-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T7zUj387R+1SWgZ5PJpVVuJcEyskqbCOW8bQadgsLWIro6N3XMtiM/sxAp8VOj4i l+kwpR+7V6QgkaZ2bYySTg== 0001005150-97-000446.txt : 19970613 0001005150-97-000446.hdr.sgml : 19970613 ACCESSION NUMBER: 0001005150-97-000446 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970612 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIT ENTERTAINMENT INC CENTRAL INDEX KEY: 0001038385 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 631145439 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-29071 FILM NUMBER: 97623204 BUSINESS ADDRESS: STREET 1: 1990 WESTWOOD BLVD PENTHOUSE FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104410900 MAIL ADDRESS: STREET 1: 1990 WESTWOOD BLVD PENTHOUSE FOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 SB-2 1 FORM SB-2 As filed with the Securities and Exchange Commission on June 12, 1997 Registration No. 333- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ UNITED FILM DISTRIBUTORS, INC. (Exact name of registrant as specified in its charter) Delaware 7812 63-1145439 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.) ------------------------
1990 Westwood Blvd., Penthouse Brian Shuster Los Angeles, California 90025 United Film Distributors, Inc. (310) 441-0900 1990 Westwood Blvd., Penthouse Los Angeles, California 90025 (310) 441-0900 (Address and telephone number of (Name, address and telephone number of agent for service of principal executive offices) principal executive offices)
------------------------ Copies to: Gerald M. Chizever, Esq. Michael Beckman, Esq. Howard J. Kern, Esq. Laurence D. Paredes, Esq. Madge S. Beletsky, Esq. Beckman & Millman, P.C. Richman, Lawrence, Mann, Greene, 116 John Street, 13th Floor Chizever, Friedman & Phillips New York, New York 10038 9601 Wilshire Blvd., Penthouse (212) 227-6777 Beverly Hills, CA 90210 (310) 274-8300 ------------------------ Approximate date of proposed sale to the public: As soon as possible after the effective date of this Registration Statement. ------------------------ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number under the earlier effective registration statement for the same offering.[ ] ------------------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ] ------------------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.[ ] ------------------------
CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------------ Title of each class of Proposed maximum Proposed maximum securities to be registered Amount to be offering price per unit aggregate offering price Amount of registration registered(1) fee(2) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock 920,000 $5.00 $4,600,000 $1,394 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Consists of (i) 800,000 shares of Common Stock being underwritten by Millennium Securities Corp. and (iii) 120,000 shares of Common Stock covered by the underwriters' over-alloment option. (2) The registration fee is calculated in accordance with Rule 457(o) of the Securities Act of 1933, as amended. ------------------------ The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registation statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ UNITED FILM DISTRIBUTORS, INC. ------------------------ CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-B
Item Number and Captions Location in Prospectus ------------------------ ---------------------- 1. Front of Registration Statement and Outside Front Cover Page of Prospectus....................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus........................................ Inside Front and Outside Back Cover Pages 3. Summary Information and Risk Factors................... Prospectus Summary; Risk Factors 4. Use of Proceeds........................................ Prospectus Summary; Use of Proceeds 5. Determination of Offering Price........................ Outside Front Cover Page; Underwriting 6. Dilution............................................... Dilution 7. Selling Security Holders............................... Not Applicable 8. Plan of Distribution................................... Outside Front Cover Page; Underwriting 9. Legal Proceedings...................................... Business 10. Directors, Executive Officers, Promoters and Control Persons.............................................. Management 11. Security Ownership of Certain Beneficial Owners and Management........................................... Security Ownership of Certain Beneficial Owners and Management 12. Description of Securities.............................. Description of Capital Stock 13. Interest of Named Experts and Counsel.................. Not Applicable 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities....................... Not Applicable 15. Organization Within Last Five Years.................... Certain Relationships 16. Description of Business................................ Prospectus Summary; Business 17. Management's Discussion and Analysis or Plan of Operation............................................ Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property................................ Business 19. Certain Relationships and Related Transactions......... Certain Relationships 20. Market for Common Equity and Related Stockholder Matters.............................................. Description of Capital Stock 21. Executive Compensation................................. Executive Compensation 22. Financial Statements................................... Financial Statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. Not Applicable
SUBJECT TO COMPLETION, DATED JUNE 12, 1997 PROSPECTUS 800,000 Shares of Common Stock UNITED FILM DISTRIBUTORS, INC. COMMON STOCK United Film Distributors, Inc. ("UFD" or the "Company") is offering 800,000 shares of Common Stock, $0.01 par value ("Common Stock") (this "Offering"). See "Description of Capital Stock." Prior to this Offering, there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price of the Common Stock will be $5.00 per share. The public offering price of the Common Stock was determined by negotiation between the Company and Millennium Securities Corp., the representative (the "Representative") of the Underwriters (the "Underwriters"), and is not necessarily related to the Company's asset value, net worth, results of operations or other established criteria of value. See "Underwriting." Application has been made to have the Common Stock approved for quotation on the NASD Electronic Bulletin Board System under the symbol "HITS" upon effectiveness of this Offering. However, there can be no assurance that the Common Stock will be accepted for quotation, or, if accepted, that an active trading market will develop, or if developed, will be sustained. See "Risk Factors." ----------------- THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ==================================================================================================================================== Title of Each Class of Security Underwriting Discounts and Proceeds to Issuer Being Registered Price to Public Commissions(1)(2) or Other Person(3) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock(4) ........... $5.00 $ .50 $ 4.50 - ------------------------------------------------------------------------------------------------------------------------------------ Totals ................. $4,000,000 $400,000 $3,600,000 ====================================================================================================================================
(1) See "Underwriting" for additional compensation to the Underwriters, including a non-accountable expense allowance of $120,000 ($138,000 if the underwriter's over-allotment is exercised in full). The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (2) Before deducting expenses estimated at $927,000, including the Underwriters' non-accountable expense allowance of $120,000 ($1,005,000 if the Underwriters' over-allotment option is exercised in full). (3) The Company has granted the Underwriters a 45-day option to purchase up to 120,000 shares of Common Stock at the public offering price, less underwriting discounts and commissions, solely to cover over-allotments, if any. If the additional 120,000 shares of Common Stock which the Company is making available are purchased, the total Purchase Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $4,600,000, $460,000 and $4,140,000, respectively. See "Underwriting." ----------------- The Common Stock being offered by the Company is being offered on a "firm commitment" basis by the Representative, when, as and if delivered to and accepted by the Underwriters, and subject to their right to reject orders in whole or in part and to certain other conditions. ----------------- Millennium Securities Corp. The date of this Prospectus is June 12, 1997 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK OF THE COMPANY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. TABLE OF CONTENTS ADDITIONAL INFORMATION.........................................................2 PROSPECTUS SUMMARY.............................................................2 RISK FACTORS...................................................................4 USE OF PROCEEDS ...............................................................9 DIVIDEND POLICY...............................................................10 DILUTION .....................................................................10 CAPITALIZATION................................................................11 SELECTED FINANCIAL DATA.......................................................12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................13 BUSINESS .....................................................................16 MANAGEMENT....................................................................25 EXECUTIVE COMPENSATION........................................................26 CERTAIN RELATIONSHIPS.........................................................27 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................................28 DESCRIPTION OF CAPITAL STOCK..................................................29 UNDERWRITING..................................................................31 CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS.................................32 LEGAL MATTERS.................................................................32 EXPERTS .....................................................................32 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form SB-2 under the Securities Act, as amended (the "Securities Act"), with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement. Copies of the Registration Statement may be obtained from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices at Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511 and at 7 World Trade Center, New York, New York 10048 upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission or at the Commission's Web site located at "http://www.sec.gov." The Company is not currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of this Offering, the Company will become subject to the informational requirements of the Exchange Act, and in accordance therewith will file reports and other information with the Commission in accordance with the Commission's rules. Such reports and other information concerning the Company may be inspected at the public reference facilities referred to above as well as certain regional offices of the Commission, and copies of such materials may be obtained upon payment of certain prescribed rates. No person is authorized to give any information or make any representation not contained in this Prospectus, and, if given or made, such information or representation should not be relied upon as having been authorized. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this Prospectus, in any jurisdiction, to or from any person to whom it is unlawful to make such offer or solicitation of an offer in such jurisdiction. Neither the delivery of this Prospectus nor any distribution of securities made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company since the date of this Prospectus. Certain statements contained in this Prospectus that are not related to historical results, including, without limitation, statements regarding the Company's business strategy and objectives, future financial position and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and involve risks and uncertainties. Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under "Risk Factors," "Management's Discussion and Analysis and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. All forward-looking statements contained in this Prospectus are qualified in their entirety by this cautionary statement. Until [ ], 1997 (90 days after the Effective Date of this Offering), all dealers effecting transactions in the Common Stock may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and financial data appearing elsewhere in this Prospectus. An investment in the Common Stock offered hereby is highly speculative in nature, involves a high degree of risk and should only be made by investors who can bear the economic risk of a potential loss of their entire investment. Prospective purchasers should carefully consider the information set forth under "Risk Factors" on page 4 before purchasing such securities. THE COMPANY United Film Distributors, Inc. (together with its subsidiaries, the "Company") is engaged in the acquisition, development, financing, production, distribution and licensing of motion pictures for exhibition in domestic and international theatrical markets and for subsequent worldwide release in different media, including, but not limited to, home video and pay and free television. The Company was incorporated in Delaware in May 1995. Harry Shuster, the Company's Chairman, has produced or co-produced 20 movies during the past 25 years. Brian Shuster, President and Chief Executive Officer of the Company, has been involved in various aspects of film production for approximately 15 movies during the past eight years. See "Management." During the Company's first two years of operations, the Company has completed production of eight films, consisting of The Secret Agent Club, Prey of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with Muscles, and Skeletons. Santa with Muscles was released in movie theaters in November 1996; Chase Morran was released in February 1997 on the SCI-Fi channel; and Skeletons was released on HBO in April 1997. Prey of the Jaguar, Blood Money, and Firestorm have been licensed to HBO by Cabin Fever Entertainment, Inc. ('CFE"), a distributor of six of the Company's motion pictures, but release dates have not yet been determined. See "Business--Financing of Motion Picture Production." The other movies are expected to be distributed by the end of the year. In addition, the Company is currently in pre-production of several films, one of which is Rear View Mirror, which should be completed in August 1997 and released in the calendar 1998. All of the films produced by the Company to date have been in a budget range of between $540,000 and $3,200,000 and have generally taken between three and six weeks to film. The Company intends to continue production of low-budget feature length motion pictures as its principal business focus. See "Business--Motion Picture Production" for the Company's current slate of motion picture projects. To produce a project, the Company first acquires the rights to a story, book or script ("property"). The Company then typically secures a financing or production commitment for the project from third parties, such as private investors, studios, and distributors, prior to expending substantial funds in the development process. However, the Company does advance its own funds to meet the interim costs of development and production which amounts are generally repaid to the Company pursuant to the production contracts. See "Business--Financing of Motion Picture Production" for a description of the Company's financing activities. The Company's strategy is to (i) develop long-term relationships with talent who have demonstrated the ability to attract widespread audience interest, both domestically and in significant international markets, (ii) seek to limit the financial risk to the Company inherent in any one motion picture project while preserving potential returns through the strategic use of its long-term distribution agreements with companies such as HBO covering the United States and Canada, and their respective territories, possessions, and protectorates (the "Domestic Territories") as well as such foreign distributors such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media (South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain) and Italian International Films (Italy), and (iii) exercise strong management control of production costs of its motion pictures, as well as of general overhead. The Company's principal goal is to produce and arrange for the release of three to five commercially successful low-budget motion pictures per year. Although there can be no assurances, the Company believes that over time these films will become the core of a library of films which management believes have the capacity of generating revenues from their worldwide exploitation in existing and future media and markets. The Company, as a small independent film company, anticipates that many, if not all of its films, will not be released in theaters but instead, will be released, if at all, on cable television, television and other similar media. The Company's principal executive offices are located at 1990 Westwood Boulevard, Penthouse, Los Angeles, California 90025 and its telephone number is (310) 441-0900. 2 The Offering Common Stock offered by the Company.......................................... 800,000 shares Common Stock outstanding before this Offering................................ 3,000,000 shares(1) Common Stock outstanding after this Offering................................. 3,800,000 shares(1) Price per share being underwritten........................................... $5.00 Comparative Stock Ownership upon completion of this Offering Present Shareholders................................................ 3,000,000(1) Public Shareholders................................................. 800,000(1) Estimated Net Proceeds to the Company........................................ $3,073,000 Use of Proceeds.............................................................. The net proceeds of this Offering will be used for (1) repaying $2,000,000 in indebtedness which is owed to the founders of the Company, and (2) working capital, including but not limited to, (a) motion picture development and production, including, but not limited to, (i) supplying production financing for the Company's motion picture projects, (ii) retaining, generally on a picture-to-picture basis, the services of writers, directors and other artistic elements in the development of motion picture projects, (iii) purchasing or obtaining options for rights to books, screenplays and other artistic properties, and (iv) general administrative expenses. See "Use of Proceeds" and "Certain Relationships." Risk Factors................................................................. An investment in the Common Stock offered hereby involves a high degree of risk and immediate and substantial dilution of the book value of the Common Stock and should be considered only by persons who can afford the loss of their entire investment. See "Risk Factors" and "Dilution." Proposed NASD Electronic Bulletin Board Trading Symbol(2).................... "HITS" - -------------------------------------------------------------------------------------------------------------------------
