholder.
Section 6.4. EMPLOYMENT AGREEMENT. At the Closing, Buyer shall enter
into an employment agreement with Shareholder containing the terms set forth in
EXHIBIT D hereto and otherwise reasonably satisfactory to Shareholder and Buyer.
Section 6.5. TAX LOAN. Within 30 business days prior to the due date
thereof, Shareholder shall reasonably determine the amount of federal, state and
local income taxes payable by him in respect of the Stock Consideration, if any,
received by the Seller at the Closing (the "LOAN AMOUNT"), and shall provide
Buyer with written notice of the Loan Amount, accompanied by a computation of
such amount in reasonable detail. So long as no amount is due and owing by
Seller or the Seller Parties to Buyer under Article XI hereof, upon delivery by
the Shareholder of a promissory note, in the form attached hereto as EXHIBIT E
(the "NOTE"), in favor of Buyer for an amount equal to the Loan Amount, and a
pledge agreement, in the form attached hereto as EXHIBIT F (the "TAX LOAN PLEDGE
AGREEMENT"), Buyer shall, no later than one business day prior to the due date
of such taxes, loan an amount equal to the Loan Amount to the Shareholder on the
terms set forth in the Note and the Tax Loan Pledge Agreement. The Loan Amount
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shall in no event exceed the product of (i) 0.24 and (ii) the closing sale price
of the Common Stock on the Closing Date as reported by the Nasdaq Stock Market,
Inc.
Section 6.6. EMPLOYEE MATTERS. Buyer shall, on or promptly after the
Closing Date, make an offer of employment to each of the employees of Seller
actively working for Seller at the time of the Closing (including those
employees on vacation at such time). Buyer shall offer such employees (i) a
salary equal to the salary paid to them by Seller immediately prior to the
Closing Date and (ii) employee benefits comparable to benefits offered to
similarly situated employees of Buyer.
Section 6.7. PUBLIC ANNOUNCEMENT. Prior to issuing any press release or
making any public statement, announcement or filing concerning this Agreement or
any aspect of the transactions contemplated hereby, Buyer shall furnish Seller
with a copy thereof and allow Seller a reasonable opportunity to consult with
Buyer with respect thereto.
Section 6.8. CONSENTS AND CONDITIONS. Buyer shall use its reasonable
efforts to assist Seller in causing each of the conditions precedent to the
obligations of Seller to be satisfied.
Section 6.9. FURTHER ACTIONS. Buyer agrees to execute and deliver such
instruments and take such other actions as may reasonably be required to
consummate the transactions contemplated hereby in accordance with the terms
hereof.
ARTICLE VII
CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS
Section 7.1. CONDITIONS. The obligation of Buyer to consummate the
Acquisition on the Closing Date is subject to the satisfaction of the following
conditions (any or all of which may be waived by Buyer, in its sole discretion,
in whole or in part, to the extent permitted by applicable law):
(i) each of the representations and warranties of Seller and
the Seller Parties contained herein that are not qualified as to
materiality shall be true and correct in all material respects and each
of the representations and warranties of Seller and the Seller Partner
that are so qualified shall be true and correct in all respects, in
each case, on and as of the Closing Date with the same force and effect
as though the same had been made on and as of the Closing Date;
(ii) Seller shall have performed and complied, in all material
respects, with the covenants and provisions of this Agreement required
to be performed or complied with by it between the date hereof and the
Closing Date;
(iii) since the date of this Agreement, no event or
circumstance shall have occurred that has had, or is reasonably likely
to have, a material
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adverse effect on the business, assets, properties, liabilities,
financial condition or results of operations of Seller taken as a whole
(a "MATERIAL ADVERSE EFFECT");
(iv) (A) no Legal Proceeding shall have been instituted or
threatened or claim or demand made against Seller or Buyer seeking to
restrain or prohibit or to obtain damages with respect to the
consummation of the transactions contemplated by this Agreement, or
which might, in the reasonable opinion of Buyer, result in a Material
Adverse Effect and (B) there shall not be in effect any Order of a
Government Body of competent jurisdiction restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated
by this Agreement;
(v) Buyer or Seller shall have received all third-party
consents and approvals referred to in SCHEDULE 3.10 and, except to the
extent the failure to obtain the same would not have a Material Adverse
Effect, all necessary governmental and regulatory approvals and all
other consents that Buyer may reasonably require with respect to its
assumption of any contracts, licenses, agreements, understandings and
other arrangements and instruments to which Seller is a party;
(vi) the closing shall have occurred under the Agreement and
Plan of Merger, dated as of January 10, 1999, by and among, Big
Entertainment, Inc., Hollywood Online Inc., The Times Mirror Company
and Big Acquisition Corp.;
(vii) Buyer shall not have obtained or discovered, in the
course of its due diligence review referred to in Section 5.2 above,
information concerning Seller or the Assets which, in the sole judgment
of Buyer, could materially adversely affect the business, assets,
financial condition or results of operations of Seller or Buyer
(provided that the condition set forth in this clause (vii) will lapse
on April 9, 1999);
(viii) Buyer shall have received an opinion of counsel for
Seller, dated the Closing Date, substantially in the form of EXHIBIT G
hereto;
(ix) Buyer shall have received a certificate to the effect set
forth in clauses (i) and (ii) above, dated the Closing Date and signed
by a duly authorized officer of Seller;
(x) Buyer shall have received a certificate of the Secretary
of Seller, dated the Closing Date, setting forth resolutions of the
Board of Directors and of the shareholders of Seller authorizing the
execution and delivery of this Agreement and each document and
instrument required to be executed and delivered by Seller hereunder
and the consummation of the transactions contemplated hereby and
thereby, and certifying that such resolutions were duly adopted and
have not been rescinded or amended as of the Closing Date;
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(xi) Seller and the Shareholder shall, to the extent required
by Section 5.10 hereto, have executed and delivered to Buyer the
Indemnification Pledge Agreement or the Escrow Agreement and Seller and
the Seller Parties shall have executed and delivered to Buyer the
Non-Competition Agreement;
(xii) Shareholder shall have entered into an employment
agreement with Buyer in accordance with Section 5.9 hereto;
(xiii) each of Seller, EDKS Associates, David Stonehill and
Elizabeth Stonehill shall have executed and delivered an Assignment
Agreement relating to the assignment to Seller by such other parties of
all rights that such parties may have in certain software used by
Seller, which Assignment Agreement shall be substantially in the form
of EXHIBIT J hereto.
(xiv) Buyer shall have received from Seller all information
reasonably requested by Buyer to enable Buyer to comply with all
applicable Bulk Sales Laws, and applicable notice periods specified in
any such Bulk Sales Laws shall have expired; and
(xv) Seller shall have executed and delivered to Buyer (A) all
documents to be delivered at the Closing in accordance with the terms
of this Agreement and (B) such other documents and instruments as Buyer
may reasonably request and which Seller can obtain with reasonable
commercial efforts in order to consummate the transactions contemplated
by this Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
Section 8.1. CONDITIONS. The obligation of Seller to consummate the
Acquisition on the Closing Date is subject to the satisfaction of the following
conditions (any or all of which may be waived by Seller, at the sole option of
Seller, in whole or in part to the extent permitted by applicable law):
(i) each of the representations and warranties of Buyer
contained herein shall be true and correct in all material respects on
and as of the Closing Date with the same force and effect as though the
same had been made on and as of the Closing Date;
(ii) Buyer shall have performed and complied, in all material
respects, with the covenants and provisions of this Agreement required
to be performed or complied with by it between the date hereof and the
Closing Date;
(iii) Seller shall have received the opinions of counsel for
Buyer, dated the Closing Date, substantially in the forms of EXHIBITS
H-1 AND H-2 hereto;
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(iv) Seller shall have received a certificate to the effect
set forth in clauses (i) and (ii) above, dated the Closing Date and
signed by a duly authorized officer of Buyer;
(v) Seller shall have received a certificate of the Secretary
of Buyer, dated the Closing Date, setting forth resolutions of the
Board of Directors of Buyer authorizing the execution and delivery of
this Agreement and each document and instrument required to be executed
and delivered by Buyer hereunder and the consummation of the
transactions contemplated hereby and thereby, and certifying that such
resolutions were duly adopted and have not been rescinded or amended as
of the Closing Date;
(vi) (A) no Legal Proceeding shall have been instituted
against Seller seeking to restrain or prohibit or to obtain damages
with respect to the consummation of the transactions contemplated by
this Agreement and (B) there shall not be in effect any Order of a
Government Body of competent jurisdiction restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated
by this Agreement;
(vii) Buyer shall have entered into an employment agreement
with Shareholder in accordance with Section 6.4;
(viii) since the date of this Agreement, no event or
circumstance shall have occurred that has had, or is reasonably likely
to have, a material adverse effect on the business, assets, properties,
liabilities, financial condition or results of operations of Buyer and
its subsidiaries taken as a whole (the parties hereto acknowledge and
agree that if the condition to Buyer's obligation to consummate the
Acquisition set forth in Section 7.1(vi) has not been satisfied as of
the Closing Date and Buyer elects to waive such condition and
consummate the Acquisition, the failure of such condition to be
satisfied shall in no event be deemed to have, or be reasonably likely
to have, a material adverse effect on the business, assets, properties,
liabilities, financial condition or results of operations of Buyer and
its subsidiaries taken as a whole); and
(ix) Buyer shall have executed and delivered to Seller (A) all
documents to be delivered at the Closing in accordance with the terms
of this Agreement and (B) such other documents and instruments as
Seller may reasonably request and which Buyer can obtain with
reasonable commercial efforts in order to consummate the transactions
contemplated by this Agreement.
ARTICLE IX
THE CLOSING
Section 9.1. CLOSING DATE. Except as hereinafter provided, the closing
of the transactions contemplated by this Agreement (the "CLOSING") shall take
place at the
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offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York at
10:00 a.m. on the third business day following the date on which each of the
conditions specified in Section 7.1 and Section 8.1 (other than those as to
which the parties agree will be satisfied at the Closing) of this Agreement has
been fulfilled (or waived by the party entitled to waive that condition) or at
such other time and place as Seller and Buyer may mutually agree in writing. The
date on which the Closing of the Acquisition occurs is referred to herein as the
"CLOSING DATE."
Section 9.2. PROCEEDINGS AT THE CLOSING. All proceedings to be taken
and all documents to be executed and delivered by Seller in connection with the
Closing shall be reasonably satisfactory in form and substance to Buyer and its
counsel. All proceedings to be taken and all documents to be executed and
delivered by Buyer in connection with the Closing shall be reasonably
satisfactory in form and substance to Seller and its counsel. All proceedings to
be taken and all documents to be executed and delivered by both parties at the
Closing shall be deemed to have been taken and executed simultaneously, and no
proceedings shall be deemed taken nor any documents executed or delivered until
all have been taken and delivered.
Section 9.3. DELIVERIES BY SELLER TO BUYER. At the Closing, Seller
shall deliver, or shall cause to be delivered, to Buyer the following:
(i) a bill of sale and assignment and assumption agreement in
the form of EXHIBIT I hereto (the "BILL OF SALE AND ASSIGNMENT AND
ASSUMPTION AGREEMENT"), duly executed by Seller;
(ii) all other assignments and other instruments or documents
as shall be reasonably necessary in the judgment of Buyer to evidence
the sale, assignment, transfer and conveyance by Seller to Buyer of the
Assets in accordance with the terms hereof, free and clear of all Liens
other than Permitted Liens;
(iii) copies of all approvals and consents referred to in
clause (v) of Section 7.1 above;
(iv) the opinion of counsel for Seller referred to in clause
(viii) of Section 7.1 above;
(v) the certificate, signed by a duly authorized officer of
Seller, referred to in clause (ix) of Section 7.1 above;
(vi) the certified resolutions of the Board of Directors and
shareholders of Seller referred to in clause (x) of Section 7.1 above;
(vii) the employment agreement referred to in clause (xii) of
Section 7.1 above;
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(viii) the Non-Competition Agreement duly executed by Seller
and the Seller Parties and, as applicable, the Indemnification Pledge
Agreement duly executed by the Shareholder or the Escrow Agreement duly
executed by the Seller and the Seller Parties;
(ix) an affidavit of Seller, in a form reasonably satisfactory
to Buyer, stating, under penalties of perjury, Seller's United States
taxpayer identification number and that Seller is not a foreign person
within the meaning of Section 1445(b)(2) of the Code; and
(x) a certificate of the Secretary of Seller attesting to the
incumbency and signature of each officer of Seller who shall execute
this Agreement or any other Seller Document.
Section 9.4. DELIVERIES BY BUYER TO SELLER. At the Closing, Buyer shall
deliver to Seller the following:
(i) the opinions of counsel for Buyer referred to in clause
(iii) of Section 8.1 above;
(ii) the certificate, signed by a duly authorized officer of
Buyer, referred to in clause (iv) of Section 8.1 above;
(iii) the employment agreement referred to in clause (vii) of
Section 8.1 above duly executed by Buyer;
(iv) the Non-Competition Agreement and, as applicable, the
Indemnification Pledge Agreement or the Escrow Agreement, each duly
executed by Buyer;
(v) the certified resolutions of the Board of Directors of
Buyer referred to in clause (v) of Section 8.1 above; and
(vi) a certificate of a duly authorized officer of Buyer
attesting to the incumbency and signature of each officer of Buyer who
shall execute this Agreement or any other Buyer Document.
ARTICLE X
ADDITIONAL POST-CLOSING COVENANTS
Section 10.1. FURTHER ASSURANCES.
(a) From time to time after the Closing Date, each of the parties
hereto will, at the request of any other party, execute and deliver such other
and further instruments of sale, assignment, assumption, transfer and conveyance
and take such other and further actions as such party may reasonably request in
order to make all the benefits
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of the Assigned Contracts and rights of Seller included in the Assets available
to Buyer, to provide for the assumption of the Assigned Contracts by Buyer, to
vest in Buyer and put Buyer in possession of the Assets, to transfer to Buyer
any contracts and rights of Seller relating to the Assets and to assure to Buyer
the benefits thereof and effectuate fully the purposes of this Agreement.
(b) With respect to any Assigned Contract which is not assumed by Buyer
at the Closing because a consent to assignment is required but not obtained
prior to the Closing, if Seller or Buyer shall thereafter obtain such consent to
assignment, then Seller and Buyer shall each execute and deliver such
instruments of assignment and assumption as may reasonably be required for
Seller to assign and Buyer to assume such Assigned Contract, subject to all the
terms and conditions of this Agreement as if such Assigned Contract had been
included in the Assets at the Closing.
Section 10.2. SELLER TO CHANGE NAME. On the Closing Date or as soon
thereafter as practicable (but in no event more than 5 business days
thereafter), Seller shall adopt (and shall make all appropriate filings so as to
adopt), and shall thereafter do business under, a new name which does not
contain the words "CinemaSource" or any variation thereof.
Section 10.3. PRESERVATION OF CORPORATE RECORDS. Seller shall preserve
and keep the Corporate Records for a period of seven years from the Closing Date
and shall make such Corporate Records and personnel, if any, of Seller available
to Buyer as Buyer may reasonably require (i) in connection with, among other
things, any insurance claims by, Legal Proceedings against or governmental
investigations of Buyer or (ii) in order to enable Buyer to comply with its
obligations under the Code, any other applicable statute with respect to
taxation, this Agreement and each other agreement, document or instrument
contemplated hereby. If Seller wishes to destroy such Corporate Records after
such seven year period, then Seller shall first give 90 days prior written
notice to Buyer and Buyer shall have the right at its option and expense, upon
prior written notice given to Seller within that 90 day period, to take
possession of the Corporate Records within 180 days after the date of such
notice.
Section 10.4. CONFIDENTIALITY. From and after the Closing Date, none of
Seller, any of its employees or the Seller Parties shall divulge, furnish or
make available to any person any knowledge or information with respect to the
Assets or Buyer (other than in the regular course and in furtherance of the
Buyer's business) which is, or which Seller or either of the Seller Parties is
advised or has reason to believe is, confidential (including, but not limited
to, information relating to any marketing, financial or personnel matters in
connection with the Assets).
ARTICLE XI
INDEMNIFICATION
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Section 11.1. INDEMNIFICATION.
(a) Each of Seller and the Seller Parties jointly and severally agrees
to indemnify and hold Buyer harmless from and against any and all losses,
liabilities, obligations, judgments, damages, deficiencies, costs, penalties and
expenses (including, without limitation, reasonable attorneys' fees and
expenses) (collectively, "LOSSES") based upon, attributable to or resulting
from:
(i) (A) any misrepresentation or breach of warranty on the
part of Seller or either of the Seller Parties under this Agreement,
any of the Seller Documents or any of the Shareholder Documents (other
than any employment or stock option agreement entered into by Buyer and
Shareholder) or (B) any breach of covenant or other agreement on the
part of Seller or either of the Seller Parties under this Agreement,
any of the Seller Documents or any of the Shareholder Documents (other
than any employment or stock option agreement entered into by Buyer and
Shareholder);
(ii) any Liabilities of Seller not expressly assumed by Buyer
under the terms of this Agreement, including, without limitation:
(A) any liabilities and obligations arising out of or
based upon the conduct of the business of Seller prior to the
Closing Date (other than obligations or liabilities that are
expressly assumed by Buyer under the terms of this Agreement);
(B) any claims for any injury to person or property
attributable to any services rendered by Seller prior to the
Closing Date, regardless of whether such claims are asserted
prior to or after the Closing;
(C) any claims by any employee or former employee of
Seller arising out of the employment or termination of
employment of the employee or former employee on or prior to
the Closing Date or as a result of the transactions
contemplated by this Agreement; and
(D) any third party claims with respect to
occurrences or events that occurred on or prior to the Closing
Date and relate to Seller, its employees or the Assets;
(iii) any liabilities and obligations, based in any way on
agreements, arrangements or understandings made by or on behalf of
Seller or the Seller Parties, for any brokerage fees, finder's fees,
commissions or like payments in respect of the transactions
contemplated by this Agreement;
(iv) any costs incurred by Buyer in connection with any claims
or disputes arising from the requirements of any applicable Bulk Sales
Laws, other than, with respect to any claim or dispute arising under
any commercial
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Bulk Sales Laws (but not any tax Bulk Sales Laws), any such claim or
dispute which arises or results solely as a result of Buyer's failure
to timely file any notice required thereunder (provided that Seller
shall have provided Buyer with the necessary information with respect
to such notice); and
(v) all actions, suits, proceedings, demands, assessments,
judgments, costs, penalties and expenses, including reasonable
attorneys' fees, incident to the foregoing.
(b) Buyer agrees to indemnify and hold Seller and the Seller Parties
harmless from and against any and all Losses attributable to or resulting from:
(i) (A) any misrepresentation or breach of warranty on the
part of Buyer under this Agreement or any of the Buyer Documents (other
than any employment or stock option agreement entered into by Buyer and
Shareholder) or (B) any breach of covenant or other agreement on the
part of Buyer under this Agreement or any of the Buyer Documents (other
than any employment or stock option agreement entered into by Buyer and
Shareholder);
(ii) any Assumed Liabilities;
(iii) to the extent Buyer is not indemnified with respect
thereto under Section 11.1(a), any claims that arise from Buyer's
ownership or operation of the Assets subsequent to the Closing Date,
including, without limitation, any claims by any employee or former
employee of Buyer arising out of the employment or termination of
employment of the employee or former employee subsequent to the Closing
Date or as a result of the transactions contemplated by this Agreement;
(iv) any liabilities and obligations, based in any way on
agreements, arrangements or understandings made by or on behalf of
Buyer, for any brokerage fees, finder's fees, commissions or like
payments in respect of the transactions contemplated by this Agreement;
and
(v) all actions, suits, proceedings, demands, assessments,
judgments, costs, penalties and expenses, including reasonable
attorneys' fees, incident to the foregoing.
Section 11.2. PROCEDURES FOR INDEMNIFICATION. (a) Whenever a claim
shall arise for indemnification under Section 11.1 above, with the exception of
claims for litigation expenses in respect of a litigation as to which a notice
of claim, as provided below in this Section 11.2, has previously been given,
which expenses shall be funded on an ongoing basis, the party entitled to
indemnification (the "INDEMNIFIED PARTY") shall promptly notify the party from
whom indemnification is sought (the "INDEMNIFYING PARTY") of such claim and,
when known, the facts constituting the basis for such claim; PROVIDED, HOWEVER,
that in the event of any claim for indemnification hereunder resulting
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from or in connection with any claim or Legal Proceeding by a third
party, the Indemnified Party shall give such notice thereof to the
Indemnifying Party not later than 10 business days prior to the time
any response to the asserted claim is required, if possible, and in any
event within 5 business days following receipt of notice thereof.