(1) Unless otherwise indicated, all share and per share information in this Prospectus (i) gives effect to the 5-for-1 stock split of the Company's Common Stock effected in May 1997 and (ii) does not include Common Stock to be issued upon exercise of the Underwriter's over-allotment option or issuable upon exercise of outstanding options or warrants or 360,000 shares of Common Stock reserved for issuance pursuant to the Company's stock option plan, pursuant to which options to purchase an aggregate of 20,000 shares of Common Stock are currently outstanding. See "Management--Stock Option Plan" and "Description of Capital Stock." (2) Although the Company intends to cause a market maker to apply for inclusion of the Common Stock on the NASD Electronic Bulletin Board, there can be no assurance that the Common Stock will be included for quotation, or if so included, that the Company will be able to continue to meet the requirements for continued quotation, or that a public trading market will develop or that if such market develops, it will be sustained. See "Risk Factors--No Prior Public Market; Possible Volatility of Stock Price; Negotiated Offering Price" and "--Lack of Prior Market for Common Stock; No Assurance of Public Trading Market." 3 RISK FACTORS The factors discussed below and elsewhere in this Prospectus could adversely affect the value of the Common Stock. In addition, the factors discussed below and elsewhere in this Prospectus may constitute forward-looking statements and, as such, may involve known or unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any forward-looking statements contained in this Prospectus should not be relied upon as predictions of future events. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "could," "seeks" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. The following factors may constitute or include cautionary, forward-looking statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. Actual results in the future could differ materially from those described in the forward-looking statements or as a result of the factors set forth below (which list does not purport to be exhaustive) and the matters set forth in this Prospectus generally. See "Management's Discussion and Analysis and Results of Operations" and "Business" for a description of certain other factors generally affecting the Company's business. RECENT OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY; LIMITED OPERATING HISTORY The Company was founded in May 1995 and has a limited history of operations on which an investor could base an evaluation of an investment in the Company. Notwithstanding the fact that the Company had net income of $67,892 for the fiscal year ended July 31, 1996, the Company incurred a net loss of $71,098 for the six months ended January 31, 1997. There can be no assurance that the Company will return to profitability. Furthermore, although Harry Shuster has substantial experience in the motion picture industry as a result of having produced or co-produced 20 movies during the past 25 years, the Company itself has been engaged in the production of motion pictures only since 1995. During that time, eight motion pictures, consisting of The Secret Agent Club, Prey of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with Muscles, and Skeletons have been completed by the Company. Santa with Muscles was released in movie theaters in November 1996; Chase Morran was released in February 1997 on the SCI-Fi channel; and Skeletons was released on HBO in April 1997. Prey of the Jaguar, Blood Money, and Firestorm have been licensed to HBO by CFE, but release dates have not yet been determined. See "Business--Financing of Motion Picture Production." The other movies are expected to be distributed by the end of the year. In addition, the Company is currently in pre-production of several films, one of which is Rear View Mirror, which should be completed in August 1997 and released in calendar 1998. All of the films produced by the Company to date have been in a budget range of between $540,000 and $3,200,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and "Management." DEPENDENCE ON KEY PERSONNEL Harry Shuster is the founder of the Company and serves as its Chairman. Mr. Shuster has substantial experience in the motion picture industry and extensive relationships with the motion picture community, including creative talent and leading distributors. The Company also relies on the expertise of Brian Shuster, the Company's President and Chief Executive Officer. Virtually all decisions concerning the conduct of the business of the Company, including the properties and rights to be acquired by the Company and the arrangements to be made for the development, financing, production and distribution of the Company's motion pictures, are made by or significantly influenced by Messrs. Harry or Brian Shuster. The loss of their services for any reason would have a material adverse effect on the Company's business and operations and its prospects for the future. The Company does not have a "key man" life insurance on the lives of any of its executive officers. See "Management." The Company also has recently entered into an employment agreement with Brian Shuster for an initial term ending March 31, 2000, but which automatically renews for additional terms of one year each unless 60 days notice of termination is provided by either party. See "Executive Compensation--Employment Contracts; Termination of Employment and Change-In-Control Arrangements." The Company does not have any employment agreement with Harry Shuster. See "--Conflicts of Interest." 4 CONFLICTS OF INTEREST The Company relies on the services of Harry Shuster, the Company's Chairman. However, Mr. Shuster is the Chief Executive Officer of two other public companies and intends to continue to devote substantial time to the businesses and affairs of these two other companies. Although Mr. Shuster intends to devote such time to the business of the Company as he deems necessary for its operations, there can be no assurance that Mr. Shuster will be available to handle any crisis situation that may arise, and if Mr. Shuster is unavailable, it is possible that the resolution of such crises may be less favorable than the resolution that could have been reached had Mr. Shuster been available. See "Management." RISKS OF MOTION PICTURE PRODUCTION General. The motion picture industry is highly speculative and inherently risky. There can be no assurance of the economic success of any motion picture since the revenues derived from the production and distribution of a motion picture (which do not necessarily bear a direct correlation to the production or distribution costs incurred) depend primarily upon its acceptance by the public, which cannot be predicted. The commercial success of a motion picture also depends upon the quality and acceptance of other competing films released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. Therefore, there is a substantial risk that some or all of the Company's motion pictures will not be commercially successful, resulting in costs not being recouped or anticipated profits not being realized. Furthermore, the Company, as a small independent film company, anticipates that many, if not all of its films, will not be released in theaters but instead, will be released, if at all, on cable television, television and other similar media. Completion of a Motion Picture Subject to Uncertainties and Financial Risks. The production, completion and distribution of motion pictures is subject to numerous uncertainties, including financing requirements, personnel availability and the release schedule of competitive films. Although the Company plans to reduce the risks of its financial involvement in the production costs of motion pictures through relationships with distributors such as HBO covering the United States and Canada, and their respective territories, possessions, and protectorates (the "Domestic Territories") as well as such foreign distributors such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media (South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain) and Italian International Films (Italy), the Company may be subject to substantial financial risks relating to the production, completion and release of motion pictures. In addition, a significant amount of time may elapse between the expenditure of funds by the Company and the receipt of revenues from the motion pictures. COMPETITION Motion picture production and distribution are highly competitive. The competition comes from both companies within the same business and companies in other entertainment media which create alternative forms of leisure entertainment. The Company's competition for the acquisition of literary properties, the services of performing artists, directors, producers and other creative and technical personnel and production financing includes several "major" film studios including, but not limited to, The Walt Disney Company, Paramount Pictures Corporation, MCA, Columbia Pictures, Tri-Star Pictures, Twentieth Century Fox, Warner Brothers Inc. and MGM/UA, which are dominant in the motion picture industry, as well as numerous independent motion picture and television production companies, television networks and pay television systems. Many of these organizations with which the Company competes have significantly greater financial and other resources than does the Company. In addition, the Company's films compete for audience acceptance and exhibition outlets with motion pictures produced and distributed by other companies, including motion pictures distributed by CFE, HBO and the Company's foreign distributors. As a result, the success of any of the Company's films is dependent not only on the quality and acceptance of that particular film, but also on the quality and acceptance of other films. RISKS OF INTERNATIONAL BUSINESS At January 31, 1997 and July 31, 1996, foreign sales in Asia, South America and Europe accounted for 41% and 48%, respectively, of total revenues for these periods. Management of the Company anticipates that a significant percentage of the Company's revenues and income, if any, will continue to come from foreign sources. Accordingly, the Company is subject to the risks inherent in conducting business across national borders, including, but not limited to, currency exchange rate fluctuations, international incidents, military outbreaks, economic downturns, government instability, nationalization of foreign assets, government protectionism and changes in governmental policy, any of which could have a material adverse effect on the Company's business and operations and its prospects for the future. 5 FLUCTUATION OF OPERATING RESULTS Most of the Company's revenues are expected to be derived from the exploitation of a limited number of motion pictures produced by the Company. As a result of this factor, as well as uncertainties in the release schedules of its motion pictures and audience responses thereto, the Company's revenues and earnings are expected to fluctuate significantly from quarter to quarter. Accordingly, the Company's revenues and earnings in any particular period may not be indicative of the results for any future period. CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS Upon completion of this Offering (assuming no exercise of the Underwriter's over-allotment option or other outstanding options or warrants), management and the existing stockholders of the Company will beneficially own approximately 78.9% of the outstanding Common Stock. As a result, management and the existing stockholders will continue to be in a position to elect all of the members of the Board of Directors of the Company, to cause an increase in the Company's authorized capital stock, to cause the dissolution, merger or sale of the assets of the Company and, generally, to direct the affairs of the Company. This concentration of ownership will likely have the effect of discouraging third parties from acquiring substantial blocks of the Company's Common Stock to cause a change in the management and control of the Company. Such concentration of ownership with management could tend to limit the price that investors might be willing to pay in the future for shares of Common Stock as it may reduce the possibility of a change in control of the Company. A change in control of an issuer frequently occurs at a premium over the historical trading prices of the issuer's publicly traded Common Stock. There are no agreements or other understandings between the officers and directors of the Company and the other current stockholders with respect to voting or any other matters pertaining to the Company. See "Security Ownership of Certain Beneficial Owners and Management" and "Description of Capital Stock." LABOR RELATIONS Many individuals associated with the Company's productions, including actors, writers and directors, are members of guilds or unions which bargain collectively with producers on an industry-wide basis from time to time. The Company's operations are dependent upon its compliance with the provisions of collective bargaining agreements governing relationships with these guilds and unions. Strikes or other work stoppages by members of these unions could delay or disrupt the Company's activities. However, the extent to which the existence of collective bargaining agreements may affect the Company in the future is not currently determinable. See "Business--Employees." NEED FOR ADDITIONAL FINANCING The Company believes that its existing capital resources, together with the proceeds of this Offering, will enable the Company to maintain its operations and working capital requirements for at least twelve (12) months. However, it is possible that additional financing will be required to fund further growth in the Company's business beyond the next 12 months whether through equity financing, debt financing or other sources. There can be no assurance that such sources of financing will be available, or will be available on terms acceptable to the Company. Inability to obtain additional financing could limit the Company's ability to produce motion pictures, retain writers, directors and other artistic elements, purchase rights to books, screenplays and other artistic properties, or take other actions that would benefit the Company and its stockholders and could therefore have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." BROAD DISCRETION IN APPLICATION OF PROCEEDS A significant portion of the estimated net proceeds of this Offering has been allocated to working capital and general corporate purposes. Management will have broad discretion as to the application of such proceeds. Excluding the proceeds from the exercise of the Underwriters' over allotment option, $1,073,000 or 34.9% of the net proceeds from this Offering will be used for general corporate purposes. See "Use of Proceeds." LIMITATION OF LIABILITY; INDEMNIFICATION The Company's Articles of Incorporation and Bylaws contain provisions that limit the liability of directors for monetary damages and provide for indemnification of officers and directors under certain circumstances. Such provisions may discourage stockholders from bringing a lawsuit against directors for breaches of fiduciary duty and may also have the effect of reducing the likelihood of derivative litigation against directors and officers even though such action, if successful, 6 might otherwise have benefitted the Company and its stockholders. In addition, a stockholder's investment in the Company may be adversely affected to the extent that costs of settlement and damage awards against the Company's officers or directors are paid by the Company pursuant to the indemnification provisions of its Articles of Incorporation and Bylaws. See "Certain Provisions of the Company's Articles of Incorporation and Bylaws." EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Certificate of Incorporation and Bylaws and of Delaware law may delay, defer or prevent a change in control of the Company and may adversely affect the voting and other rights of the holders of Common Stock. In particular, the ability of the Company's Board of Directors to issue "blank check" preferred stock without further stockholder approval may have the effect of delaying, deferring or preventing a change in control of the Company. See "Description of Capital Stock." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; NEGOTIATED OFFERING PRICE Prior to this Offering there has been no public market for the Company's Common Stock, and there can be no assurance that an active public trading market will develop after this Offering or be sustained. The initial public offering price of the Common Stock to be sold in this Offering was determined by negotiations between the Company and the Representative and may not be indicative of the market price of the Common Stock after this Offering. The initial public offering price also does not necessarily bear any relationship to the Company's assets, book value, net worth or results of operations of the Company or any other established criteria of value. Factors not within the control of the Company, including public statements from securities analysts and others concerning the Company's operations, public acceptance of the Company's motion pictures, interest rates and changes in general market conditions could have a significant impact on the future market prices for shares of the Common Stock, which may be volatile. LACK OF PRIOR MARKET FOR COMMON STOCK; NO ASSURANCE OF PUBLIC TRADING MARKET Prior to this Offering, no public trading market existed for the Common Stock. There can be no assurance that a public trading market for the Common Stock will develop or that a public trading market, if developed, will be sustained. Although the Company anticipates that upon completion of this Offering, the Common Stock will be eligible for inclusion on the NASD Electronic Bulletin Board System, no assurances can be given that the Common Stock will be listed on the Bulletin Board. Consequently, there can be no assurance that a regular trading market for the Common Stock will develop after the completion of the Offering. If a trading market does in fact develop for the Common Stock offered hereby, there can be no assurance that it will be maintained. Furthermore, if for any reason the Common Stock is not listed on the Electronic Bulletin Board or a public trading market does not otherwise develop, purchasers of the Common Stock may have difficulty in selling their Common Stock should they desire to do so. In any event, because certain restrictions may be placed upon the sale of securities under $5.00, unless such securities qualify for an exemption from the 'penny stock' rules, such as a listing on The NASDAQ SmallCap Market, some brokerage firms will not effect transactions in the Company's Common Stock and it is unlikely that any bank or financial institution will accept such securities as collateral, which could have an adverse effect in developing or sustaining any market for the Common Stock. See "--'Penny Stock' Regulations May Impose Certain Restrictions on Marketability of Securities." Although they have no legal obligation to do so, the Underwriters from time to time may act as market makers and may otherwise effect and influence transactions in the Common Stock. However, there is no assurance that the Underwriters will continue to effect and influence transactions in the Common Stock. The prices and liquidity of the Company's Common Stock may be significantly affected by the degree, if any, of the Underwriters' participation in the market. The Underwriters may voluntarily discontinue such participation at any time. Further, the market for, and liquidity of, the Common Stock may be adversely affected by the fact that a significant amount of the Common Stock may be sold to customers of the Underwriters. The Common Stock offered hereby will be traded in the over-the-counter market in what are commonly referred to as the 'pink sheets' or on the Electronic Bulletin Board. As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the price of the Common Stock offered hereby. The above-described rules may materially adversely affect the liquidity of the market for the Company's Common Stock. See "Underwriting." SUBSTANTIAL AND IMMEDIATE DILUTION 7 The initial public offering price is substantially higher than the book value per share of Common Stock. Investors purchasing shares of Common Stock pursuant to this Prospectus therefore will incur immediate and substantial dilution of $3.66 per share (approximately 73.2% of the per share offering price). Existing stockholders acquired their shares of Common Stock at a nominal price and, accordingly, new investors will bear virtually all of the risks inherent in an investment in the Company. See "Dilution." SHARES AVAILABLE FOR FUTURE SALE Upon completion of this Offering, there will be 3,800,000 shares of Common Stock outstanding (3,920,000 shares if the Underwriters' over-allotment option is exercised in full), excluding shares issuable upon exercise of stock options and warrants. Of these shares, the 800,000 shares sold in this Offering (920,000 shares if the Underwriters' over-allotment is exercised in full) will be freely tradeable under the Securities Act of 1933, as amended (the "Securities Act"), except for any such shares purchased by an "affiliate" of the Company. The remaining 3,000,000 shares (the "Restricted Shares") (which were issued and sold by the Company in private transactions in reliance upon the non-public offering exemption set forth in Section 4(2) of the Securities Act) and any other shares hereafter acquired by an "affiliate" of the Company will be eligible for sale under Rule 144 under the Securities Act, or at any time pursuant to an effective registration statement relating to such shares. No prediction can be made as to the effect, if any, that future sales, or the availability of shares of capital stock for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of stock (including shares issuable upon the exercise of stock options and warrants), or the perception that such sales could occur, could adversely affect prevailing market prices for such shares. SUBSTANTIAL NUMBER OF AUTHORIZED SHARES AVAILABLE FOR FUTURE ISSUANCE; POSSIBLE DILUTIVE AND ANTI-TAKEOVER EFFECTS The Company's Articles of Incorporation authorize the issuance of 20,000,000 shares of Common Stock. Upon completion of this Offering (assuming the Underwriters' over-allotment option is not exercised), there will be approximately 16,200,000 authorized but unissued shares of Common Stock available for future issuance. The Company's Board of Directors has the power to issue substantial amounts of additional shares without stockholder approval. Although the Company currently has no commitments to issue any shares of Common Stock other than as described in this Prospectus, the Company may issue a substantial number of additional shares in connection with future financings or acquisitions. To the extent that additional shares of Common Stock are issued, dilution of the interests of the Company's stockholders will occur. The Company's Articles of Incorporation also authorize the issuance of 3,000,000 shares of Preferred Stock with such designations, rights, and preferences as may be determined from time to time by the Board of Directors. The Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting power or other rights of the holders of the Company's Common Stock. In addition, the issuance of Preferred Stock and Common Stock could be utilized, under certain circumstances, as a method of discouraging, delaying, or preventing a change in control of the Company. Although the Company currently has no commitments to issue any shares of Preferred Stock or Common Stock, there can be no assurance that the Company will not do so in the future. See "Description of Capital Stock." 'PENNY STOCK' REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF SECURITIES The Securities and Exchange Commission (the "Commission"') has adopted regulations which generally define 'penny stock' to be any security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Therefore, if the market price of the Common Stock is less than $5.00 per security, then such security would fall within the definition of 'penny stock.' Since it is intended that the Common Stock offered hereby will be authorized for quotation on the Electronic Bulletin Board, such securities will not be exempt from the definition of 'penny stock.' The Company's Common Stock may become subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and 8 the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the 'penny stock' rules may restrict the ability of broker-dealers to sell the Company's Common Stock and may affect the ability of purchasers in this Offering to sell the Company's Common Stock in the secondary market and the price at which such purchasers can sell any such securities. ABSENCE OF DIVIDENDS The Company has never paid cash dividends on the Common Stock and no cash dividends are expected to be paid on the Common Stock in the foreseeable future. The Company anticipates that for the foreseeable future all of its cash resources and earnings, if any, will be retained for the operation and expansion of the Company's business. See "Dividend Policy." IN ADDITION TO THE ABOVE RISKS, BUSINESSES ARE OFTEN SUBJECT TO RISKS NOT FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS MEMORANDUM, POTENTIAL INVESTORS SHOULD KEEP IN MIND OTHER POSSIBLE RISKS. USE OF PROCEEDS The net proceeds from the sale of the 800,000 shares of Common Stock offered by the Company in this Offering, after deducting the estimated underwriting discounts and commissions and expenses payable by the Company to attorneys and accountants in connection with this Offering, are estimated to be $3,073,000 ($3,583,000 if the Underwriters' over-allotment option is exercised in full). The net proceeds of this Offering will be used for (1) repaying $2,000,000 in indebtedness which is owed to the founders of the Company, and (2) working capital, including but not limited to, (a) motion picture development and production, including, but not limited to, (i) supplying production financing for the Company's motion picture projects, (ii) retaining, generally on a picture-to-picture basis, the services of writers, directors and other artistic elements in the development of motion picture projects, (iii) purchasing or obtaining options for rights to books, screenplays and other artistic properties, and (iv) general administrative expenses. The money borrowed from the founders of the Company was used to fund film productions and operations. Interest on this indebtedness accrued at 7% per annum. See "Certain Relationships." The Company intends to maintain flexibility in order to adjust its strategies in response to (i) the financial results of its motion pictures, (ii) developments in the motion picture and entertainment industries, (iii) changing needs of the Company, and (iv) new opportunities that may arise in the future. Accordingly, the specific allocation and expenditure of the proceeds of this Offering among the foregoing uses will remain within the discretion of management and cannot be determined as of the date of this Prospectus. Pending their ultimate application, the net proceeds will be invested in interest or non-interest bearing accounts or invested in short-term government obligations, investment-grade securities, money market funds or certificates of deposit. Management believes that the net proceeds from this Offering, together with its existing capital, funds from operations, advances from both domestic and foreign distributors and other available sources of capital, will be sufficient to enable the Company to fund its planned development, production and overhead expenditures for the next 12 months. The following table summarizes the expected use of proceeds described above:
Dollar Percentage of Use of Proceeds Amount Net Proceeds --------------- ------ ------------ Repayment of Indebtedness........................................$2,000,000 65.1% Working Capital.................................................. 1,073,000 34.9% Total...................................................$3,073,000 100.0%
9 DIVIDEND POLICY The Company presently intends to retain future earnings, if any, to finance the expansion and development of its business and not pay cash dividends on the Common Stock in the foreseeable future. Any future decision of the Company's Board of Directors to pay dividends will be made in light of the Company's earnings, financial position, capital requirements and other relevant factors then existing. DILUTION As of January 31, 1997, the Company has a net tangible book value of $ 2.036 million or $0.68 per share. Net tangible book value per share of Common Stock is defined as the tangible assets of the Company, less all liabilities, divided by the number of shares of Common Stock outstanding, including the shares resulting from the assumed exercise of all outstanding warrants and options. After giving effect as of January 31, 1997 to the sale of 800,000 shares of Common Stock offered hereby and after deducting the estimated offering expenses, the pro forma net tangible book value of the Common Stock at January 31, 1997 would have been $5.109 million or $1.34 per share. This represents an immediate increase in net tangible book value of $0.66 per share to existing stockholders and an immediate dilution of $3.66 per share or 73.1% of the offering price, to new investors purchasing the shares offered hereby. The following table illustrates this per share dilution:
Initial public offering price $ 5.00 Net tangible book value per share before offering $0.68 Increase in net tangible book value attributable to new investors 0.66 --------------- Pro forma net tangible book value after giving effect to public offering 1.34 ----------- Dilution per share to new investors (1) $ 3.66 ===========
- ------------------------ (1) Dilution to new investors does not take into account the issuance of shares of Common Stock upon exercise of options or warrants, and assumes no exercise of the Underwriter's over-allotment option. See "Underwriting." To the extent any of these options or warrants are exercised, there may be further dilution to new investors. The following table, calculated as of January 31, 1997 on the same basis as above, summarizes with respect to existing holders of Common Stock and new investors of Common Stock in this Offering, a comparison of the number of shares acquired from the Company, the percentage ownership of such shares, the total consideration paid, the percentage total consideration paid and the average price per share.
Shares Purchased Total Consideration Average ----------------- ------------------- Price Number Percent Amount Percent Per Share ------ ------- ------ ------- --------- Existing Stock holders 3,000,000 78.9% $ 2,035,931 33.7% $ 0.68 New Investors 800,000 21.1% 4,000,000 66.3% $ 5.00 ----------------------------------------------------- 3,800,000 100.0% $ 6,035,931 100.0% =====================================================
10 CAPITALIZATION The following table sets forth the capitalization of the Company as of January 31, 1997, and as adjusted to give effect to the sale of the Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the consolidated financial statements and related Notes thereto and "Management's Discussion and Analysis and Results of Operation" appearing elsewhere in this Prospectus.
January 31, 1997 ---------------- Actual As Adjusted ------ ----------- (in thousands) Minority Interest $ 3,132 $ 3,132 Shareholders' Equity: Preferred stock, $0.01 par value -- -- 3,000,000 shares authorized, none issued Common stock, $0.01 par value, 30 38 20,000,000 shares authorized, 3,000,000 shares issued and outstanding; 3,800,000 shares issued and outstanding, as adjusted Additional paid-in capital 2 ,041 5,106 Retained Earnings (35) (35) ---------- ---------- Total shareholders' equity 2,036 5,109 ---------- ---------- Total Capitalization $ 2,036 $ 5,109 ========== ----------
----------------------- (1) In accordance with Statement of Financial Accounting Standards No. 53 "Financial Reporting by Producers and Distributors of Motion Pictures," the Company has elected to present an unclassified balance sheet. For information concerning the Company's debt and lease obligations, see Notes to Consolidated Financial Statements. 11 SELECTED FINANCIAL DATA The following selected consolidated financial data are qualified by reference to, and should be read in conjunction with, the Company's consolidated financial statements, the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Prospectus. The selected financial data for each of the two years ended July 31, 1996 and 1995 are derived from Company's audited financial statements. The selected financial data for the six-month periods ended January 31, 1997 and 1996 are derived from the Company's unaudited financial statements. Operating results for the six months ended January 31, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 1997.
Years Ended Six Months Ended July 31, January 31, --------------------------- ------------------------------ Consolidated Statement of Operations Data: 1996 1995 1997 1996 ------------ ------------ ------------ --------------- (in thousands, except per share data) Film revenue............................................ $ 2,626 $ - $ 4,030 $ - Film amortization....................................... 1,609 - 3,185 - ------------- ------------ ------------ --------------- Gross Profit............................................ 1,017 - 845 - General, administrative and selling expenses....... 755 32 436 333 Interest expenses.................................. 127 - 77 42 Other income (expenses) net........................ 48 - (1) 9 Income (loss) before income taxes....................... 183 (32) 331 (366) Provision (benefit) for income taxes.................... 27 - (27) (155) ------------- ------------ ------------ --------------- Income (loss) before minority interests................. $ 156 $ (32) 358 (211) ============= ============ ============ =============== Minority interests (1).................................. $ 88 $ - $ 429 - Net Income (loss)....................................... $ 68 $ (32) (71) (211) Net income (loss) per share............................. $ 0.03 $ (0.03) $ (0.02) (0.14) ============= ============ ============ =============== Weighted average shares outstanding..................... 2,364 1,000 3,000 1,527 ============= ============ ============ ===============
January 31, 1997 ---------------------------- Actual Proforma(2) ------------- ------------ (Unaudited) (Unaudited) Consolidated Balance Sheet Data: Film costs, net......................................... $ 6,725 $ 6,725 Total assets............................................ 7,433 8,506 Shareholder advances.................................... 1,809 - Total stockholders' equity (deficit).................... 2,036 5,109
- ---------- (1) Certain related and third parties own minority interests in two limited partnerships that financed three of the Company's motion pictures. See "Business--Financing of Motion Picture Production." (2) Adjusted to reflect the sale of the 800,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and the Notes thereto appearing elsewhere in this Registration Statement on Form SB-2 of which this Prospectus forms a part. Certain statements contained in this Registration Statement on Form SB-2 of which this Prospectus forms a part that are not related to historical results, including, without limitation, statements regarding the Company's business strategy and objectives, future financial position and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and involve risks and uncertainties. Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward- looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under "Risk Factors" and "Business," as well as those discussed elsewhere in this Registration Statement on Form SB-2 of which this Prospectus forms a part. All forward-looking statements contained in this Registration Statement on Form SB-2 of which this Prospectus forms a part are qualified in their entirety by this cautionary statement. The period from May 10, 1995, the Company's inception, to July 31, 1995 is referred to herein as FY 1995 and the fiscal year ended July 31, 1996 is referred to herein as FY 1996. OVERVIEW The Company is primarily engaged in the production and distribution of motion pictures in domestic and foreign markets. The Company produces low budget movies striving for stories with wide appeal and high production quality. The Company has produced eight movies and released seven through January 31, 1997 ranging in production costs from $540,000 to $3,200,000. The Company is in pre-production for its ninth production and is in the development stage of several more projects. The Company plans to produce three to five low budget movies per year. The Company expects its next several films to have budgets less than $1.0 million. The Company also believes that low budget films require less capital resources, less general and administrative costs and limit the financial risk to the Company in any one motion picture. Furthermore, the Company has had more favorable experiences with film costing less than $1.0 million. A substantial portion of the Company's film revenue since its inception on May 10, 1995 has been derived from transactions with Cabin Fever Entertainment, Inc. ("CFE"). The Company licensed domestic rights to CFE for seven movies. In November 1996, after the Company already delivered the seven films licensed, CFE refused to accept delivery of the last of the seven movies. The relationship between the Company and CFE has subsequently deteriorated, resulting in a lawsuit wherein the Company claims damages for copyright infringement, breach of contract and fraud. The case was filed in federal district court in New York in the first quarter of 1997. CFE did not answer the complaint but instead moved to dismiss the copyright claim, which is the basis for federal jurisdiction. If CFE is successful on its motion, the Company intends to move forward with the remaining contract and fraud claims in state court. Subsequent to the deterioration of the relationship with CFE, the Company has licensed two other films domestically through other distributors. See "Business-- Legal Proceedings." Management of the Company anticipates that the majority of the total estimated revenue for the Company will be from licensing to foreign distributors. The Company attends film markets such as the Cannes Film Festival to promote and license its films to territories such as Germany, South Korea, Latin America and Spain. As of January 31, 1997, the Company has not licensed films in some major territories such as Japan and Scandinavia. Although there can be no assurances, the Company hopes to have licensing agreements in these territories by December 1997. As of January 31, 1997, the Company has a backlog of foreign sales orders of approximately $2,988,000. The Company generally amortizes film costs using the individual-film-forecast computation method, under which film costs are amortized for each film in the proportion that revenue recognized during the current period for the film bears to management's estimate of the total film revenue to be realized from all media and markets for that film. Film costs include acquisition costs, print and advertising costs (including costs for advertising which is intended to benefit the films in other markets such as home video or television), and, with respect to home video, the costs of manufacturing (if applicable) and distributing the motion picture. Management regularly reviews and revises its revenue estimates for each film, which may result in a change in the rate of amortization and a write-down of the asset (thereby affecting stockholders' equity and the Company's gross profit). 13 The Company's unamortized film costs are comprised as of the dates set forth below of the following:
July 31, 1995 January 31, 1996 July 31, 1996 January 31, 1997 ------------- ---------------- ------------- ---------------- (In thousands) Film costs, net............. $ -- $3,694 $9,200 $6,725
The Company believes gross film revenue with respect to a motion picture is typically realized in the first few years following the film's availability. As of January 31, 1997, approximately 70% of film costs have been amortized for films available for delivery prior to July 31, 1996. RESULTS OF OPERATIONS The table sets forth, for the periods indicated, the percentage of total revenues represented by certain items included in the Statement of Operations.