Notwithstanding anything in the preceding sentence to the contrary, the
failure of any Indemnified Party to so notify the Indemnifying Party
shall not relieve the Indemnifying Party from any liability for
indemnification it may have if and to the extent that the Indemnifying
Party shall not have been prejudiced by such omission. In the event of
any such claim for indemnification resulting from or in connection with
a claim or Legal Proceeding by a third party, the Indemnifying Party
may, at its sole cost and expense, assume the defense thereof with
counsel selected by the Indemnifying Party and reasonably satisfactory
to the Indemnified Party; PROVIDED, HOWEVER, that Seller shall not be
entitled to assume the defense of any claim or Legal Proceeding against
Buyer for Taxes with respect to a period ending after the Closing Date.
If an Indemnifying Party assumes the defense of any such claim or Legal
Proceeding, the Indemnifying Party shall be entitled to select counsel
and take all steps necessary in the defense thereof; PROVIDED, HOWEVER,
that no settlement shall be made without the prior written consent of
the Indemnified Party, which consent shall not be unreasonably withheld
(and if the Indemnified Party shall withhold its consent to any
monetary settlement proposed by the Indemnifying Party and which the
other party to the action has indicated it is prepared to accept, the
Indemnified Party shall in no event be deemed for purposes of this
Agreement, to have suffered Losses in connection with such claim or
proceeding in excess of the proposed amount of such settlement);
PROVIDED, FURTHER, that the Indemnified Party may, at its own expense,
participate in any such proceeding with the counsel of its choice
without any right of control thereof. So long as the Indemnifying Party
is in good faith defending such claim or Legal Proceeding, the
Indemnified Party shall not compromise or settle such claim without the
prior written consent of the Indemnifying Party, which consent shall
not be unreasonably withheld. If the Indemnifying Party does not assume
the defense of any such claim or Legal Proceeding in accordance with
the terms hereof, the Indemnified Party may defend (and, in the case of
any claim or Legal Proceeding against Buyer for Taxes with respect to a
period ending after the Closing Date, shall defend) against such claim
or Legal Proceeding in such manner as it may deem appropriate,
including, but not limited to, settling such claim or litigation (after
giving prior written notice of the same to the Indemnifying Party and
obtaining the prior written consent of the Indemnifying Party, which
consent shall not be unreasonably withheld) on such terms as the
Indemnified Party may deem appropriate, and the Indemnifying Party will
promptly indemnify the Indemnified Party in accordance with the
provisions of this Section 11.2; PROVIDED, HOWEVER, that if the
Indemnified Party does not obtain the prior written consent of the
Indemnifying Party to any such settlement, and such written consent is
not unreasonably withheld by the Indemnifying Party, the Indemnified
Party shall not be entitled to indemnification hereunder from such
Indemnifying Party with respect to the claim settled. The Indemnifying
Party shall be liable for the fees and expenses of counsel employed by
the Indemnified Party for any period during which the Indemnifying
Party has not assumed the defense thereof. Notwithstanding anything in
this Section 11.2 to the contrary, if, in any claim or Legal
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Proceeding with respect to which the Indemnified Party has given the
notice required under this Section 11.2, such Indemnified Party shall
have reasonably concluded, based upon the opinion of its outside legal
counsel, that there may be one or more legal defenses available to it
that are different from or additional to those available to the
Indemnifying Party, then (x) the Indemnified Party may participate in
any such proceeding with the counsel of its choice, the expense for
which shall be borne by the Indemnifying Party (but in no event shall
the Indemnifying Party be required to pay the fees and expenses of more
than one counsel employed by the Indemnified Party with respect to such
claim or proceeding) and (y) the Indemnifying Party shall not have the
right to direct the defense of any such action on behalf of the
Indemnified Party.
(b) Notwithstanding anything to the contrary set forth in this Article
XI, except with respect to any misrepresentation or breach of warranty set forth
in Section 3.12(d), Seller shall have no responsibility or obligation to
indemnify Buyer or defend, or hold Buyer harmless against any Losses, claims or
Legal Proceedings arising out of Seller's or Buyer's use, reuse, modification,
compilation, collection, reproduction, public display or performance, or
distribution of showtime data, radio programming data or musical event data.
Should Seller choose to litigate or otherwise defend against a claim or Legal
Proceeding relating to the foregoing in which Buyer is not a named party, in
accordance with the provisions set forth in this Article XI, Seller shall notify
Buyer and Buyer may, at its sole expense and cost, participate in the defense of
any such Legal Proceeding with the counsel of its choice. Should Buyer elect not
to participate in any such Legal Proceeding, Seller shall have no responsibility
to defend such issues and may compromise any such claims on terms favorable to
Seller, in Seller's sole discretion, without regard to the outcome of such
issues.
Section 11.3. DETERMINATION OF DAMAGES AND RELATED MATTERS. (a) For
purposes of indemnification under Section 11.1(a)(i)(A) and Section
11.1(b)(i)(A), any breach of any representation or warranty shall be deemed to
constitute a breach of such representation or warranty notwithstanding any
limitation or qualification as to materiality (or, in the case of the
representation and warranty set forth in Section 3.5, as to dollar amounts) set
forth in such representation or warranty on the scope, accuracy or completeness
thereto, it being the intention of the parties hereto that, except as provided
in Sections 11.3(b) and (c), each Indemnified Party shall be indemnified and
held harmless from and against any and all Losses arising out of or based upon
or with respect to the failure of any such representation or warranty to be
true, correct and complete in any respect.
(b) An Indemnifying Party shall not have any liability under Sections
11.1(a)(i)(A) and 11.1(b)(i)(A) unless the aggregate amount of Losses to the
Indemnified Party finally determined to arise thereunder exceeds $100,000, and
then only to the extent of such excess.
(c) In the absence of fraud or willful misconduct on the part of the
Indemnifying Party or any of its employees or agents, an Indemnifying Party
shall not have liability for Losses indemnifiable under Section 11.1(a) or
Section 11.1(b) in excess
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of $6,000,000 in the aggregate; PROVIDED, HOWEVER, that the foregoing cap shall
not apply to any Losses in respect of Taxes for which Seller and the Seller
Parties have indemnified Buyer under Section 11.1(a).
(d) Notwithstanding anything to the contrary set forth in this Article
XI, in the absence of fraud or willful misconduct, Pamela West's liability under
Section 11.1(a) shall in no event exceed the greater of (i) $1,000,000 and (ii)
the market value of any assets directly or indirectly transferred to Pamela West
by Brett West on or after the date hereof.
(e) The amount of any Losses for which indemnification is provided
under this Article XI shall be reduced by any amounts recovered or recoverable
by the Indemnified Party under any insurance policy with respect to such Losses.
(f) To the extent any payment under this Article XI is not treated as
an adjustment to the Consideration for Tax purposes, then an additional amount
shall be paid to the Indemnified Party to take into account any additional Tax
cost by reason of the receipt of any indemnity payment (including any payment
pursuant to this paragraph). Any payment to an Indemnified Party pursuant to
this Article XI shall be reduced to take account of any net Tax benefit actually
realized by the Indemnified Party in respect of the taxable year in which such
Loss is incurred or paid and, with respect to a Tax benefit arising in a year
subsequent to the year in which the Loss is paid or incurred, the Indemnified
Party shall pay to the Indemnifying Party the amount of such Tax benefit
(including, as relevant, any member of its affiliated group as determined for
Tax purposes) when such Tax benefit is actually realized. In computing the
amount of any such Tax cost or Tax benefit, the Indemnified Party shall be
deemed to recognize all other items of income, gain, loss, deduction or credit
before recognizing any item arising from the receipt of any indemnity payment
hereunder or the incurrence or payment of any indemnified loss, liability,
claim, damage or expense.
(g) Until it is no longer possible in law or fact for the Indemnified
Party to sustain Losses by reason of any breach hereof or to assert a claim with
respect to any such breach or Losses, except as otherwise provided herein, the
indemnification provisions of this Article XI shall survive.
Section 11.4. PAYMENTS TO INDEMNIFIED PARTY. All payments by the
Indemnifying Party pursuant to this Article XI shall be paid in full in cash in
immediately available funds; PROVIDED, HOWEVER, that to the extent that any of
the Consideration consists of Stock Consideration, Seller and the Seller Parties
may elect to pay any amount payable by them as an Indemnifying Party
fifty-percent (50%) in cash in immediately available funds and fifty-percent
(50%) in Common Stock of Buyer. For purposes of the preceding sentence, the
Common Stock shall be valued at $10.50 per share (as adjusted to reflect any
subdivision, stock split, stock dividend or similar event after the date hereof
with respect to the Common Stock). Notwithstanding the foregoing, Seller and the
Seller Parties shall not, without the written consent of Buyer, be permitted to
make payments to Buyer pursuant to this Article XI to the extent such cash
payments would cause the net
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Stock Consideration (taking into account all payments by Seller or the Seller
Parties pursuant to this Article XI) paid by Buyer hereunder to equal or exceed
70% of the net Consideration (taking into account all payments by Seller or the
Seller Parties pursuant to this Article XI) paid by Buyer hereunder. For
purposes of the preceding sentence only, the Stock Consideration shall be valued
based upon the closing sale price of the Common Stock on the Closing Date as
reported by the Nasdaq Stock Market, Inc. Seller and the Seller Parties shall,
in lieu of making cash payments that would violate the above provisions (it
being understood that if Buyer consents to such cash payments, the above
provisions will not be violated), make such payments by delivery of a number of
shares of Common Stock of Buyer equal to the quotient of (i) the cash amount
otherwise payable by Seller and the Seller Parties and (ii) the closing sale
price of the Common Stock on the trading day immediately before such payments
are made as reported by the Nasdaq Stock Market, Inc.
Section 11.5. EXCLUSIVE REMEDY. The remedies set forth in this Article
XI shall be the exclusive remedies for Buyer, Seller and the Seller Parties with
respect to any Loss for which indemnification is provided to such party
hereunder but shall not preclude any assertion by Buyer, Seller or the Seller
Parties, as the case may be, of any causes of action for (i) fraud or willful
misconduct or (ii) specific performance in situations in which only equitable
relief would be suitable to address the injury or potential injury. Nothing in
this Article XI shall limit the remedies available to an Indemnified Party to
enforce its right to indemnification.
ARTICLE XII
TERMINATION
Section 12.1. TERMINATION. This Agreement may be terminated (i) by the
written agreement of Seller and Buyer, (ii) by either Seller or Buyer by written
notice to the other given after the date that is 180 days after the date of this
Agreement if the Closing shall not have occurred on or before such date;
PROVIDED, that no party shall have the right to terminate this Agreement
pursuant to this clause (ii) to the extent such party's failure to fulfill its
obligations under this Agreement is the cause of, or results in, the failure to
satisfy any of the conditions to the consummation of the Acquisition set forth
in Article VII or VIII, (iii) by Buyer in accordance with the provisions of
Section 5.1, (iv) by Buyer upon written notice given to Seller on or before
April 9, 1999 if, in the course of the due diligence review referred to in
Section 5.2, Buyer obtains or discovers information concerning Seller or the
Assets, which, in the sole judgment of Buyer, could materially adversely affect
the business, assets, financial condition or results of operations of Seller or
Buyer (unless, within 10 days after delivery by Buyer of such notice, Seller is
able to satisfy Buyer (which shall act reasonably and in good faith) that the
event, occurrence, fact or situation discovered or obtained by Buyer has been
cured and could not materially adversely affect the business, assets, financial
condition or results of operations of Seller or Buyer), and (v) by Buyer upon
written notice to Seller that the condition set forth in Section 7.1(vi) is not
reasonably likely to be satisfied;
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PROVIDED, HOWEVER, that, in each case, such termination shall have no effect
upon the agreements and obligations set forth in Section 13.5 and Sections 5.5
and 6.2 above. The date of any such termination is referred to herein as the
"TERMINATION DATE."
Section 12.2. LIABILITIES AFTER TERMINATION. Upon any termination of
this Agreement pursuant to Section 12.1 above, no party hereto shall thereafter
have any further liability or obligation hereunder; PROVIDED, HOWEVER, that no
such termination shall relieve any party hereto of any liability for any breach
of this Agreement prior to the date of such termination and PROVIDED, FURTHER,
that Seller shall remain bound by Section 5.5 above, Buyer shall remain bound by
Section 6.2 above, and each of Seller and Buyer shall remain bound by Section
13.5 below.
ARTICLE XIII
MISCELLANEOUS
Section 13.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a) Seller,
the Seller Parties and Buyer hereby agree that the representations and
warranties contained in this Agreement, as supplemented or modified by any
amendments to the Schedules hereto made on or prior to the Closing Date, shall
survive the execution and delivery of this Agreement and shall further survive
the Closing hereunder until the close of business on December 31, 2000,
regardless of any investigation made by the parties hereto; PROVIDED, HOWEVER,
that the representations and warranties contained in Sections 3.2, 3A.1 and 4.2
shall survive indefinitely and the representations and warranties contained in
Section 3.13 shall survive for the applicable statute of limitations plus 90
days. Notwithstanding the foregoing, the obligations of the parties to indemnify
and hold harmless any other party pursuant to Article XI for any
misrepresentation or breach of warranty shall not terminate with respect to any
item as to which the party to be indemnified shall have, before the expiration
of the applicable representation and warranty, previously made a claim by
delivering a notice pursuant to Section 11.2 (stating in reasonable detail the
basis of the claim) to the party to be providing the indemnification.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if Buyer elects to deliver all of the Consideration in the form of
Cash Consideration, then immediately prior to the Closing Date, the
representations and warranties contained in Sections 4.5, 4.6 and 4.7 shall
terminate and shall be deemed not to have been made by Buyer for any and all
purposes of this Agreement and the transactions contemplated hereby.
Section 13.2. ENTIRE AGREEMENT. This Agreement (with its Schedules and
Exhibits) contains, and is intended as, a complete statement of, all of the
terms and the arrangements between the parties hereto with respect to the
matters provided for herein, and supersedes any previous agreements and
understandings among the parties hereto with respect to those matters.
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Section 13.3. GOVERNING LAW; CONSTRUCTION. This Agreement and all
agreements related thereto shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts to be made, executed,
delivered and performed wholly in such state, but without regard to conflicts of
law principles of such state. The table of contents, captions and headings in
this Agreement are for reference purposes only and shall be given no effect in
the construction and interpretation of this Agreement. No provision of this
Agreement shall be construed against either party because such party drafted or
caused to be drafted such provision. Each provision of this Agreement shall be
construed as if such provision were proposed by both Buyer and Seller.
Section 13.4. TRANSFER TAXES. Seller shall pay when due (i) all
transfer and documentary taxes and fees imposed with respect to instruments of
conveyance in the transactions contemplated hereby and (ii) all sales, use and
other transfer or similar taxes on the transfer of the Assets contemplated
hereby. Buyer shall execute and deliver to Seller at the Closing any
certificates or other documents as Seller may reasonably request to perfect any
exemption from any such transfer, documentary, sales or use tax.
Section 13.5. EXPENSES. Each of Buyer, Seller and the Seller Parties
shall bear its own expenses (including, without limitation, all fees and
expenses of financial institutions, accountants, legal counsel, brokers,
investment bankers and other advisors), incurred in connection with the
negotiation, preparation, execution, review, delivery and performance of this
Agreement, each of the other documents and instruments executed in connection
with or contemplated by this Agreement or related hereto, and the consummation
of the transactions contemplated hereby and thereby.
Section 13.6. NOTICES. Any notice, request, instruction or other
communication to be given under this Agreement or otherwise in connection with
the Acquisition shall be in writing and shall be delivered by hand or prepaid
telecopy, or sent, postage prepaid, by registered, certified or express mail, or
reputable overnight courier service and shall be deemed given when so delivered
by hand or telecopied, or if mailed, three days after mailing (one business day
in the case of express mail or overnight courier service) to a party at the
following address (or at such other address as such party may have specified by
notice given to the other party pursuant to this provision):
if to Seller or the Seller Parties at: Prior to the Closing Date:
CinemaSource, Inc.
641 Danbury Road
Ridgefield, CT 06877
Attention: Brett West and Pamela West
Telecopier No.: (203) 438-0043
After the Closing Date:
2 Lookout Point Drive
Ridgefield, CT 06877
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with a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Goodwin Square
225 Asylum Street
Hartford, CT 06103
Attention: Thomas Fairfield, Esq.
Telecopier No.: (860) 293-3555
and if to Buyer at: Big Entertainment, Inc.
2255 Glades Road
Suite 237W
Boca Raton, Florida 33431
Attention: Mitchell Rubenstein
Telecopier No.: (561) 998-2974
with a copy to: Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Howard Chatzinoff, Esq.
Telecopier No.: (212) 310-8007
Section 13.7. SEVERABILITY. If any provision of this Agreement, or the
application of such provision to Buyer, Seller, or any Person or circumstance,
shall be held invalid, then the remainder of this Agreement, or the application
of such provision to persons, entities or circumstances other than those as to
which it is held invalid, shall not be affected thereby.
Section 13.8. BINDING EFFECT; NO ASSIGNMENT.
(a) This Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and permitted assigns. Nothing in
this Agreement shall create or be deemed to create any third party beneficiary
rights in any Person not party to this Agreement. Except as expressly permitted
below, no assignment of this Agreement or of any rights or obligations hereunder
may be made by either party (by operation of law or otherwise) without the prior
written consent of the other party hereto and any attempted assignment without
such required consent shall be void.
(b) Prior to the Closing, Buyer may assign any and all of its rights
and obligations under this Agreement to any party, if Buyer directly and
unconditionally guarantees the obligations of such assignee under this
Agreement. After the Closing, Buyer may assign any or all of its rights and
obligations with respect to the Assets without the consent of Seller, provided
that Buyer shall cause its obligations to Seller under this Agreement in respect
of the Acquisition to be binding upon any successor to Buyer and Buyer shall
directly and unconditionally guarantee the obligations of such successor.
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<PAGE>
Section 13.9. AMENDMENTS. This Agreement may be amended, supplemented
or modified, and any provision hereof may be waived, only pursuant to a written
instrument making specific reference to this Agreement signed by each of the
parties hereto.
Section 13.10. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this instrument as
of the date and year first above written.
CINEMASOURCE, INC.
By:
------------------------------------------
Brett West
President
BIG ENTERTAINMENT, INC.
By:
------------------------------------------
Mitchell Rubenstein
Chairman of the Board and Chief
Executive Officer
The undersigned hereby acknowledges and agrees to be bound by the
provisions of Sections 1.4, 5.3, 5.4, 5.8, 5.9, 5.11, 6.5, 10.1(a) and 10.4 and
Articles III, III-A and XI of this Agreement, and, to the extent applicable,
Articles XII and XIII of this Agreement. The undersigned hereby acknowledges and
agrees to the terms set forth in EXHIBIT B and EXHIBIT C to this Agreement and
agrees to execute and deliver to Buyer at the Closing agreements in the forms of
such Exhibits.
---------------------------
Brett West
The undersigned hereby acknowledges and agrees to be bound by the
provisions of Sections 5.4, 10.1(a) and 10.4 and Articles III, III-A and XI of
this Agreement, and, to the extent applicable, Articles XII and XIII of this
Agreement. The undersigned hereby acknowledges and agrees to the terms set forth
in EXHIBIT B to this Agreement and agrees to execute and deliver to Buyer at the
Closing an agreement in the form of such Exhibit.
---------------------------
Pamela West
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EXHIBIT A
1. NO UNDISCLOSED LIABILITIES. As of the date such certificate is
delivered, except for liabilities set forth on Seller's balance sheet at
December 31, 1998 (or reflected in the notes thereto) and except for normal or
recurring liabilities incurred since such date in the ordinary course of
business and the contingent liabilities described in SCHEDULE 3.7 to the Asset
Purchase Agreement, Seller does not have any liabilities of any kind whatsoever,
either accrued, contingent or otherwise and whether due or to become due
(whether or not required to be reflected in financial statements pursuant to
generally accepted accounting principles).
<PAGE>
EXHIBIT B
FORM
OF
NON-COMPETITION AGREEMENT
This Non-Competition Agreement (this "Agreement") is entered into as of
_________ __, 1999 by and among Big Entertainment, Inc., a Florida corporation
(the "Company"), CinemaSource, Inc., a Connecticut corporation ("CinemaSource")
and each of Brett West and Pamela West (together, the "Executives").
RECITALS
WHEREAS, the Company, CinemaSource and the Executives are parties to
that certain Asset Purchase Agreement, dated as of March __, 1999 (the "Purchase
Agreement"), providing for the purchase by the Company of substantially all of
the assets of CinemaSource;
WHEREAS, Brett West is the President and sole shareholder of
CinemaSource and serves as a director of CinemaSource, and Pamela West is the
Treasurer and the Secretary of CinemaSource and serves as a director of
CinemaSource;
WHEREAS, the Company and the Executives wish to provide for and
acknowledge certain arrangements and understandings following the closing of the
transactions contemplated by the Purchase Agreement; and
WHEREAS, the closing of the transactions contemplated by the Purchase
Agreement is conditioned upon the execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Capitalized terms used but not otherwise defined
herein shall have the meanings assigned thereto in the Purchase Agreement. As
used in this Agreement, the following terms shall have the respective meanings
set forth in this Section 1:
"Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in New York, New York are authorized or required by
law to close.