Years Ended Six Months Ended July 31, January 31, ----------------------- ---------------------- 1996 1995 1997 1996 --------- ----------- --------- ---------- Film Revenue 100.0% - 100.0% - Amortization of Film Costs 61.3 - 79.0 - Gross Margin 38.7 - 21.0 - Selling, General and Administrative 28.7 - 10.8 - Expenses Interest, Net (4.4) - (1.9) - Income Before Income Taxes 6.9 - 8.2 - Benefit (Provision) for taxes (1.0) - 0.7 - Minority Interests (3.3) - (10.7) - Net Income (Loss) 2.6 - (1.8) -
YEAR ENDED JULY 31, 1996 COMPARED TO INCEPTION (MAY 10, 1995) THROUGH JULY 31, 1995 Film revenue. Film revenue for the year ended July 31, 1996 was $2.626 million. For the period from inception in May 1995 to July 31, 1995 there was no revenue recognized. There were four films available for foreign and domestic distribution in FY 1996. During FY 1995, the Company's efforts were directed to production of films and start-up of the Company. Approximately 74.6% of the Company's film revenue for the year ended July 31, 1996 was attributable to one film released in the period. Film Amortization. Film amortization primarily represents the amortization of the Company's film costs. Film amortization was $1.610 million in FY 1996 and there was no amortization for the period ended July 31, 1995. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to approximately $0.755 million for FY 1996 from approximately $0.032 for FY 1995, which represented only three months. During FY 1995, which represented only three months, the Company's efforts were directed to production of films and start-up of the Company. Interest. Interest expense for the year ended July 31, 1996 increased to approximately $0.117 million from $0 for the period ended July 31, 1995. The increase was primarily attributable to the increase in stockholders' advances used to fund production efforts. SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1996 Film revenue. Film revenue for the six months ended January 31, 1997 increased to approximately $4.030 million from no revenues for the comparable period in 1996. The film revenue in 1997 was primarily attributable to the availability of seven movies for both foreign and domestic distribution at some period in the six months ended January 31, 1997 compared to no movies available for the comparable period in 1996. Approximately 48.5% of the Company's film revenue during the six months ended January 31, 1997 was attributable to one of the films initially released during the period. In addition, the 14 Company expects to increase the backlog of sales to foreign territories and upon delivery a significant portion of the existing and increased backlog, recognizing revenue accordingly in the final two quarters of 1997. Film Amortization. Film amortization primarily represents the amortization of the Company's film costs. Film amortization increased from $3.185 million during the six month period ended January 31, 1996 compared to no expense for the six month period ended January 31, 1996. The increase was due to the increase in the Company's revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to approximately $0.436 million for the six months ended January 31, 1997 from approximately $0.333 for the six months ended January 31, 1996. For each six month period ended January 31, 1996 and 1997, the total selling, general and administrative costs, in absolute dollars were approximately $1.0 million. However, in connection with the production and pre-release marketing efforts during the six months ended January 31, 1996, the Company capitalized certain selling, personnel and administrative costs attributable to the production or initial marketing of films. During the six months ended January 31, 1997, less costs were capitalized as the Company's selling, personnel and administrative costs were allocated to both production and selling efforts for previously released films. The Company expects selling, general and administrative expenses, in absolute dollars, to remain level in the near future. Interest. Interest expense for the six months ended January 31, 1997 increased to approximately $0.077 million from approximately $0.042 million for the corresponding period in 1996. The 239% percent increase was primarily attributable to the increase in stockholders' advances used to fund production efforts. Interest expense, as a percentage of advances due to stockholders, was consistent for each period. Provision (Benefit) for Income Taxes. The benefit for income taxes for the six month period ended January 31, 1997 decreased to $0.027 million from $0.155 million. The 82.8% decrease was attributable to a smaller operating loss for the six months ended January 31, 1997 as compared to the corresponding period in 1996. The effective rate remained relatively constant, net of usage of net operating loss carryforwards, of pre-tax income for the six months ended January 31, 1996 and for the six months ended January 31, 1997. Minority Interests. Minority interests represents the pro-rata portion (based on revenues of films financed by minority interests) of amounts due minority limited partners in excess of their initial investment in the Company's limited partnerships subsidiaries. Minority interest increased to $0.429 million during the six month period ended January 31, 1997 compared to no expense for the six month period ended January 31, 1996 due to the increase in the Company's revenues for the applicable three films. INFLATION. The Company believes that inflation, including periodic increases in movie admission and video rental prices, has not had a material impact on the Company's financial condition or results of operations. LIQUIDITY AND CAPITAL RESOURCES Since its inception on May 10, 1995, the Company has satisfied its liquidity requirements principally through advances and equity financing provided from its shareholders or investments from the sale of limited partnership interests in two limited partnerships. The Company's cash flow from operating, investing, and financing activities for FY 1995 and FY 1996 and for the six-month periods ended January 31, 1996 and 1997 were as follows:
Fiscal Year Ended Six Months Ended July 31, January 31, 1995 1996 1996 1997 -------------- --------------- -------------- ------------- (In thousands) Cash Flow Provided by (Used in): Operating activities $ (32) $ 2,186 $ 344 $ 3,165 Investing activities - (10,810) (3,674) (710) Financing activities 500 8,155 6,405 (2,160)
15 As set forth above, cash flows provided by financing (primarily equity and advances provided by shareholders and investments in limited partnership interests in its subsidiaries) and cash provided from operating activities (mostly film revenues in domestic and international markets) have been sufficient to cover cash flows used for the Company's investing activities (primarily the Company's film acquisition and production costs). The Company experienced positive cash flow from operations of $3.165 million for the six months ending January 31, 1997. As the Company increases the number of films it acquires or produces, it can be expected that net negative cash flow from investing will continue to be offset, in part by cash flows provided by cash flows provided by operating activities. The Company will continue to be significantly dependent upon its ability to deliver movies to its customers. As of July 31, 1996, the Company had licenses with its customers for approximately $7.357 million, of which approximately $3.134 million was collected. The remaining $4.223 million of backlog will be collected at various periods depending on license terms between the Company and its customers and when movies are delivered. As the Company continues its selling efforts in film markets such as Cannes, America Film Market and Milan International Film, backlog is expected to increase, offset by collections upon delivery of movies to its customers. The Company actively seeks to acquire motion pictures to produce and distribute. The Company's ability to acquire suitable films has, in the past, been limited by its ability to raise capital through subsidiaries (see "Financing of Motion Picture Production - Limited Partnerships") and its founding stockholders ability to provide adequate capital. The founding stockholders do not currently intend to make any further advances or investments to the Company. The Company has no material commitments for capital expenditures at July 31, 1996 and January 31, 1997. The Company believes that its existing capital resources, together with the proceeds of this Offering, will enable the Company to maintain its operations and working capital requirements for at least twelve (12) months. However, it is possible that additional financing will be required to fund further growth in the Company's business beyond the next 12 months whether through equity financing, debt financing or other sources. There can be no assurance that such sources of financing will be available, or will be available on terms acceptable to the Company. Inability to obtain additional financing could limit the Company's ability to produce motion pictures, retain writers, directors and other artistic elements, purchase rights to books, screenplays and other artistic properties, or take other actions that would benefit the Company and its stockholders and could therefore have a material adverse effect on the Company. BUSINESS MOTION PICTURE INDUSTRY OVERVIEW GENERAL The motion picture industry consists of two principal activities: production, which involves the development, financing and production of motion pictures; and distribution, which involves the promotion and exploitation of feature-length motion pictures in a variety of media, including theatrical exhibition, home video, television and other ancillary markets, both domestically and internationally. The United States motion picture industry is dominated by the "major" studios, including The Walt Disney Company, Paramount Pictures Corporation, Warner Brothers, Inc., MCA, Twentieth Century Fox, Columbia Pictures, Tri-Star Pictures and MGM/UA. The major studios are typically large diversified corporations that have strong relationships with creative talent, exhibitors and others involved in the entertainment industry and whose libraries of motion pictures provide a stable source of earnings which offset the variations in the financial performance of their motion picture releases and other aspects of their motion picture operations. The major studios have historically produced and distributed the vast majority of high grossing theatrical motion pictures released annually in the United States. In recent years, "independent" films have been successfully marketed and have received commercial acclaim. Of the five pictures nominated for "best picture" in 1996, four, Fargo, The English Patient, Shine and Secrets and Lies, are independent films. In addition, an independent film, The English Patient, won the Oscar for the Best Picture of 1996. Furthermore, the major recipients of Oscar nominations were independent films rather than the films produced by the larger studios. The public's acceptance of these movies not produced by a major studio indicates that companies such as the Company can be competitive in an industry that traditionally has been dominated by the larger studios. Harvey Weinstein, co-Chairman of Miramax, the New York based and Disney-owned company, commented that the Oscar nominations indicate "that there are actually two movie businesses now: the big studio event movies and the smaller, more innovative independent film." He added that all the nominations "have one thing in common: they were writer-driven with good sound stories." The 16 results of the 1996 Oscars further solidify the importance of independent film makers. The independent studios earned most of the major Oscars, including, best picture, best actor, best actress, best supporting actress, and best director. The Company has also profited from the success of the independent film companies in 1996. Since the nominations were announced, management of the Company has been able to speak with well-known actors, actresses, and directors about working with the Company to develop independent productions. In the past, these people would not have discussed any possible projects with the Company. However, management of the Company believes that the success of the independents in 1996 may be the beginning of a cycle from which the Company will be able to benefit. Management of the Company believes that over time the Company can develop a solid reputation for producing quality, market-accepted lower-budget movies. MOTION PICTURE PRODUCTION AND FINANCING The production of a motion picture begins with the screenplay adaptation of a popular novel or other literary work acquired by the producer or the development of an original screenplay having its genesis in a story line or scenario conceived or acquired by the producer. In the development phase, the producer typically seeks production financing and tentative commitments from a director, the principal cast members and other creative personnel. A proposed production schedule and budget are also prepared during this phase. Upon completing the screenplay and arranging financing commitments, pre-production of the motion picture begins. In this phase, the producer engages creative personnel to the extent not previously committed; finalizes the filming schedule and production budget; obtains insurance and secures completion guaranties, if necessary; establishes filming locations and secures any necessary studio facilities and stages; and prepares for the start of actual filming. For the Company, principal photography (the actual filming of the screenplay) generally extends from three to six weeks, depending upon such factors as budget, location, weather and complications inherent to the screenplay. This varies considerably from the major studios which may be in principal photography for as long as 30 to 40 weeks. Following completion of principal photography in what is typically referred to as post-production, the motion picture is edited, opticals, dialogue, music and any special effects are added, and voice, effects and music sound tracks and pictures are synchronized. This results in the production of the negative from which release prints of the motion picture are made. Production costs consist of acquiring or developing the screenplay, film studio rental, principal photography, post-production and the compensation of creative and other production personnel. Distribution expenses, which consist primarily of the costs of advertising and preparing release prints, are not included in direct production costs. The major studios generally fund production costs from cash flow generated by motion picture and related activities or, in some cases, from unrelated businesses or through off-balance sheet methods. Substantial overhead costs, consisting largely of salaries and related costs of the production staff and physical facilities maintained by the major studios, also must be funded. Independent production companies generally avoid incurring overhead costs as substantial as those incurred by the major studios by hiring creative and other production personnel and retaining the other elements required for pre-production, principal photography and post-production activities on a picture-by-picture basis. Sources of funds for independent production companies may include bank loans, "pre-licensing" of distribution rights, equity offerings and joint ventures. Independent production companies generally attempt to obtain all or a substantial portion of their financing of a motion picture prior to commencement of principal photography, at which point substantial production costs begin to be incurred and require payment. "Pre-Licensing" of film rights is often used by independent film companies to finance all or a portion of the direct production costs of a motion picture. By "pre-licensing" film rights, a producer obtains amounts from third parties in return for granting such parties a license to exploit the completed motion picture in various markets and media. Production companies with distribution divisions may retain the right to distribute the completed motion picture either domestically or in one or more international markets. Other production companies may separately license theatrical, home, video, television and all other distribution rights among several licensees. See "Business -- Financing of Motion Picture Production." In connection with the production and distribution of a motion picture, major studios and independent production companies often grant contractual rights to actors, directors, screen writers, and other creative and financial contributors to share in revenues or net profits (as defined in their respective agreements) from such motion picture. Except for the most sought-after talent, these third-party participations are generally payable after