"Competing Business" means (i) Premier Datavision, Inc.,
____________________, (ii) any other business, enterprise or venture that
competed with CinemaSource on the date of the Purchase Agreement or the Closing
Date or that is engaged in any business, enterprise or venture conducted by the
business that constitutes the Assets, (iii) any other business, enterprise or
venture that is engaged anywhere in North America in the compilation,
reproduction or distribution of movie showtimes , movie dates, movie
descriptions or synopses, movie photos, movie trailers or any other movie or
theatre related information, or (iv) any other business, enterprise or venture
that is engaged anywhere in North America in the compilation, reproduction or
distribution of information related to radio programming or concerts or other
musical events.
<PAGE>
"Person" means any individual, business, trust, unincorporated
association, corporation, partnership, joint venture, limited liability company
or other entity of any kind.
"Proprietary Information" means all intellectual property rights, trade
secrets and other proprietary or confidential information related to the
business and operations of CinemaSource or the Assets (as defined in the
Purchase Agreement). The term "Proprietary Information" includes, by way of
example, matters of a technical nature, "know-how," computer programs (including
documentation of such programs), research projects, and matters of a business
nature, such as proprietary information about costs, profits, markets, sales,
lists of customers, and other information of a similar nature to the extent not
available to the public, and such materials constituting plans for future
development.
2. NON-SOLICITATION AND NON-INTERFERENCE. For a period of five (5)
years after the date of this Agreement, neither CinemaSource nor the Executives
shall (a) induce or attempt to induce any employee of the Company to leave the
employ of the Company or in any way interfere adversely with the relationship
between any such employee and the Company, (b) induce or attempt to induce any
employee of the Company to work for, render services or provide advice to or
supply Proprietary Information to any Person or (c) induce or attempt to induce
any customer, supplier, licensee, licensor, consultant or other business
relation of the Company to cease doing business with the Company or in any way
interfere with the relationship between any such customer, supplier, licensee,
licensor, consultant or other business relation and the Company.
3. INDIRECT SOLICITATION. For a period of five (5) years after the date
of this Agreement, neither CinemaSource nor the Executives shall, directly or
indirectly, induce, assist or encourage any Person in carrying out, directly or
indirectly, any activity that would be prohibited by the provisions of Section 2
if such activity were carried out by CinemaSource or either of the Executives,
either directly or indirectly; and, by way of example but not limitation,
neither CinemaSource nor the Executives shall, directly or indirectly, induce,
assist or encourage any employee of the Company to carry out, directly or
indirectly, any such activity.
4. COVENANT NOT TO COMPETE. For a period of five (5) years after the
date of this Agreement, neither CinemaSource nor the Executives shall, directly
or indirectly, have any interest in, own, manage, operate, control, be connected
with as a stockholder (other than as a stockholder of less than two percent (2%)
of the issued and outstanding stock of a company whose stock is listed on a
national securities exchange or quoted on The Nasdaq Stock Market), joint
venturer, officer, director, partner, employee or consultant, or otherwise
engage, be interested in, or invest or participate in any Competing Business.
5. PROPRIETARY INFORMATION. From and after the date of this Agreement,
neither CinemaSource nor the Executives shall (for the benefit of CinemaSource
or either of the Executives or for the benefit of any other Person) use or
disclose any Proprietary Information known to, or in the possession of, any of
them.
6. REPRESENTATIONS. Each Executive represents and warrants to the
Company that he or she is an officer and a director of CinemaSource, is actively
involved in the business of
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CinemaSource and will receive, directly or indirectly, substantial benefits from
the transactions contemplated by the Purchase Agreement.
7. SPECIFIC ENFORCEMENT. The parties hereto acknowledge and agree that
if any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached, irreparable damage would occur
and it would be extremely impracticable and difficult to measure damages.
Accordingly, in addition to any other rights and remedies to which the parties
may be entitled by law or equity, the parties shall be entitled to an injunction
or injunctions to prevent or cure breaches of the provisions of this agreement
and to enforce specifically the term and provisions hereof, and the parties
expressly waive (a) the defense that a remedy in damages will be adequate and
(b) any requirement, in an action for specific performance, for the posting of a
bond.
8. GOVERNING LAW. This Agreement shall be governed and construed in all
respects in accordance with the laws of the State of New York. The Company,
CinemaSource and the Executives each hereby consents to personal jurisdiction in
any action brought with respect to this Agreement and the transactions
contemplated hereby in the United States District Court for the Southern
District of New York or, if subject matter jurisdiction is unable to be obtained
in such court, in any state court in the City of New York in the State of New
York. The Company, CinemaSource and the Executives each also agrees that service
of process may be accomplished pursuant to the provisions of Section 11 hereof.
9. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
10. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the full
and entire understanding and agreement between the parties with regard to the
subjects hereof, and no party shall be liable or bound to any other party in any
manner with respect to such subjects by any warranties, representations or
covenants except as specifically set forth herein. Except as expressly provided
herein, neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
11. NOTICES, ETC. Unless otherwise provided, any notice, request,
demand or other communication required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given upon personal delivery
to the party to be notified, or when sent by telex or telecopier (with receipt
confirmed), or one Business Day following deposit with overnight courier or
three Business Days following deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed as follows (or at
such other address as a party may designate by notice to the other):
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<PAGE>
If to the Company:
Big Entertainment, Inc.
2255 Glades Road, #237W
Boca Raton, Florida 33431-7383
Attention: Chief Executive Officer
Facsimile: (561) 998-2970
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Howard Chatzinoff, Esq.
Facsimile: (212) 735-4989
If to CinemaSource or the Executives:
2 Lookout Point Dr.
Ridgefield, Connecticut 06877
Attention: Brett West and Pamela West
with a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Goodwin Square
225 Asylum Street
Hartford, CT 06103
Attention: Thomas Fairfield, Esq.
Facsimile: (860) 293-3555
SEVERABILITY. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, invalid, unenforceable or void, this Agreement shall continue in full
force and effect without said provision. It is the desire and intent of the
parties hereto that the restrictions set forth in Sections 2 through 5 of this
Agreement shall be enforced and adhered to in every particular, and in the event
that any provision, clause or phrase shall be declared by a court of competent
jurisdiction to be judicially unenforceable either in whole or in part whether
the fault be in duration, geographic coverage or scope of activities precluded -
the parties agree that they will mutually petition the court to sever or limit
the unenforceable provision so as to retain and effectuate to the greatest
extent legally permissible the intent of the parties as expressed in Sections 2
through 5 of this Agreement.
12. TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
13. FACSIMILE SIGNATURES. Any signature page delivered by a fax machine
or telecopy machine shall be binding to the same extent as an original signature
page, with regard to any
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<PAGE>
agreement subject to the terms hereof or any amendment thereto. Any party who
delivers such a signature page agrees to later deliver an original counterpart
to any party which requests it.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
The foregoing agreement is hereby executed as of the date first above
written.
BIG ENTERTAINMENT, INC.
By
------------------------------------------
Name: Mitchell Rubenstein
Title: Chairman of the Board and Chief
Executive Officer
CINEMASOURCE, INC.
By
------------------------------------------
Name: Brett West
Title: President
By:
------------------------------------------
Brett West
By:
------------------------------------------
Pamela West
5
<PAGE>
FORM
OF
INDEMNIFICATION PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of __________, 1999 (the
"Agreement"), made by Brett West (the "Pledgor") in favor of Big Entertainment,
Inc., a Florida corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company, CinemaSource, Inc. ("CinemaSource"),
Pledgor and Pamela West have entered into an Asset Purchase Agreement, dated as
of March __, 1999 (the "Purchase Agreement"), whereby the Company has agreed to
purchase, and CinemaSource has agreed to sell, substantially all of the assets
of CinemaSource;
WHEREAS, pursuant to the Purchase Agreement, the Company,
Pledgor and Pamela West have jointly and severally agreed to indemnify and hold
the Company harmless from certain losses, liabilities and obligations that may
arise in connection with the transactions contemplated by the Purchase
Agreement;
WHEREAS, Pledgor is the legal and beneficial owner of the
shares of Pledged Stock (as hereinafter defined) issued by the Company; and
WHEREAS, it is a condition precedent to the obligation of the
Company to close the transactions contemplated by the Purchase Agreement that
Pledgor shall have executed and delivered this Pledge Agreement to the Company.
NOW, THEREFORE, in consideration of the premises and to induce
the Company to close the transactions contemplated by the Purchase Agreement,
Pledgor hereby agrees with the Company, as follows:
1. DEFINED TERMS. (a) The following terms shall have the
following meanings:
"AGREEMENT": this Pledge Agreement, as the same may be
amended, modified or otherwise supplemented from time to time.
"BUSINESS DAY": any day other than a Saturday, Sunday or other
day on which commercial banks in New York, New York are authorized or required
by law to close.
"CODE": the Uniform Commercial Code from time to time in
effect in the State of New York.
"COLLATERAL": the Pledged Stock and all Proceeds.
<PAGE>
"COMMON STOCK": the common stock, $0.01 par value per share,
of the Company.
"EVENT OF DEFAULT": Pledgor's failure to pay any amount to the
Company in respect of the Obligations within ten (10) Business Days after
written notice is given to Pledgor by the Company specifying that, in the
reasonable judgment of the Company, such amount is due and owing by Pledgor to
the Company, provided, that the Company shall have provided notice to the extent
required by Article XI of the Purchase Agreement, and PROVIDED FURTHER, that if
Pledgor shall have contested any claim by the Company under Article XI of the
Purchase Agreement, no such claim shall constitute an Obligation hereunder
unless and until the Company shall have obtained a final judgment (not subject
to further appeal) from a court of competent jurisdiction and, in such event, an
Obligation shall be deemed to arise only to the extent provided in such
judgment.
"INDEMNITORS": each of CinemaSource, the Pledgor and Pamela
West.
"OBLIGATIONS": all obligations of the Indemnitors under
Article XI of the Purchase Agreement and all reasonable costs and expenses of
every kind incurred by the Company in respect of the enforcement of its rights
under the Purchase Agreement and this Agreement, including, without limitation,
reasonable attorneys' fees and disbursements of counsel to the Company.
"PERSON": any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"PLEDGED STOCK": the shares of Common Stock listed on Schedule
1 hereto, together with all stock certificates that may be issued or granted by
the Company to Pledgor as a dividend, distribution, option or right paid or
issued on the Common Stock without payment of any consideration by Pledgor while
this Agreement is in effect.
"PROCEEDS": all "proceeds" as such term is defined in Section
9-306(l) of the Code on the date hereof and, in any event, shall include,
without limitation, all dividends or other income from the Pledged Stock,
collections thereon or distributions with respect thereto.
(b) The words "hereof," "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section and
paragraph references are to this Agreement unless otherwise specified.
(c) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
2. PLEDGE; GRANT OF SECURITY INTEREST. Pledgor hereby delivers
to the Company all the Pledged Stock and hereby grants to the Company a first
security interest in the Collateral, as collateral security for the prompt and
complete payment and performance when due of the Obligations.
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<PAGE>
3. STOCK POWERS. Concurrently with the delivery to the Company
of each certificate representing one or more shares of Pledged Stock to the
Company, Pledgor shall deliver an undated stock power, in the form of Exhibit A
hereto, covering such certificate, duly executed in blank by Pledgor with, if
the Company so requests, signature guaranteed.
4. COVENANTS. Pledgor covenants and agrees with the Company
that, from and after the date of this Agreement until this Agreement is
terminated and the security interests created hereby are released:
(a) If Pledgor shall, solely as a result of its ownership of
the Pledged Stock and without payment of any consideration other than delivery
or exchange of certificates representing the Pledged Stock, become entitled to
receive or shall receive any stock certificate (including, without limitation,
any certificate representing a stock dividend or a distribution in connection
with any reclassification, increase or reduction of capital or any certificate
issued in connection with any reorganization), option or rights, whether in
addition to, in substitution of, as a conversion of, or in exchange for any
shares of the Pledged Stock, or otherwise in respect thereof, Pledgor shall
accept the same as the agent of the Company, hold the same in trust for the
Company, and deliver the same forthwith to the Company in the exact form
received, duly endorsed by Pledgor to the Company, if required, together with an
undated stock power, in the form of Exhibit A hereto, covering such certificate
duly executed in blank by Pledgor and with, if the Company so requests,
signature guaranteed, to be held by the Company, subject to the terms hereof, as
additional collateral security for the Obligations. Any such stock certificate
shall constitute Pledged Stock under this Agreement.
(b) Pledgor is subject to the restrictions on the transfer of
the Pledged Stock set forth in Section 5.8 of the Purchase Agreement. In
addition, without the prior written consent of the Company, Pledgor will not (1)
sell, assign, transfer, exchange or otherwise dispose of, or grant any option
with respect to, the Collateral, (2) create, incur or permit to exist any lien
or option in favor of, or any claim of any Person with respect to, any of the
Collateral, or any interest therein, except for the security interests created
by this Agreement or (3) enter into any agreement or undertaking restricting the
right or ability of Pledgor or the Company to sell, assign or transfer any of
the Collateral.
(c) Pledgor shall maintain the security interest created by
this Agreement as a first, perfected security interest and shall defend such
security interest against claims and demands of all Persons whomsoever. At any
time and from time to time, upon the written request of the Company, and at the
sole expense of Pledgor, Pledgor will promptly and duly execute and deliver such
further instruments and documents and take such further actions as the Company
may reasonably request for the purposes of obtaining or preserving the full
benefits of this Agreement and of the rights and powers herein granted. If any
amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note, other instrument or chattel paper, such
note, instrument or chattel paper shall be immediately delivered to the Company,
duly endorsed in a manner satisfactory to the Company, to be held as Collateral
pursuant to this Agreement.
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<PAGE>
(d) Pledgor shall pay, and save the Company harmless from, any
and all liabilities with respect to, or resulting from any delay in paying, any
and all stamp, excise, sales or other taxes which may be payable or determined
to be payable with respect to any of the Collateral or in connection with any of
the transactions contemplated by this Agreement.
5. CASH DIVIDENDS; VOTING RIGHTS. Unless an Event of Default
shall have occurred and be continuing, Pledgor shall be permitted to receive all
cash dividends paid in respect of the Pledged Stock and to exercise all voting
and corporate rights with respect to the Pledged Stock.
6. REMEDIES. (a) The Company and Pledgor hereby agree that the
Pledged Stock shall be deemed to have a value of $10.50 per share (the "Stated
Value") for purposes of this Agreement regardless of the market value of the
Pledged Stock from time to time. The Stated Value of the Pledged Stock shall be
adjusted from time to time to reflect any subdivision, stock split, stock
dividend or similar event after the date hereof with respect to the Common
Stock.
(b) Subject to Pledgor's rights to sell the Pledged Stock
under Section 8(b) hereof, if an Event of Default shall have occurred and be
continuing, the Company may at any time, without further demand of performance
or other demand, presentment, protest, advertisement or notice of any kind to or
upon Pledgor or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived) transfer and assign to and upon
itself a number of shares of the Pledged Stock (rounded to the nearest whole
number) equal to the quotient of (i) the amount determined in the reasonable
judgment of the Company to be due and owing by Pledgor to the Company in respect
of the Obligations and (ii) the Stated Value. Such transfer and assignment shall
be deemed to be a payment of the Obligations in an amount equal to the product
of (i) the number of shares of Pledged Stock transferred and assigned and (ii)
the Stated Value. If such payment is not sufficient to pay the Obligations in
full, the Pledgor and the other Indemnitors shall remain liable for any
deficiency. The Company shall not be required to account for any surplus to the
Pledgor in the event that the market value of shares of the Pledged Stock
exceeds the Stated Value at any time. To the extent permitted by applicable law,
Pledgor waives all claims, damages and demands it may acquire against the
Company arising out of the exercise by the Company of any rights hereunder.
7. EXECUTION OF FINANCING STATEMENTS. Pursuant to Section
9-402 of the Code, Pledgor authorizes the Company to file financing statements
with respect to the Collateral without the signature of Pledgor in such form and
in such filing offices as the Company reasonably determines appropriate to
perfect the security interests of the Company under this Agreement. A carbon,
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement for filing in any jurisdiction.
8. RELEASE AND TERMINATION.
(a) In the event that Pledgor elects to sell any shares of
Pledged Stock as permitted by the Purchase Agreement and so long as no claim has
been made by the
4
<PAGE>
Company under Article XI of the Purchase Agreement that remains outstanding and
unpaid (an "Outstanding Claim"), the number of shares of Common Stock (not to
exceed in any quarter the aggregate number of shares that may be sold pursuant
to Section 5.8 of the Purchase Agreement) designated by Pledgor shall be
released from this Agreement and delivered to Pledgor on the first day of each
calendar quarter beginning on the first anniversary of the Closing Date.
(b) Upon the written request of Pledgor to the Company
following the occurrence of an Event of Default, the Company shall release a
number of shares of Pledged Stock to be sold, subject to applicable securities
laws, by on or behalf of Pledgor such that the net proceeds resulting therefrom
shall be sufficient to pay in full all Obligations of Pledgor. The net proceeds
of any such sale shall be paid directly to the Company in satisfaction of the
Obligations.
(c) This Agreement shall terminate and the Pledged Stock shall
be released and delivered to Pledgor on December 31, 2000 unless there exists an
Outstanding Claim. If there are one or more Outstanding Claims on December 31,
2000, then this Agreement shall remain in effect and a number of shares of
Pledged Stock having an aggregate value (based on a value of $10.50 per share)
equal to the aggregate amount of all Outstanding Claims shall remain subject to
this Agreement until all such Outstanding Claims are satisfied or terminated,
and all other shares of Pledged Stock shall be released to Pledgor.
9. NOTICES. All notices, requests and demands to or upon the
Company or Pledgor to be effective shall be in writing (or by telex, facsimile
or similar electronic transfer confirmed in writing) and shall be deemed to have
been duly given or made (1) when delivered by hand or (2) if given by mail, when
deposited in the mails by certified mail, return receipt requested, or (3) if by
telex, facsimile or similar electronic transfer, when sent and receipt has been
confirmed, addressed to the Company or Pledgor at its address or transmission
number for notices provided on the signature page hereto. The Company and
Pledgor may change their addresses and transmission numbers for notices by
notice in the manner provided in this Section 9.
10. SEVERABILITY. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11. AMENDMENTS IN WRITING; NO WAIVER; CUMULATIVE REMEDIES. (a)
None of the terms or provisions of this Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
Pledgor and the Company, provided that any provision of this Agreement may be
waived by the Company in a letter or agreement executed by the Company or by
telex or facsimile transmission from the Company.
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(b) The Company shall not by any act (except by a written
instrument pursuant to paragraph 11(a) hereof), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or Event of Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Company, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Company of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Company would otherwise have
on any future occasion.
(c) The rights and remedies herein provided are cumulative,
may be exercised singly or concurrently and are not exclusive of any other
rights or remedies provided by law.
12. SECTION HEADINGS. The section headings used in this
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon the successors and assigns of Pledgor and shall inure to the benefit of the
Company and its successors and assigns.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be duly executed and delivered as of the date first above written.
By:
------------------------
Brett West
Address for Notices:
2 Lookout Point Dr.
Ridgefield, Connecticut 06877
Fax: (____) ____-______
Accepted this ____ day of ________, 1999
BIG ENTERTAINMENT, INC.
By:
---------------------------------------
Mitchell Rubenstein
Chairman of the Board and Chief Executive Officer
Address for Notices:
Big Entertainment, Inc.
2255 Glades Road, #237W
Boca Raton, Florida 33431-7383
Fax: (561) 998-2970
7
<PAGE>
SCHEDULE 1
TO PLEDGE AGREEMENT
DESCRIPTION OF PLEDGED STOCK
1. Stock Certificate No. _____, representing ________ shares
of Common Stock, par value $.01 per share, of Big Entertainment, Inc.
8
<PAGE>
EXHIBIT A
STOCK POWER
For value received, Brett West hereby sells, assigns and
transfers unto __________________________, ________ shares of Common Stock of
Big Entertainment, Inc. standing in the name on the books of said Big
Entertainment, Inc. represented by Certificate No. ____ herewith and does hereby
irrevocably constitute and appoint ________________ as attorney to transfer said
shares on the books of Big Entertainment, Inc. with full power of substitution
in the premises.
Dated: Signature
------------------------ -------------------------
Brett West
9
<PAGE>
EXHIBIT E
FORM
OF
LIMITED RECOURSE
PROMISSORY NOTE
$_______________ _________________, 2000
FOR VALUE RECEIVED, the undersigned Brett West (the
"Borrower"), hereby, promises to pay to the order of Big Entertainment, Inc., a
Florida corporation (the "Company") at its offices, in lawful money of the
United States of America, the principal amount of _____________ ($________). The
principal amount shall be paid on the earlier to occur of (i) the disposition of
any shares of Pledged Stock (as such term is defined in the Pledge Agreement
referred to below) by the Borrower, provided, that the Borrower shall be
required only to pay that amount of the principal amount which is equal to the
proceeds received from any such disposition (with any outstanding unpaid
principal remaining subject to this sentence) and (ii) [one year after the date
of issuance of this Note] (the "Maturity Date").