all distribution fees, marketing expenses, direct production costs and financing costs are recouped in full. 17 MOTION PICTURE DISTRIBUTION General ------- Distribution of a motion picture involves domestic and international licensing of the picture for (a) theatrical exhibition, (b) non-theatrical exhibition, which includes airlines, hotels and armed forces facilities, (c) video cassettes, (d) presentation on television, including pay-per-view, pay, network, syndication or basic cable and (e) marketing of the other rights in the picture and underlying literary property, which may include books, merchandising and soundtracks. In recent years, revenues from the licensing of rights to distribute motion pictures in ancillary (i.e., other than domestic theatrical) markets, particularly home video and international pay and free television, have increased significantly. The distributor typically acquires rights from the producer to distribute a motion picture in one or more markets and/or media. For its distribution rights, the distributor generally agrees to pay to the producer a certain minimum advance or guarantee upon the delivery of the completed motion picture, which amount is to be recouped by the distributor out of revenues generated from the distribution of the motion picture in particular media or territories. After the distributor has recouped the amount advanced (if any) plus its distribution costs, the distributor is then entitled to retain ongoing distribution fees computed as a percentage of the gross revenues generated from its distribution of the picture. The producer is thereafter entitled to receive all remaining revenues in excess of the ongoing distribution fee retained by the distributor. A substantial portion of a film's ultimate revenues are generated in a film's initial distribution cycle (generally the first five years after the film's initial domestic theatrical release). Commercially successful motion pictures, however, may continue to generate revenues after the film's initial distribution cycle from the relicensing of distribution rights in certain media, including television and home video, and from the licensing of distribution rights with respect to new media and technologies. Below is a summary of the potential distribution cycle of a motion picture. It is important to realize that the distribution cycle of a motion picture varies from picture to picture and from company to company. The Company, as a small independent film company, anticipates that many, if not all, of its films will not be released in theaters and instead, will be released, if at all, on television or other similar media. The movie industry is highly competitive, and there is no guarantee that any of the Company's movies will be released in any media, or if released, will be able to generate enough revenues to recoup the direct negative costs associated with the movie's production. See "--Competition" and "Risk Factors--Risks of Motion Picture Production." Theatrical ---------- The theatrical distribution of a motion picture involves the licensing and booking of the motion picture to theatrical exhibitors, the promotion of the picture through advertising and publicity campaigns and the manufacture of release prints from the film negative. Expenditures on these activities, particularly on promotion and advertising, are often substantial and may have a significant impact on the ultimate success of the film's theatrical release. Moreover, as the vast majority of these costs (primarily advertising costs) are incurred prior to the first weekend of the film's domestic theatrical release, there is not necessarily a correlation between these costs and the film's ultimate box office performance. In addition, the ability to distribute a picture during peak exhibition seasons, including the summer months and the Christmas holidays, may affect the theatrical success of the picture. While arrangements for the exhibition of a film vary greatly, there are certain fundamental economic relationships applicable to domestic theatrical distribution. Theater owners (the "exhibitors") retain a portion of the admission paid at the box office ("gross box office receipts"). The share of the gross box office receipts retained by an exhibitor generally includes a fixed amount per week (in part to cover overhead), plus a percentage of receipts that escalates over time. The balance ("gross film rentals") is remitted to the distributor. The distributor then retains a distribution fee from the gross film rentals and recoups the costs incurred in distributing the film which consist primarily of the cost of advertising and the cost of release prints for exhibition. The balance of gross film rentals, after deducting distribution fees and any additional distribution costs recouped by the distributors ("net film rentals"), is then remitted to the producer of the film. 18 Home Videos ----------- A motion picture typically becomes available for videocassette distribution within four to six months after its initial domestic theatrical release. Home video distribution consists of the promotion and sale of video cassettes to local, regional and national video retailers which rent or sell video cassettes to consumers primarily for home viewing. Television ---------- Television rights are generally licensed first to pay-per-view for an exhibition period within six to nine months following initial domestic theatrical release, then to pay television approximately twelve to fifteen months after initial domestic theatrical release, thereafter in certain cases to free television for an exhibition period, and then to pay television again. These films are then syndicated to either independent stations or basic cable outlets. Pay-per-view allows subscribers to pay for individual programs. Pay television allows cable television subscribers to view such services as HBO, Cinemax, Showtime, The Movie Channel or Encore Media Services offered by their cable system operators for a monthly subscription fee. Since groups of motion pictures are typically packaged and licensed as a group for exhibition on television over a period of time, revenues from these television licensing "packages" may be received over a period that extends beyond five years from the initial domestic theatrical release of a particular film. Motion pictures are also "packaged" and licensed for television broadcast in international markets. Non-Theatrical and Other Rights -----------------'-------------- Films may be licensed for use by airlines, schools, public libraries, community groups, the military, correctional facilities, ships at sea and others. Music contained in a film may be licensed for sound recording, public performance and sheet music publication. Rights in motion pictures may be licensed to merchandisers for the manufacture of products such as video games, toys, T-shirts, posters and other merchandise. Rights may also be licensed to create novelizations of the screenplay and other related book publications. International Markets --------------------- In addition to their domestic distribution activities, motion picture producers and distributors generate substantial revenues from distribution of motion pictures in international markets (in the same media in which films are distributed in the domestic market). COMPANY HISTORY The Company was organized under the laws of the State of Delaware in May 1995. The Company is engaged in the acquisition, development, financing, production, distribution and licensing of motion pictures for exhibition in domestic and international theatrical markets and for subsequent worldwide release in different media, including, but not limited to, home video and pay and free television. The Company was incorporated in Delaware in May 1995. Harry Shuster, the Company's Chairman, has produced or co-produced 20 movies during the past 25 years. Brian Shuster, President and Chief Executive Officer of the Company, has been involved in various aspects of film production for approximately 15 movies during the past eight years. See "Management." During the Company's first two years of operations, the Company has completed production of eight films, consisting of The Secret Agent Club, Prey of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with Muscles, and Skeletons. Santa with Muscles was released in movie theaters in November 1996; Chase Morran was released in February 1997 on the SCI-Fi channel; and Skeletons was released on HBO in April 1997. Prey of the Jaguar, Blood Money, and Firestorm have been licensed by HBO from CFE, but release dates have not yet been determined. See "Business--Financing of Motion Picture Production." The other movies are expected to be distributed by the end of the year. In addition, the Company is currently in pre-production of several films, one of which is Rear View Mirror, which should be completed in August 1997 and released in calendar 1998. All of the films produced by the Company to date have been in a budget range of between $540,000 and $3,200,000. See "--Motion Picture Production" for the Company's current slate of motion picture projects. To produce a project, the Company first acquires the rights to a story, book or script ("property"). The Company then typically secures a financing or production commitment for the project from third parties, such as private investors, studios, and distributors, prior to expending substantial funds in the development process. However, the Company does advance its own funds to meet the interim costs of development and production which amounts are generally repaid to the 19 Company pursuant to the production contracts. See "Business--Financing of Motion Picture Production" for a description of the Company's financing activities. STRATEGIC OBJECTIVE The Company's strategy is to (i) develop long-term relationships with talent who have demonstrated the ability to attract widespread audience interest, both domestically and in significant international markets, (ii) seek to limit the financial risk to the Company inherent in any one motion picture project while preserving potential returns through the strategic use of long-term distribution agreement with companies such as HBO covering the United States and Canada, and their respective territories, possessions, and protectorates (the "Domestic Territories") as well as such foreign distributors such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media (South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain) and Italian International Films (Italy), and (iii) exercise strong management control of production costs of its motion pictures, as well as of general overhead. The Company's principal goal is to produce and arrange for the release of three to five commercially successful low-budget motion pictures per year. Although there can be no assurances, the Company believes that over time these films will become the core of a library of films which management believes have the capacity of generating revenues from their worldwide exploitation in existing and future media and markets. The Company, as a small independent film company, anticipates that many, if not all of its films, will not be released in theaters but instead, will be released on cable television, television and other similar media. The Company attempts to balance the financial risk in its productions with the potential return from exploitation of the rights in its motion pictures by entering into selective, strategic financing and distribution arrangements with certain domestic and international distributors. These distributors provide advances and minimum guarantees in return for the right to distribute the Company's motion pictures in the licensed territory or media. Generally, the Company's goal is to receive licensing advances and guarantees (referred to herein as "prelicensing") in an amount equal to a substantial percentage of the aggregate direct negative cost of its motion pictures and, in this way, arrange for distribution of the Company's motion pictures without incurring the substantial overhead or financial risk often associated with distribution. Management believes, based upon its experience, that it can obtain advances from pre-licensing pursuant to distribution agreements in an amount equal to a substantial percentage of the aggregate direct negative cost of each motion picture. However, there can be no assurance with respect to any particular motion picture that such advances will equal such film's direct negative cost. The Company attempts to strictly control the cost of each motion picture through active management involvement in all phases of the production process. Management is actively involved in the budgeting process, including the development of economic assumptions used in determining whether a particular project is approved for production. Management of the Company believes that its extensive experience in the motion picture industry will enable the Company to control and maintain its general overhead expenditures at appropriate levels given its production schedule. For each motion picture that is approved for production, additional personnel are employed to work on that motion picture only, and the costs of these personnel are included in the budgeted cost for such motion picture. Management of the Company believes that there will be adequate qualified personnel available from time to time to meet the Company's needs for additional personnel. As a result, when no motion pictures are in production, the Company maintains a relatively small staff (currently 11 full-time employees), which management believes is sufficient to conduct the Company's current business activities. Management intends to keep its permanent, full-time staff members needed to operate the Company on a day-to-day basis at a small number in order to keep its fixed overhead expenses low. See "Business--Employees." MOTION PICTURE PRODUCTION Much of the Company's first two years of operations was spent acquiring the rights to and developing motion picture projects, as well as producing eight motion pictures. The Company has completed production of eight motion pictures to date, consisting of: The Secret Agent Club, Prey of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with Muscles, and Skeletons. In addition, as indicated below, the Company has several projects in pre-production, one of which is entitled Rear View Mirror, which has an anticipated completion date August 1997 and should be released in calendar 1998. The aggregate direct negative costs of the Company's eight completed films was approximately $10,000,000. 20