The Borrower further agrees to pay interest in like money at
such office on the unpaid principal amount hereof from time to time outstanding
at a variable interest rate equal to the Prime Rate (as defined below) plus 1%
per annum on (x) the Maturity Date and (y) with respect to the amount of any
payment upon the disposition of shares of Pledged Stock or any optional
repayment, on the date of such payment. Interest shall accrue hereunder on the
unpaid principal amount hereof on each day during the period from and including
the date of this Note to but excluding the date this Note is paid in full.
"Prime Rate" shall mean the prime commercial lending rate of Citibank, N.A., New
York, New York as quoted on the first business day of each calendar month.
This Note is subject to optional prepayment in whole or in
part at any time without premium or penalty.
Reference is hereby made to the Pledge Agreement of even date
herewith made by the Borrower in favor of the Company (the "Pledge Agreement").
The obligation of Borrower to pay the principal amount of, and accrued interest
on, this Note is recourse only to the Pledged Stock and other Collateral (as
defined in the Pledge Agreement) pledged to the Company under the Pledge
Agreement.
The following shall constitute "Events of Default" under the
terms of this Note:
(i) default in payment when due and payable,
upon acceleration or otherwise, of principal of, or interest
on, this Note; and
<PAGE>
(ii) default by the Borrower in any of its
obligations under the Pledge Agreement
Upon the occurrence of any one or more of the Events of
Default, all amounts then remaining unpaid on this Note shall become, or may be
declared to be, immediately due and payable by the Company.
All parties now and hereafter liable with respect to this
Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby
waive presentment, demand, protest and all other notices of any kind.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
--------------------------
BRETT WEST
<PAGE>
EXHIBIT F
FORM
OF
TAX LOAN PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of __________, 2000, made by Brett
West (the "Pledgor") in favor of Big Entertainment, Inc., a Florida corporation
(the "Company").
W I T N E S S E T H:
WHEREAS, the Company has agreed to make a loan (the "Loan") to
Pledgor to be used to pay certain state and federal income taxes payable by
Pledgor in respect of the shares of Common Stock of the Company received by
Pledgor in connection with the Asset Purchase Agreement, dated as of March __,
1999, (the "Purchase Agreement") by and among the Company, Cinema Source, Inc.
and Pledgor;
WHEREAS, the Loan will be evidenced by a promissory note of
even date herewith in favor of the Company (the "Note");
WHEREAS, Pledgor is the legal and beneficial owner of the
shares of Pledged Stock (as hereinafter defined) issued by the Company; and
WHEREAS, it is a condition precedent to the obligation of the
Company to make the Loan to Pledgor that Pledgor shall have executed and
delivered this Pledge Agreement to the Company.
NOW, THEREFORE, in consideration of the premises and to induce
the Company to make the Loan, Pledgor hereby agrees with the Company, as
follows:
1. DEFINED TERMS. (a) Unless otherwise defined herein, terms
defined in the Note and used herein shall have the meanings assigned to them in
the Note.
(b) The following terms shall have the following meanings:
"AGREEMENT": this Pledge Agreement, as the same may be
amended, modified or otherwise supplemented from time to time.
"BUSINESS DAY": any day other than a Saturday, Sunday or other
day on which commercial banks in New York, New York are authorized or required
by law to close.
"CODE": the Uniform Commercial Code from time to time in
effect in the State of New York.
"COLLATERAL": the Pledged Stock and all Proceeds.
<PAGE>
"DEFAULT": any event that is or with the passage of time or
the giving of notice or both would be an Event of Default under the Note.
"OBLIGATIONS": the collective reference to the unpaid
principal of and interest on the Note and all other obligations and liabilities
of Pledgor to the Company (including, without limitation, interest accruing at
the then applicable rate provided in the Note after the maturity of the Loan and
interest accruing at the then applicable rate provided in the Note after the
filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to Pledgor, whether or not a claim
for post-filing or postpetition interest is allowed in such proceeding), whether
direct or indirect, absolute or contingent, due or to become due, or now
existing or hereafter incurred, which may arise under, out of, or in connection
with the Note and this Agreement or any other document made, delivered or given
in connection therewith, in each case whether on account of principal, interest,
costs, expenses or otherwise.
"PERSON": any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"PLEDGED STOCK": the shares of capital stock listed on
Schedule 1 hereto, together with all stock certificates that may be issued or
granted by the Company to Pledgor as a dividend, distribution, option or right
paid or issued on the Pledged Stock, without payment of any consideration by
Pledgor, while this Agreement is in effect.
"PROCEEDS": all "proceeds" as such term is defined in Section
9-306(l) of the Code on the date hereof and, in any event, shall include,
without limitation, all dividends or other income from the Pledged Stock,
collections thereon or distributions with respect thereto.
(c) The words "hereof," "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section and
paragraph references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
2. PLEDGE; GRANT OF SECURITY INTEREST. Pledgor hereby delivers
to the Company all the Pledged Stock and hereby grants to the Company a first
security interest in the Collateral, as collateral security for the prompt and
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations.
3. STOCK POWERS. Concurrently with the delivery to the Company
of each certificate representing one or more shares of Pledged Stock to the
Company, Pledgor shall deliver an undated stock power, in the form of Exhibit A
hereto, covering such certificate, duly executed in blank by Pledgor with, if
the Company so requests, signature guaranteed.
2
<PAGE>
4. COVENANTS. Pledgor covenants and agrees with the Company
that, from and after the date of this Agreement until this Agreement is
terminated and the security interests created hereby are released:
(a) If Pledgor shall, solely as a result of its ownership of
the Pledged Stock and without payment of any consideration other than delivery
or exchange of certificates representing the Pledged Stock, become entitled to
receive or shall receive any stock certificate (including, without limitation,
any certificate representing a stock dividend or a distribution in connection
with any reclassification, increase or reduction of capital or any certificate
issued in connection with any reorganization), option or rights, whether in
addition to, in substitution of, as a conversion of, or in exchange for any
shares of the Pledged Stock, or otherwise in respect thereof, Pledgor shall
accept the same as the agent of the Company, hold the same in trust for the
Company, and deliver the same forthwith to the Company in the exact form
received, duly endorsed by Pledgor to the Company, if required, together with an
undated stock power, in the form of Exhibit A hereto, covering such certificate
duly executed in blank by Pledgor and with, if the Company so requests,
signature guaranteed, to be held by the Company, subject to the terms hereof, as
additional collateral security for the Obligations. Any such stock certificate
shall constitute Pledged Stock under this Agreement.
(b) Pledgor is subject to the restrictions on the transfer of
the Pledged Stock set forth in Section 5.8 of the Purchase Agreement. In
addition, without the prior written consent of the Company, Pledgor will not (1)
sell, assign, transfer, exchange or otherwise dispose of, or grant any option
with respect to, the Collateral, (2) create, incur or permit to exist any lien
or option in favor of, or any claim of any Person with respect to, any of the
Collateral, or any interest therein, except for the security interests created
by this Agreement or (3) enter into any agreement or undertaking restricting the
right or ability of Pledgor or the Company to sell, assign or transfer any of
the Collateral.
(c) Pledgor shall maintain the security interest created by
this Agreement as a first, perfected security interest and shall defend such
security interest against claims and demands of all Persons whomsoever. At any
time and from time to time, upon the written request of the Company, and at the
sole expense of Pledgor, Pledgor will promptly and duly execute and deliver such
further instruments and documents and take such further actions as the Company
may reasonably request for the purposes of obtaining or preserving the full
benefits of this Agreement and of the rights and powers herein granted. If any
amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note, other instrument or chattel paper, such
note, instrument or chattel paper shall be immediately delivered to the Company,
duly endorsed in a manner satisfactory to the Company, to be held as Collateral
pursuant to this Agreement.
(d) Pledgor shall pay, and save the Company harmless from, any
and all liabilities with respect to, or resulting from any delay in paying, any
and all stamp, excise, sales or other taxes which may be payable or determined
to be payable with respect to any of the Collateral or in connection with any of
the transactions contemplated by this Agreement.
3
<PAGE>
5. COMPANY'S RIGHT TO REQUIRE SALE OF PLEDGED SHARES. In the
event that the Obligations have not been paid in full prior to [THE ONE-YEAR
ANNIVERSARY OF THE CLOSING DATE UNDER THE PURCHASE AGREEMENT] (the "Anniversary
Date"), the Company shall have the right to require Pledgor to sell up to 10% of
the original number of shares of Pledged Stock (as adjusted to reflect any
subdivision, stock split, stock dividend or similar event) during the first four
weeks of each calendar quarter ending after the Anniversary Date until the
Obligations are paid in full. All of the proceeds of any such sales shall be
paid to the Company in respect of the Obligations. The Company shall exercise
its rights under this paragraph by delivery of a notice to Pledgor no later than
5 Business Days before the commencement of any such calendar quarter, which
notice shall indicate the number of shares of Pledged Stock required to be sold
by Pledgor in accordance with this paragraph. Pledgor shall make all
arrangements for any such sale and shall notify the Company as to where it
should deliver the certificates representing the Pledged Stock to be sold. The
Company shall release the lien and security interest on any Pledged Stock to be
sold in accordance with this paragraph.
6. CASH DIVIDENDS; VOTING RIGHTS. Unless an Event of Default
shall have occurred and be continuing and the Company shall have given notice to
Pledgor of the Company's intent to exercise its corresponding rights pursuant to
Section 8 below, Pledgor shall be permitted to receive all cash dividends paid
in respect of the Pledged Stock and to exercise all voting and corporate rights
with respect to the Pledged Stock.
7. RIGHTS OF THE COMPANY. If an Event of Default shall occur
and be continuing and the Company shall give notice to Pledgor of the Company's
intent to exercise its corresponding rights pursuant to Section 8 below, the
Company shall have the right to receive any and all cash dividends paid in
respect of the Pledged Stock and make application thereof to the Obligations in
such order as the Company may determine.
8. REMEDIES. If an Event of Default shall have occurred and be
continuing, the Company may exercise, in addition to all other rights and
remedies granted in this Agreement and in any other instrument or agreement
securing, evidencing or relating to the obligations, all rights and remedies of
a secured party under the Code. Without limiting the generality of the
foregoing, the Company, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon Pledgor or any other Person (all
and each of which demands, defenses, advertisements and notices are hereby
waived), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Collateral, or any part thereof, and/or may forthwith sell,
assign, give option or options to purchase or otherwise dispose of and deliver
the Collateral or any part thereof (or contract to do any of the foregoing), in
one or more parcels at public or private sale or sales, in the over-the-counter
market, at any exchange, broker's board or office of Company or elsewhere upon
such terms and conditions as it may deem advisable and at such prices as it may
deem best, for cash or on credit or for future delivery without assumption of
any credit risk. The Company shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or sales,
to purchase the whole or any part of the Collateral so sold, free of any right
or equity of redemption in Pledgor, which right or equity is hereby waived or
released. The Company
4
<PAGE>
shall apply any Proceeds from time to time held by it and the net proceeds of
any such collection, recovery, receipt, appropriation, realization or sale,
after deducting all reasonable costs and expenses of every kind incurred in
respect thereof or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the Company
hereunder, including, without limitation, reasonable attorneys' fees and
disbursements of counsel to the Company, to the payment in whole or in part of
the Obligations, in such order as the Company may elect, and only after such
application and after the payment by the Company of any other amount required by
any provision of law, including, without limitation, Section 9-504(l)(c) of the
Code, need the Company account for the surplus, if any, to Pledgor. To the
extent permitted by applicable law, Pledgor waives all claims, damages and
demands it may acquire against the Company arising out of the exercise by the
Company of any rights hereunder. If any notice of a proposed sale or other
disposition of Collateral shall be required by law, such notice shall be deemed
reasonable and proper if given at least 10 days before such sale or other
disposition.
9. EXECUTION OF FINANCING STATEMENTS. Pursuant to Section
9-402 of the Code, Pledgor authorizes the Company to file financing statements
with respect to the Collateral without the signature of Pledgor in such form and
in such filing offices as the Company reasonably determines appropriate to
perfect the security interests of the Company under this Agreement. A carbon,
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement for filing in any jurisdiction.
10. NOTICES. All notices, requests and demands to or upon the
Company or Pledgor to be effective shall be in writing (or by telex, facsimile
or similar electronic transfer confirmed in writing) and shall be deemed to have
been duly given or made (1) when delivered by hand or (2) if given by mail, when
deposited in the mails by certified mail, return receipt requested, or (3) if by
telex, facsimile or similar electronic transfer, when sent and receipt has been
confirmed, addressed to the Company or Pledgor at its address or transmission
number for notices provided on the signature page hereto. The Company and
Pledgor may change their addresses and transmission numbers for notices by
notice in the manner provided in this Section 10.
11. SEVERABILITY. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
12. AMENDMENTS IN WRITING; NO WAIVER; CUMULATIVE REMEDIES. (a)
None of the terms or provisions of this Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
Pledgor and the Company, provided that any provision of this Agreement may be
waived by the Company in a letter or agreement executed by the Company or by
telex or facsimile transmission from the Company.
5
<PAGE>
(b) The Company shall not by any act (except by a written
instrument pursuant to paragraph 12(a) hereof), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or Event of Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Company, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Company of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Company would otherwise have
on any future occasion.
(c) The rights and remedies herein provided are cumulative,
may be exercised singly or concurrently and are not exclusive of any other
rights or remedies provided by law.
13. SECTION HEADINGS. The section headings used in this
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon the successors and assigns of Pledgor and shall inure to the benefit of the
Company and their successors and assigns.
15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed and delivered as of the date first above written.
By:
--------------------------------
Brett West
Address for Notices:
2 Lookout Point Dr.
Ridgefield, Connecticut 06877
Fax: (____) ____-______
Accepted this ____ day of ________, 2000
BIG ENTERTAINMENT, INC.
By:
---------------------------------------
Mitchell Rubenstein
Chairman of the Board and Chief Executive Officer
Address for Notices:
Big Entertainment, Inc.
2255 Glades Road, #237W
Boca Raton, Florida 33431-7383
Fax: (561) 998-2970
7
<PAGE>
SCHEDULE 1
TO PLEDGE AGREEMENT
DESCRIPTION OF PLEDGED STOCK
1. Stock Certificate No. _____, representing ________ shares
of Common Stock, par value $.01 per share, of Big Entertainment, Inc.
8
<PAGE>
EXHIBIT A
STOCK POWER
For value received, Brett West hereby sells, assigns and
transfers unto __________________________, ________ shares of Common Stock of
Big Entertainment, Inc. standing in the name on the books of said Big
Entertainment, Inc. represented by Certificate No. ____ herewith and do hereby
irrevocably constitute and appoint ________________ as attorney to transfer said
shares on the books of Big Entertainment, Inc. with full power of substitution
in the premises.
Dated: Signature
------------------------- ------------------
Brett West
9
<PAGE>
EXHIBIT I
BILL OF SALE AND ASSIGNMENT
AND ASSUMPTION AGREEMENT
BILL OF SALE AND ASSIGNMENT AND ASSUMPTION AGREEMENT (the
"Agreement"), dated as of __________ ____, 1999, by and between Big
Entertainment, Inc., a Florida corporation ("Buyer"), and CinemaSource, Inc., a
Connecticut corporation ("Seller"). Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to such terms in the Asset
Purchase Agreement (as defined below).
WHEREAS, Buyer and Seller have entered into that certain Asset
Purchase Agreement (the "Asset Purchase Agreement"), dated as of March __, 1999,
pursuant to which Seller has agreed to sell, assign and transfer to Buyer, and
Buyer has agreed to purchase and acquire from Seller, all right, title and
interest of Seller in and to all assets, properties, rights, contracts, claims,
operations, and business of Seller (but excluding the Excluded Assets), free and
clear of all Liens;
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
1. Seller does hereby sell, assign, transfer, convey and
deliver to Buyer all of the right, title and interest of Seller in, to and under
the Assets, including each of the Assigned Contracts listed on Schedule 1.1(a)
hereto.
2. Buyer hereby assumes the Assumed Liabilities. Buyer does
not assume and shall not be bound by any other Liabilities of Seller, all of
which shall remain the sole responsibility of Seller.
3. This Agreement is in accordance with, and is subject to all
of the representations, warranties, covenants and exclusions set forth in, the
Asset Purchase Agreement.
4. Seller will, at the request of Buyer, execute and deliver
such other and further instruments of sale, assignment, transfer and conveyance
and take such other and further actions as Buyer may reasonably request, with
respect to the Assets, in order to make all the benefits of the Assigned
Contracts and rights of Seller in the Assets available to Buyer, to vest in
Buyer and put Buyer in possession of the Assets and to transfer to Buyer any
contracts and rights of Seller relating to the Assets and to assure to Buyer the
benefits thereof and effectuate fully the purposes of this Agreement.
5. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and permitted assigns
under the Asset Purchase Agreement. Except as expressly permitted under the
Asset Purchase Agreement, no assignment of this Agreement or of any rights or
obligations hereunder may be made by either party (by operation of law or
otherwise) without the prior written consent of the
<PAGE>
other party hereto and any attempted assignment without such required consent
shall be void.
6. Nothing in this Agreement, express or implied, is intended
or shall be construed to confer upon, or give to, any person, firm or
corporation other than Buyer and Seller and their respective successors and
permitted assigns, any remedy or claim under or by reason of this instrument or
any term, covenant or condition hereof, and all the terms, covenants and
conditions, promises and agreements in this instrument contained shall be for
the sole and exclusive benefit of Buyer and Seller and their respective
successors and permitted assigns.
7. This Agreement may be amended, supplemented or modified,
and any provision hereof may be waived, only pursuant to a written instrument
making specific reference to this Agreement signed by each of the parties
hereto.
8. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts to be
made, executed, delivered and performed wholly in such state, but without regard
to conflicts of law principles of such state. No provision of this Agreement
shall be construed against either party because such party drafted or caused to
be drafted such provision. Each provision of this Agreement shall be construed
as if such provision were proposed by both Buyer and Seller.
To have and to hold the Assets unto Buyer, its successors and
assigns forever.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
instrument as of the date and year first above written.
BIG ENTERTAINMENT, INC.
By:
----------------------------------
Mitchell Rubenstein
Chairman of the Board and Chief
Executive Officer
CINEMASOURCE, INC.
By:
---------------------------------
Brett West
President
EXHIBIT 21.1
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF CORPORATION INCORPORATION
------------------- -------------
<S> <C>
Big Acquisition Corp. Delaware
Big Entertainment Franchise Corp. Florida
Fedora, Inc. Iowa
Huge Entertainment LLC Delaware
NetCo Partners (1)
Tekno Books (2)
Tekno Books International, LLC Wisconsin
Tekno Comix, Inc. Florida
Tomorrow, Inc. Wisconsin
</TABLE>
- ----------------
(1) NetCo Partners is a general partnership formed under the laws of the State
of New York in which the Company has a 50% partnership interest.
(2) Tekno Books is a general partnership formed under the laws of the State of
Wisconsin in which the Company has a 51% ownership interest.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference of our report dated March 12, 1999 (except with
respect to the matters discussed in Notes 17(b) and 17(c), as to which the date
is March 30, 1999), included in this Form 10-KSB into Big Entertainment, Inc.'s
previously filed Registration Statements on Form S-3, file numbers 333-21173,
33-382919, 333-57855 and 333-68209, and on Form S-8, file no. 333-14659. It
should be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1998 or performed any audit procedures subsequent to
the date of our report.
Arthur Andersen LLP
Miami, Florida
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 729,334
<SECURITIES> 0
<RECEIVABLES> 608,761
<ALLOWANCES> 39,982
<INVENTORY> 1,176,356
<CURRENT-ASSETS> 3,365,944
<PP&E> 4,931,217
<DEPRECIATION> (1,786,016)
<TOTAL-ASSETS> 8,569,821
<CURRENT-LIABILITIES> 4,693,397
<BONDS> 0
0
6,152,261
<COMMON> 81,613
<OTHER-SE> (4,710,439)
<TOTAL-LIABILITY-AND-EQUITY> 8,569,821
<SALES> 11,126,516
<TOTAL-REVENUES> 11,126,516
<CGS> 5,987,383
<TOTAL-COSTS> 14,144,230
<OTHER-EXPENSES> (42,989)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 818,849
<INCOME-PRETAX> (9,250,489)
<INCOME-TAX> (1,407,600)
<INCOME-CONTINUING> (10,658,089)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,658,089)
<EPS-PRIMARY> (1.47)
<EPS-DILUTED> (1.47)
</TABLE>