Completed and Pending Motion Picture Productions Title Major Creative Elements Storyline Release Date ----- ----------------------- --------- ------------ Skeletons Director: David DeCoteau After suffering a heart attack, a Pulitzer Released on HBO in (Prey of the Jaguar, Puppet Prize winning journalist relocates his family April 1997. Master 3, Lady Avenger) to a picture perfect town in Maine. When he becomes involved in a murder investigation he Cast: Ron Silver discovers the evil truth behind the town. (Time Cop, Reversal of Since the 19th Century, the residents have Fortune) kept the outside world away by murdering anyone who attempts to infiltrate their James Coburn pristine village. (Maverick, Eraser) Christopher Plummer (12 Monkeys, Wolf) Santa with Muscles Director: John Murlowski When a small town falls victim to the devious Released domestically (Automatic, Amityville: A New plans of an arch villain, they must turn to in November 1996. Generation, The Secret Agent the only person capable of helping Club) them...Santa Claus. Two weeks before Christmas, a miracle arrives in the form of a Cast: Hulk Hogan mysterious stranger -- who is convinced he is (No Holds Barred, Suburban the real Santa Claus. In no time at all, Commando, Mr. Nanny, The criminals are quaking in fear and the town Secret Agent Club) begins to come alive again. The Elevator Directors: Arthur Borman A desperate young writer traps a movie mogul To be released (...And God Spoke) in an elevator in order to read him a series domestically by the of shorts that he had written. end of 1997. Nigel Dick (Private Investigations) Rafal Zielinski (Fun) Cast: Martin Landau (Ed Wood, Crimes and Misdemeanors) Martin Sheen (The American President, Apocalypse Now) The Secret Agent Director: John Murlowski Ray (Hulk Hogan) leads a double life. Known To be released Club (Automatic, Amityville: A New by his community and son as a clumsy toy domestically by the Generation, Santa with Muscles) store owner, he is really the best secret end of 1997. agent in 1997. America. After returning from Tibet and seizing the most powerful weapon Cast: Hulk Hogan ever invented, Ray is kidnapped by evil-doers (No Holds Barred, Suburban who want the weapon to control the universe. Commando, Mr. Nanny, With help from his friend, Ray's son locates Santa with Muscles) the super-weapon and rescues Ray. 21 Title Major Creative Elements Storyline Release Date ----- ----------------------- --------- ------------ Prey of the Jaguar Director: David DeCoteau Damien Bandera escapes from prison and To be released (Skeletons, Puppet Master 3, murders the family of Special Operations domestically by the Lady Avenger) agent Derek Leigh, the man who put him in end of 1997. prison. Filled with grief, Leigh assumes the Cast: Stacy Keach identity of JAGUAR, a fantasy super-hero, to (Escape from L.A., Up in upon seek revenge upon Bandera and his entire Smoke, The Heart is a Lonely operation. Hunter) Blood Money Director: John Shepphird Lester Grisam escapes from prison and holds To be released (Firestorm, Teenage Bonnie & hostage the girlfriend of the man who domestically by the Klepto Clyde) testified against him. Grisam demands a end of 1997. ransom of $100,000. However, as the plot Cast: James Brolin unfolds it becomes apparent that the man's (The Amityville Horror, girlfriend was quite different than how she Westworld) appeared. Chase Morran Director: Gilbert Po A psychotic criminal escapes from the highest Released on the (Magnificent Scoundrel) security prison of the 24th Century in a SCI-FI network in stolen shuttle. He lands on Dome 4, a small February 1997. Cast: Bruce Campbell and peaceful space colony. Within minutes he (Army of Darkness, McHale's kills the head of security, enslaves the Navy) residents and takes control of the Dome. His plans begin to fall apart, when Chase Morran, a peacekeeper from Earth, arrives on Dome 4 to surprise his wife. Firestorm Director: John Shepphird In the early 21st Century, on the planet To be released (Firestorm, Teenage Bonnie & Markus 4, a group of androids capable of domestically by the Klepto Clyde, Blood Money) human feelings and emotions are enslaved by a end of 1997. heartless villain named Brinkman (John Cast: John Savage Savage). Tarmac, the android leader starts a (White Squall, The Onion rebellion to free his people aided by an Field) employee of Brinkman's. Rear View Mirror Director: David DeCoteau A housewife finds out her husband is cheating Not yet in production. (Skeletons, Prey of the on her. She kills her husband and becomes a Scheduled to be Jaguar, Puppet Master 3, fugitive with a man with a secret. completed in August Lady Avenger) 1997 and released in the first half of 1998. Cast: Lorraine Bracco (Someone to Watch Over Me, GoodFellas) John Heard (Home Alone, Home Alone2: Lost in New York)
There can be no assurance that the Company will be able to complete any future pictures or that future pictures will be completed in accordance with the anticipated schedules or budgets, as the production, completion and distribution of motion pictures is subject to numerous uncertainties, including financing requirements, personnel availability and the release schedule of competitive films. There also is no assurance that the Company's motion pictures will be profitable and enable the Company to recoup its direct negative costs. See "--Competition" and "Risk Factors--Risks of Motion Picture Production." 22 FINANCING OF MOTION PICTURE PRODUCTION General Prior to the commencement of production of a motion picture, the Company attempts to enter into license agreements with distributors pursuant to which distributors acquire the right to distribute such motion picture (or series of motion pictures pursuant to an output agreement) in a certain geographic territory and media for a specific term. In consideration for these distribution rights, the distributor is typically required to pay the producer a fixed amount upon delivery of the motion picture to the distributor ("Minimum Guarantee"). Once the distributor has recouped an amount equal to its Minimum Guarantee and costs of distribution, the distributor is entitled to retain ongoing distribution fees computed as a percentage of the gross revenues generated from the distribution of the motion picture. The Company is thereafter entitled to receive all remaining revenues generated from distribution of the picture in such territory in excess of the ongoing distribution fee retained by the distributor. In connection with each license agreement, the Company also receives an advance generally equal to 20% of the Minimum Guarantee (the "Advance"). The Company typically utilizes the Advance toward the production costs of the motion picture. Distribution Agreements From 1995 to the present, the Company entered into both domestic and foreign licensing agreements. The Company has been able to license each of its motion pictures, including the pictures that are still in pre-production. Among the licensees of the Company's motion pictures are Cabin Fever Entertainment, Inc. ("CFE") and HBO (United States), Highlight Communications (Germany), Saehan/Hollyvision/Digital Media (Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain), and Italian International Films (Italy). Revenues received by the Company pursuant to its licensing agreements during the fiscal years ended July 31, 1995 and 1996 were $0 and $2.626 million, respectively. However, revenues are only realized at the time the motion pictures are delivered to the respective licensee. Backlogs, which indicate the revenues that will be realized upon delivery of the motion pictures, were $0 and $5.448 million, respectively, for the same periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Limited Partnerships In addition to the licensing agreements and the advances thereunder, the Company also raised approximately $4,105,000 in connection with the sale of limited partnership interests in two (2) limited partnerships, HEP I, L.P. ("HEP I") and HEP II, L.P. ("HEP II") (collectively, the "Partnerships") of which the Company is the sole general partner. The third party limited partners of HEP I and HEP II invested an aggregate of $1,050,000 and $3,000,000, respectively, in the Partnerships. The Company also invested $1,200,000 as a limited partner in HEP I. HEP I partners financed and participate in the exploitation of the movie The Secret Agent Club. HEP II partners financed and participate in the exploitation of the movies Santa with Muscles and Skeletons. Pursuant to the distribution agreement between the Company and the Partnerships, the Partnerships are entitled to receive revenue collected from sales net of a 20% distribution fee and selling expenses not to exceed $75,000 per film (collectively, "Net Partnership Revenue"). Pursuant to terms of the limited partnership agreements, ninety-nine percent (99%) of Net Partnership Revenue is to be distributed to the limited partners and one percent (1%) to the Company as the sole general partner until the limited partners have received 110% of their original investment. After the limited partners have been disbursed their original investment plus ten (10%) percent, the distribution of Net Partnership Revenue is to be distributed equally between the general partner and the limited partners as a group. Both Partnerships terminate when the limited partners receive a return equal to 200% of their investment. United Leisure Corporation ("ULC"), a company in which Harry Shuster is also Chairman of the Board, is one of two limited partners of HEP II. ULC originally invested $1,500,000 in May 1996. In October 1996, the Company paid each of HEP II's limited partners approximately $380,000 pursuant to HEP II's partnership agreement and the Company's exploitation of Santa with Muscles and Skeletons. See "Certain Relationships." MAJOR CUSTOMERS For the six months ended January 31, 1997, revenue from one customer accounted for $1,290,000 or 32% of total revenues for the period. For the year ended July 31, 1996, revenues from two customers accounted for $1,225,000 and $275,000, or 47% and 10%, respectively, of total revenues for the year. Management of the Company believes that it can negotiate new distribution agreements on terms similar to those contained in existing agreements in the event that any such existing agreement is terminated or expires. Accordingly, management of the Company believes that the profitability of the Company is not dependent on any single customer. 23 EMPLOYEES The Company, like other independent production companies, does not maintain a substantial staff of creative or technical personnel. Management of the Company believes that sufficient motion picture properties and creative and technical personnel (such as screenwriters, directors and performers) are available in the market at acceptable prices to enable the Company to produce as many motion pictures as it currently plans or anticipates, at the level of commercial quality the Company may require. At June 4, 1997, the Company employed a total of 11 full-time employees. The Company also hires additional employees on a picture-by-picture basis in connection with the production of the Company's motion pictures. The salaries of these additional employees, as well as the salaries of certain full-time employees of the Company who provide direct production services, are typically allocated to the capitalized cost of the related pictures. The Company and certain of its subsidiaries are subject to the terms in effect from time to time of various industry-wide collective bargaining agreements, including the Writers Guild of America, the Directors Guild of America, the Screen Actors Guild and the International Alliance of Theatrical Stage Employees. A strike, job action or labor disturbance by the members of any of these organizations may have a material adverse effect on the production of a motion picture within the United States. None of the Company's full-time employees are represented by a labor union. The Company believes that its current relationship with its employees is satisfactory. COMPETITION Motion picture production and distribution are highly competitive. The competition comes from both companies within the same business and companies in other entertainment media which create alternative forms of leisure entertainment. The Company's competition for the acquisition of literary properties, the services of performing artists, directors, producers and other creative and technical personnel and production financing includes several "major" film studios including, but not limited to, The Walt Disney Company, Paramount Pictures Corporation, MCA, Columbia Pictures, Tri-Star Pictures, Twentieth Century Fox, Warner Brothers Inc. and MGM/UA, which are dominant in the motion picture industry, as well as numerous independent motion picture and television production companies, television networks and pay television systems. Many of these organizations with which the Company competes have significantly greater financial and other resources than does the Company. In addition, the Company's films compete for audience acceptance and exhibition outlets with motion pictures produced and distributed by other companies, including motion pictures distributed by CFE, HBO and the Company's foreign distributors. As a result, the success of any of the Company's films is dependent not only on the quality and acceptance of that particular film, but also on the quality and acceptance of other films. PROPERTIES The Company leases office space in Westwood, California. The total office space is approximately 3,446 square feet. The leases expire on various dates through June 30, 2001. Total rental on the office space is $9,477 per month. The office building is owned by 1990 Westwood Blvd, Inc., which is a private corporation, of which Harry Shuster, the Company's Chairman, is a majority shareholder. See "Certain Relationships." LEGAL PROCEEDINGS The Company is not a party to any legal proceedings that could have a material adverse affect on the Company's operations or financial condition. It is anticipated that from time to time it will be subject to claims, suits and complaints that arise in the ordinary course of business. A substantial portion of the Company's film revenue since its inception on May 10, 1995 has been derived from transactions with Cabin Fever Entertainment, Inc. ("CFE"). The Company licensed domestic rights to CFE for seven movies. In November 1996, after the Company already delivered the seven films licensed, CFE refused to accept delivery of the last of the seven movies. The relationship between the Company and CFE has subsequently deteriorated, resulting in a lawsuit wherein the Company claims damages for copyright infringement, breach of contract and fraud. The case was filed in federal district court in New York in the first quarter of 1997. CFE did not answer the complaint but instead moved to dismiss the copyright claim, which is the basis for federal jurisdiction. If CFE is successful on its motion, the Company intends to move forward with the remaining contract and fraud claims in state court. Subsequent to the deterioration of the relationship with CFE, the Company has licensed two other films domestically through other distributors. 24 MANAGEMENT The directors and executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Harry Shuster....................................... 60 Chairman Brian Shuster....................................... 39 President, Chief Executive Officer, Director David M. Kane....................................... 34 Chief Financial Officer and Secretary J. Brooke Johnston, Jr.............................. 57 Director George Folsey, Jr................................... 52 Director
Harry Shuster has been Chairman of the Company since its inception in May 1995. Mr. Shuster has been Chairman, President and Chief Executive Officer of United Leisure Corporation ("United Leisure"), a publicly-traded leisure time services company, for over 20 years. Mr. Shuster also acts as an independent consultant and as Chairman, President and Chief Executive Officer of Grand Havana Enterprises, Inc., a publicly traded company formed in 1993, that operates private membership cigar rooms. In 1990, Lion Country Safari, Inc., California, a subsidiary of United Leisure, in connection with major litigation with its landlord, was forced to seek protection under the United States Bankruptcy Code by the filing of a voluntary petition under Chapter 11 of such Code. By filing the petition, the subsidiary was able to protect its assets from the claims of the landlord. The bankruptcy petition has been dismissed by stipulation of the parties, but the litigation still is pending. Brian Shuster has served as Chief Executive Officer, President and a director of the Company since its inception in May 1995. Since he has been with the Company, Mr. Shuster has served as the producer of seven films. Prior to joining the Company, he served as President of Beverly Hills Producers Group, a private production company, where he produced one motion picture, served as executive producer of another motion picture, and oversaw production of three other motion pictures. From 1990 until 1993, he served as vice president of Worldwide Entertainment Group, where he produced three motion pictures. Mr. Shuster also is a director of United Leisure. David M. Kane has served as Secretary and Chief Financial Officer of the Company since March 1997. Mr. Kane has also been the Chief Financial Officer of two other public companies since March 1997, Grand Havana Enterprises, Inc. and United Leisure. See "Certain Relationships." From July 1995 until March 1997 he was director of finance for Virgin Records America, Inc., a private record company. From May 1994 until June 1995, he was controller of Hemdale Home Video, Inc., a public video and foreign programming distributor. From October 1992 until May 1994, Mr. Kane was a senior accountant in the audit division for Kenneth Leventhal & Company, Los Angeles, California. From June 1991 until December 1991, he was a financial analyst for Walt Disney Imagineering, Inc., Glendale, California. From June 1987 until May 1991, Mr. Kane was a senior accountant in the audit division for Arthur Andersen & Co., Los Angeles, California. J. Brooke Johnston, Jr. has been a director of the Company since April 1997. Since April 1996, Mr. Johnston has served as Senior Vice President and General Counsel of MedPartners, Inc., a physician practice management company. Prior to joining MedPartners, Inc., Mr. Johnston was a senior principal in the law firm of Haskell Slaughter Young & Johnston, Professional Association, Birmingham, Alabama, where he practiced corporate and securities law for over seventeen years. Before joining Haskell Slaughter, Mr. Johnston practiced law in New York, New York and at another firm in Alabama. Mr. Johnston is a member of the Alabama State Bar and the New York and American Bar Associations. Mr. Johnston is a member of the Board of Directors of United Leisure. See "Certain Relationships." George Folsey, Jr. has been a director of the Company since April 1997. Mr. Folsey is the son of the late Hollywood cinematographer, George Folsey, who received fourteen Academy Award nominations. After graduating from Pomona College, Mr. Folsey worked as an editor at KABC-TV in Los Angeles and formed a company that filmed and edited all the filmed segments of Laugh-In. Mr. Folsey's work as a film editor includes: Animal House; The Blues Brothers; Coming to America; Michael Jackson's Thriller; Bulletproof; the American version of Michelangelo Antonioni's The Passenger; and re-editing The Great Santini and John Duigan's Romero. Among Mr. Folsey's producing credits are: An American Werewolf in London; Trading Places; Spies Like Us; Thriller; Clue; Greedy; The Three Amigos; Into the Night; and Grumpier Old Men. He is currently producing a TV pilot based on the motion picture Fargo. After fifteen years of 25 partnership with director John Landis, Mr. Folsey was asked, in 1988, to become Chairman of QSound Labs, a Canadian corporation specializing in sound enhancement and localization, where he continues to serve as a member of the Board of Directors. Mr. Folsey also is a member of the Directors Guild of America and a member of the Board of Directors of Paulist Productions, which produced Romero. Harry Shuster is the father of Brian Shuster. There are no other relationships between the executive officers and the directors. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation for the Chief Executive Officer of the Company. No other executive officer received remuneration in excess of $100,000 for the fiscal year ended July 31, 1996 (the "Named Executive"): SUMMARY COMPENSATION TABLE Annual Compensation Name and Principal Position Year Salary (1) --------------------------- ---- ---------- Brian Shuster 1996 $90,000 President and Chief 1995(2) $12,500 Executive Officer ---------- (1) Mr. Shuster was paid as a consultant for the two years stated above. (2) The amount paid for 1995 was for the period from May 1995 through July 1996. DIRECTOR COMPENSATION Each non-employee director of the Company receives options to purchase 10,000 shares of Common Stock upon his election to the Board of Directors plus reimbursement of reasonable expenses for each meeting they attend. The options vest in equal quarterly installments on the anniversary date of the grant date over four years. The exercise price of the options is equal to the fair market value of the Common Stock as of the grant date. 1997 STOCK OPTION PLAN The Company has a Stock Option Plan that is designed to provide incentive to officers, key employees, consultants, and directors of the Company or the Company's subsidiaries. There are 360,000 shares of Common Stock authorized for issuance under the plan, and to date options to purchase 20,000 shares have been issued under the plan in May 1997. Under the plan, such persons may be granted, at the discretion of the Board or the Compensation Committee, options at an exercise price equal to at least 100% of the fair market value of the Common Stock covered by the option on the grant date, as determined by the Board or the Compensation Committee. In addition, non-employee Directors of the Company are automatically granted options to purchase 10,000 shares of Common Stock on the date they become Directors. Options granted under the plan may be incentive stock options or non-statutory stock options. Options granted under the plan become immediately exercisable upon a "change of control" of the Company, as defined in the plan. 26 EMPLOYMENT CONTRACTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS On April 1, 1997, the Company entered into a three year employment agreement with Brian Shuster, the Company's President, Chief Executive Officer and a director. The agreement is for a term of three years and provides for an annual salary of Two Hundred Six Thousand Four Hundred Dollars ($206,400), subject to annual increases at the sole discretion of the Board of Directors. The agreement is terminable by the Company for good cause including, but not limited to, dishonesty, improper disclosure of confidential information, or neglect of duties under certain circumstances. The agreement is also terminable by Mr. Shuster for any reason upon 60 days written notice. The agreement is binding upon any successor corporation to the Company and may have the effect of discouraging, delaying, or preventing a change of control of the Company. CERTAIN RELATIONSHIPS The Company leases certain of its executive office space at a rental of $9,477 per month, from a corporation of which Harry Shuster, the Company's Chairman of the Board, is the majority shareholder. The Company is advised that the rental paid by the Company for its Westwood, California executive offices is no more favorable to Mr. Shuster than could have been obtained in a similar location from an unrelated third party. Between June 2, 1995 and June 27, 1996, the founders of the Company lent the Company approximately $3,184,333, of which $1,809,333 remained outstanding at January 31, 1997. The loans were made to fund the Company's operations and bore interest at the rate of 7% per annum. The interest expense for these loans was $114,038. The balance of the loans will be repaid out of the proceeds from this Offering. See "Use of Proceeds." In April 1996, United Leisure Corporation ("ULC") acquired fifty percent of the limited partnership interests in HEP II, L.P. ("HEP II") for a capital contribution of $1,500,000. HEP II made an initial capital distribution to ULC of $379,500 on July 25, 1996. The Company is the general partner of HEP II. Harry Shuster, the Chairman of the Board of the Company, is the Chairman of the Board and the Chief Executive Officer of ULC, and Brian Shuster, the President, Chief Executive Officer and a director of the Company, is a director of ULC. In addition, J. Brooke Johnston, Jr. is a director of both the Company and ULC. See "Business--Limited Partnerships." On July 9, 1996, ULC made a loan to HEP II of $250,000, which loan was repaid in October 1996. ULC made an additional loan to HEP II of $500,000 on July 22, 1996, which loan was repaid on July 25, 1996. As a general rule, all transactions among the Company and its officers, directors or 5% or greater stockholders have been, and in the future will be, made on terms no less favorable than terms available form unaffiliated third parties. 27 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to (i) each director of the Company, (ii) the Named Executive, (iii) all directors and executive officers of the Company as a group at June 4, 1997, including the number of shares of Common Stock beneficially owned by each of them, and (iv) each person known by the Company to own beneficially or of record more than 5% of the outstanding shares of Common Stock. Unless otherwise indicated below, the business address of each individual is the same as the address of the Company's principal executive offices.
Prior to the Offering After the Offering --------------------- ------------------ Number of Number of Shares Shares Beneficially Beneficially Beneficial Owner Owned Percentage(1) Owned Percentage(1)(2) ---------------- ------------ ------------- ------------ ---------------- Harry Shuster(3) 500,000 16.7% 500,000 13.2% Brian Shuster(4) 750,000 25.0% 750,000 19.7% J. Brooke Johnston(5) 0 * 0 * George Folsey, Jr.(6) 0 * 0 * Executive Officers and Directors as a Group 1,250,000 41.7% 1,250,000 32.9% (5 people) 5% Shareholders --------------- Stanley Shuster(7) 500,000 16.7% 500,000 13.2% Stephen J. Drescher(8) 750,000 25.0% 750,000 19.7% Nadine Belfort(9) 750,000 25.0% 750,000 19.7%
- ---------- * Less than one percent. (1) Based on 3,000,000 shares outstanding and shares issuable upon the exercise of options or warrants that are exercisable within 60 days of June 4, 1997 which are deemed to be outstanding for the purpose of computing the percentage of outstanding stock owned by such persons individually and by each group of which they are a member, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) Includes 800,000 shares to be issued in connection with this Offering, but does not include any shares issuable upon exercise of the Underwriter's over-allotment option. (3) Chairman of the Company. (4) President, Chief Executive Officer and a director of the Company. Includes 250,000 shares of Common Stock held by a trust of which Mr. Shuster is the sole trustee and 250,000 shares of Common Stock held by a trust of which Mr. Shuster is a co-trustee with Stanley Shuster. Mr. Shuster disclaims beneficial ownership of the shares of Common Stock held by this trust. (5) Director of the Company. Mr. Johnston's address is 3000 Galeria Tower, Suite 1000, Birmingham, Alabama 35244. (6) Director of the Company. Mr. Folsey's address is 350 North Cliffwood Avenue, Los Angeles, California 90049-2618. (7) Consists of 250,000 shares of Common Stock held by a trust of which Mr. Shuster is the sole trustee and 250,000 shares of Common Stock held by a trust of which Mr. Shuster is a co-trustee with Brian Shuster. Mr. Shuster disclaims beneficial ownership of the shares of Common Stock held by this trust. Mr. Shuster's address is 1990 Westwood Boulevard, Penthouse, Los Angeles, California 90025 (8) Held by a trust of which Stephen J. Drescher is the sole trustee. Mr. Drescher disclaims beneficial ownership of the shares of Common Stock held by this trust. Mr. Drescher's address is 101 West 67th Street, Penthouse 2B, New York, New York 10023. Mr. Drescher does not have any management and/or consulting role with the Company. (9) Ms. Belfort's address is 3830 Woodside Avenue, Long Island City, New York 11104. 28 DESCRIPTION OF CAPITAL STOCK GENERAL The Company is authorized to issue up to 20,000,000 shares of Common Stock, par value $0.01 per share, 3,000,000 shares of which were issued and outstanding as of June 4, 1997 and were owned by approximately seven holders of record. In addition, the Company is authorized to issue up to 3,000,000 shares of preferred stock, $0.01 par value (the "Preferred Stock"). As of June 4, 1997, there were no shares of Preferred Stock outstanding. COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to the rights of holders of Preferred Stock (if there are any shares outstanding), the holders of Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor and in the event of liquidation, dissolution or winding-up of the Company, to share ratably in all assets remaining after payment of all liabilities. The holders of Common Stock have no preemptive or conversion rights and are not subject to further calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. PREFERRED STOCK The Articles of Incorporation of the Company provide that the Board of Directors may issue an aggregate of 3,000,000 shares of Preferred Stock from time to time in one or more series. As of June 4, 1997, there were no shares of Preferred Stock outstanding. The Board of Directors is authorized to determine, among other things, with respect to each series of Preferred Stock which may be issued: (i) the dividend rate, conditions and preferences, if any; (ii) whether dividends will be cumulative and, if so, the date from which dividends will accumulate; (iii) whether, and to what extent, the holders of a series will enjoy voting rights, if any, in addition to those prescribed by law; (iv) whether and upon what terms, a series will be convertible into or exchangeable for shares of any other class of capital stock or other series of Preferred Stock; (v) whether, and upon what terms, a series will be redeemable; (vi) whether a sinking fund will be provided for the redemption of a series and, if so, the terms and conditions of the sinking fund; and (vii) the preference if any, to which a series will be entitled on voluntary or involuntary liquidation, dissolution or winding up of the Company. With regard to dividends, redemption and liquidation preference, any particular series of Preferred Stock may rank junior to, on a parity with, or senior to any other series of Preferred Stock and Common Stock. The Board of Directors, without shareholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock under certain circumstances could have the effect of delaying or preventing a change of control of the Company or other corporate action. The Board of Directors could issue Preferred Stock having terms that could discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders, might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then market price of such stock. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is Chase Mellon Shareholder Services, Los Angeles, California. Shares Eligible for Future Sale Prior to this Offering, there has been no public market for the Common Stock. Sales of substantial amounts of shares of Common Stock in the public market could adversely affect market prices of the shares and make it more difficult for the Company to sell equity securities in the future at a time and price it deems appropriate. Upon completion of the Offering, there will be 3,800,000 shares of Common Stock outstanding, excluding (a) an aggregate of 120,000 shares issuable upon exercise of the over-allotment option; and (b) an aggregate of 360,000 shares reserved for issuance pursuant to the Company's 1997 Stock Option Plan. Of these shares, the 800,000 shares sold in this Offering and the maximum of 120,000 shares issuable upon full exercise of the over-allotment option will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended, (the "Securities Act"), except for any such shares purchased by an "affiliate" of the Company, which will be subject to the resale limitations of Rule 144 under 29 the Securities Act. As defined in Rule 144, an affiliate of the issuer is a person who, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such issuer, and generally includes members of the Board of Directors and senior management. The 3,000,000 shares outstanding as of the date of this Prospectus and the 360,000 shares issuable upon exercise of stock options that have been or may be granted under the 1997 Stock Option Plan are "restricted shares" as defined in Rule 144 under the Securities Act ("Rule 144") (collectively, the "Restricted Shares") and may not be sold without registration under the Securities Act unless pursuant to an applicable exemption therefrom. In addition, the Company expects to register under the Securities Act the shares reserved for issuance under the 1997 Stock Option Plan. In general, Rule 144 allows a stockholder who has beneficially owned Restricted Shares for at least one year (including persons who may be deemed "affiliates" of the Company under Rule 144) to sell a number of shares within any three-month period that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (approximately 38,000 shares after giving effect to this Offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks immediately preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner and notice of sale and the availability of public information about the Company. A stockholder who is not an "affiliate" of the Company at any time during the 90 days immediately preceding a sale, and who has beneficially owned his shares for at least two years (as computed under Rule 144), is entitled to sell such shares under Rule 144 without regard to the volume and manner of sale limitations described above. Rule 144A under the Securities Act permits the immediate sale by the current holders of Restricted Shares of all or a portion of their shares to certain qualified institutional buyers, as defined in Rule 144A. In addition, subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants, or advisers prior to the date the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. The Securities and Exchange Commission has also indicated that Rule 701 will apply to stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon the exercise of such options (including exercises after the date of this Prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this Prospectus, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirement. As of the date of this Prospectus, options to purchase 20,000 shares were issued and outstanding as to which Rule 701 may apply. DELAWARE ANTI-TAKEOVER LAW The Company is governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In general, the law prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. "Business combinations" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with its affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. The provisions regarding certain business combinations under the GCL could have the effect of delaying or preventing a change in control of the Company or the removal of existing management. A takeover transaction frequently affords stockholders the opportunity to sell their shares at a premium over current market prices. 30 UNDERWRITING Subject to the terms and conditions contained in the underwriting agreement between the Company and the Underwriters named below, for which Millennium Securities Corp. is acting as Representative (a copy of which agreement is filed as an exhibit to the Registration Statement of which this Prospectus forms a part), the Company has agreed to sell to each of the Underwriters named below, and each of such Underwriters has severally agreed to purchase, the number of shares of Common Stock set forth opposite its name. All 800,000 shares of Common Stock offered must be purchased by the several Underwriters if any are purchased. The shares of Common Stock are being offered by the Underwriters subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to approval of certain legal matters by counsel and certain other conditions. Underwriter No. of Shares ----------- ------------- Millennium Securities Corp. Total 800,000 The Representative has advised the Company that the Underwriters propose to offer the shares of Common Stock to the public at the offering prices set forth on the cover page of this Prospectus. The Representative has further advised the Company that the Underwriters propose to offer the Common Stock through members of the National Association of Security Dealers, Inc. (the "NASD"), and may allow a concession, in their discretion, to certain dealers who are members of the NASD and who agree to sell the Common Stock in conformity with the NASD Conduct Rules. Such concessions shall not exceed the amount of underwriting discount that the Underwriters are to receive. The Company has granted the Underwriters an option, exercisable for 45 days from the date of this Prospectus, to purchase up to 120,000 shares of Common Stock at the public offering price less the underwriting discounts set forth on the cover page of this Prospectus (the "Over-Allotment Option"). The Underwriters may exercise this option solely to cover over-allotments in the sale of the shares of Common Stock offered hereby. Officers and directors of the Company may introduce the Representative to persons to consider this Offering and purchase shares of Common Stock either through the Representative, other Underwriters, or through participating dealers. In this connection, officers and directors will not receive any commissions or any other compensation. The Company has agreed to pay to the Underwriters a commission of ten percent (10%) of the gross proceeds of the Offering, including the gross proceeds from the sale of the Over-Allotment Option, if exercised. In addition, the Company has agreed to pay to the Representative a non-accountable expense allowance of three percent (3%) of the gross proceeds of this Offering. The Company has paid to the Representative a $50,000 advance in respect of such non-accountable expense allowance. The Representative's expenses in excess of its non-accountable expense allowance will be paid by the Representative. To the extent that the expenses of the Representative are less than the amount of the non-accountable expense allowance received, such excess shall be deemed to be additional compensation to the Representative. The Company has agreed to engage the Representative as its investment banker for a period of twelve (12) months on the first day of the month following the closing of the Offering at an aggregate fee of $5,000 for eight months for a total of $40,000. The Representative also has agreed, at the Company's request, to provide advice and consulting services to the Company concerning potential merger and acquisition and financing proposals, whether by public financing or otherwise. The Company has agreed, at the closing of the Offering, to enter into a merger and acquisition agreement with the Representative. The merger and acquisition agreement will provide that the Representative will be paid a finder's fee of five (5%) percent of the first $5,000,000, four (4%) of next $5,000,000 and 3% of the excess, if any, over $10,000,000 of the consideration received or paid to the other party by the Company in any such transactions. Holders of 3,000,000 shares of Common Stock have agreed not to sell any of such Common Stock for a period of 24 months from the Effective Date, without the prior written consent of the Representative. See "Description of Capital Stock--Shares Eligible for Future Sale." The Company has agreed to indemnify the Underwriters against any costs or liabilities incurred by the Underwriters by reason of misstatements or omissions to state material facts in connection with the statements made in the Registration Statement and the Prospectus. The Underwriters have in turn agreed to indemnify the Company against any liabilities by reason of misstatements or omissions to state material facts in connection with the statements made in the Registration Statement, of which this Prospectus is a part, based on information relating to the Underwriters and furnished in writing by the Underwriters. To the extent that these provisions may purport to provide exculpation from possible liabilities arising under the federal securities laws, in the opinion of the Securities and Exchange Commission, such indemnification is contrary to public policy and therefore unenforceable. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to copies of each such agreement, which are filed as exhibits to the Registration Statement. See "Additional Information." PRICING OF THE OFFERING Prior to this Offering, there has been no public trading market for the Common Stock. Consequently, the initial offering price of the shares of Common Stock has been determined by negotiations between the Company and the Representative. Among the factors considered in determining the offering price were the financial condition and prospects of the Company, the industry in which the Company is engaged, certain financial and operating information of companies engaged in activities similar to those of the Company and the general market condition of the securities markets. The offering price does not necessarily bear any relationship to any established standard or criteria of value based upon assets, earnings, book value or other objective measures. 31 The Company anticipates that the Common Stock will be listed for quotation on the NASD Electronic Bulletin Board under the symbol "HITS," but there can be no assurance that an active trading market will develop, even if the Common Stock is accepted for quotation. The Underwriters intend to make a market in the Common Stock. CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS The Company's Articles of Incorporation provide that the liability of directors for monetary damages shall be limited to the fullest extent permissible under Delaware law. The Articles of Incorporation and the Company's Bylaws provide for indemnification of its officers and Directors to the fullest extent permitted under Delaware law. See "Risk Factors--Limitation on Director Liability." LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by the law firm of Richman, Lawrence, Mann, Greene, Chizever, Friedman & Phillips, Beverly Hills, California. The law firm of Beckman & Millman, P.C., New York, New York will pass upon certain aspects of this Offering on behalf of the Underwriters. EXPERTS The audited financial statements of the Company as of July 31, 1995 and 1996 and for the fiscal years then ended are included herein and in the registration statement in reliance upon the report of Moore Stephens, P.C., certified public accountants, as indicated in the reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. 32 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors of United Film Distributors, Inc. Los Angeles, California We have audited the accompanying consolidated balance sheet of United Film Distributors, Inc. and its subsidiaries as of July 31, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended, and for the period from May 10, 1995 [date of inception] through July 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Film Distributors, Inc. and its subsidiaries as of July 31, 1996, and the consolidated results of their operations and their cash flows for the year then ended, and for the period from May 10, 1995 [date of inception] through July 31, 1995, in conformity with generally accepted accounting principles. MOORE STEPHENS, P.C. Certified Public Accountants. Cranford, New Jersey November 15, 1996 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
JANUARY 31, JULY 31, 1 9 9 7 1 9 9 6 [UNAUDITED] ASSETS: Cash $ 295,774 $ -- Deposits 318,870 341,501 Deferred Tax Asset 26,658 -- Prepaid and Other Current Assets 7,556 7,556 Film Costs - Net 6,724,776 9,200,319 Equipment - Net 60,198 66,526 --------------- ---------------- TOTAL ASSETS $ 7,433,832 $ 9,615,902 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY: Cash Overdraft $ -- $ 160,687 Accounts Payable 35,003 187,987 Accrued Interest Payable - Stockholders 190,664 114,038 Income Taxes Payable 26,657 26,657 Deferred Income 204,050 508,050 Due to Affiliates -- 14,325 Advances from Stockholders 1,809,333 2,359,333 --------------- ---------------- TOTAL LIABILITIES 2,265,707 3,371,077 --------------- ---------------- COMMITMENT AND CONTINGENCIES [8] -- -- --------------- ---------------- MINORITY INTEREST 3,132,193 4,137,795 --------------- ---------------- STOCKHOLDERS' EQUITY: Preferred Stock, Authorized 3,000,000 Shares, Issued and Outstanding -0- Shares, Par Value $.01 -- -- Common Stock, Authorized 20,000,000 Shares, Issued and Outstanding 3,000,000 Shares, Par Value $.01 30,000 30,000 Paid-in Capital 2,040,666 2,040,666 Retained Earnings [Deficit] (34,734) 36,364 --------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 2,035,932 2,107,030 --------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,433,832 $ 9,615,902 =============== ================ The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-2 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
FOR THE PERIOD -------------- MAY 10, 1995 ------------ [DATE OF -------- INCEPTION] ---------- SIX MONTHS ENDED YEAR ENDED THROUGH ---------------- ---------- ------- JANUARY 31, JULY 31, JULY 31, ----------- -------- -------- 1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 ------- ------- ------- ------- [UNAUDITED] [UNAUDITED] REVENUES: Revenues - Completed Film Contracts $ 4,029,908 $ -- $ 2,626,000 $ -- ---------------- --------------- ---------------- --------------- EXPENSES: General and Administrative Expenses 194,016 206,021 439,769 31,528 Film Festivals 117,283 74,914 252,753 -- Rent - Related Party 118,734 45,456 49,380 -- Depreciation on Equipment 6,328 6,326 12,653 -- Amortization - Film Cost 3,185,276 -- 1,609,466 -- ---------------- --------------- ---------------- --------------- TOTAL EXPENSES 3,621,637 332,717 2,364,021 31,528 ---------------- --------------- ---------------- --------------- OPERATING INCOME [LOSS] 408,271 (332,717) 261,979 (31,528) ---------------- --------------- ---------------- --------------- INCOME AND [EXPENSES]: Interest Income -- 8,200 11,608 -- Interest Expense -- -- (12,936) -- Interest Expense - Related Party (76,629) (41,589) (114,037) -- Other Income -- -- 35,730 -- ---------------- --------------- ---------------- --------------- OTHER [EXPENSES] - NET (76,629) (33,389) (79,635) -- ---------------- --------------- ---------------- --------------- INCOME [LOSS] BEFORE MINORITY INTEREST 331,642 (366,106) 182,344 (31,528) MINORITY INTEREST (429,398) -- (87,795) -- ---------------- --------------- ---------------- --------------- [LOSS] INCOME BEFORE INCOME TAXES (97,756) (366,106) 94,549 (31,528) BENEFIT [PROVISION] FOR INCOME TAXES 26,658 154,868 (26,657) -- ---------------- --------------- ---------------- --------------- NET [LOSS] INCOME $ (71,098) $ (211,238) $ 67,892 $ (31,528) ================ =============== ================ =============== NET [LOSS] INCOME PER SHARE $ (.02) $ (.14) $ .03 $ (.03) ================ =============== ================ =============== WEIGHTED AVERAGE NUMBER OF SHARES 3,000,000 1,526,541 2,363,512 1,000,000 ================ =============== ================ =============== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-3
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK COMMON STOCK RETAINED TOTAL --------------- ------------ -------- ----- NUMBER OF NUMBER OF PAID-IN EARNINGS STOCKHOLDERS' --------- --------- ------- -------- ------------- SHARES AMOUNT SHARES AMOUNT CAPITAL [DEFICIT] EQUITY ------ ------ ------ ------ ------- --------- ------ Initial Contribution -- $ -- 1,000,000 $ 10,000 $ 43,333 $ -- $ 53,333 Net [Loss] for the period May 10, 1995 [Date of Inception] through July 31, 1995 -- -- -- -- -- (31,528) (31,528) ----------- ---------- ----------- --------- ------------ ---------- ----------- BALANCE - JULY 31, 1995 -- -- 1,000,000 10,000 43,333 (31,528) 21,805 Issuance of Common Stock September 1995 -- -- 1,000,000 10,000 43,333 -- 53,333 Issuance of Common Stock October 1995 -- -- 343,687 3,437 671,563 -- 675,000 Issuance of Common Stock November 1995 -- -- 138,493 1,385 270,615 -- 272,000 Issuance of Common Stock February 1996 -- -- 178,207 1,782 348,218 -- 350,000 Issuance of Common Stock March 1996 -- -- 89,104 891 174,109 -- 175,000 Issuance of Common Stock June 1996 -- -- 250,509 2,505 489,495 -- 492,000 Net Income for the year ended July 31, 1996 -- -- -- -- -- 67,892 67,892 ----------- ---------- ----------- --------- ------------ ---------- ----------- BALANCE - JULY 31, 1996 -- -- 3,000,000 30,000 2,040,666 36,364 2,107,030 Net Loss for the six months Ended January 31, 1997 -- -- -- -- -- (71,098) (71,098) ----------- ---------- ----------- --------- ------------ ---------- ----------- BALANCE - JANUARY 31, 1997 [UNAUDITED] $ -- $ -- 3,000,000 $ 30,000 $ 2,040,666 $ (34,734) $ 2,035,932 =========== ========== =========== ========= ============ ========== =========== The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-4 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
FOR THE PERIOD -------------- MAY 10, 1995 ------------ [DATE OF -------- INCEPTION] ---------- SIX MONTHS ENDED YEAR ENDED THROUGH ---------------- ---------- ------- JANUARY 31, JULY 31, JULY 31, ----------- -------- -------- 1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 ------- ------- ------- ------- [UNAUDITED] [UNAUDITED] OPERATING ACTIVITIES: Net Income [Loss] $ (71,098) $ (211,238) $ 67,892 $ (31,528) ---------------- --------------- ---------------- --------------- Adjustments to Reconcile Net Income [Loss] to Net Cash Provided by [Used For] Operating Activities: Amortization of Film Costs 3,185,276 -- 1,609,466 -- Depreciation 6,328 6,326 12,653 -- Deferred Tax Asset (26,658) -- -- -- Minority Interest 429,398 -- 87,795 -- Changes in Assets and Liabilities: [Increase] Decrease in: Prepaid Expenses -- (7,998) (7,556) -- Deposits from Film Contracts 22,631 141,409 (341,501) -- Equipment Purchases -- (66,526) (79,179) -- Increase [Decrease] in: Accounts Payable (152,987) 126,846 187,987 -- Accrued Interest 76,629 41,589 114,037 -- Income Taxes Payable -- (155,942) 26,657 -- Deferred Income (304,000) 469,975 508,050 -- ---------------- --------------- ---------------- --------------- Total Adjustments 3,236,617 555,679 2,118,409 -- ---------------- --------------- ---------------- --------------- NET CASH - OPERATING ACTIVITIES - FORWARD 3,165,519 344,441 2,186,301 (31,528) ---------------- --------------- ---------------- --------------- INVESTING ACTIVITIES: Capitalizable Assets -- -- (897,240) -- Film Advances - Net (709,733) (3,673,582) (9,912,545) -- ---------------- --------------- ---------------- --------------- NET CASH - INVESTING ACTIVITIES - FORWARD (709,733) (3,673,582) (10,809,785) -- ---------------- --------------- ---------------- --------------- FINANCING ACTIVITIES: Cash Overdraft (160,687) -- 160,687 -- Finance from Limited Partners (1,435,000) 4,050,000 4,050,000 -- Advances from Related Party (14,325) -- 14,325 -- Advances from Stockholders (550,000) 1,354,667 1,912,666 446,667 Collection on Stock Subscription -- 1,000,333 2,017,334 53,333 ---------------- --------------- ---------------- --------------- NET CASH - FINANCING ACTIVITIES - FORWARD $ (2,160,012) $ 6,405,000 $ 8,155,012 $ 500,000 The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
F-5 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
FOR THE PERIOD -------------- MAY 10, 1995 ------------ [DATE OF -------- INCEPTION] ---------- SIX MONTHS ENDED YEAR ENDED THROUGH ---------------- ---------- ------- JANUARY 31, JULY 31, JULY 31, ----------- -------- -------- 1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 ------- ------- ------- ------- [UNAUDITED] [UNAUDITED] NET CASH - OPERATING ACTIVITIES - FORWARDED $ 3,165,519 $ 344,441 $ 2,186,301 $ (31,528) NET CASH - INVESTING ACTIVITIES - FORWARDED (709,733) (3,673,582) (10,809,785) -- NET CASH - FINANCING ACTIVITIES - FORWARDED (2,160,012) 6,405,000 8,155,012 500,000 ---------------- --------------- ---------------- --------------- NET INCREASE [DECREASE] IN CASH 295,774 3,075,859 (468,472) 468,472 CASH - BEGINNING OF PERIODS -- 468,472 468,472 -- ---------------- --------------- ---------------- --------------- CASH - END OF PERIODS $ 295,774 $ 3,544,331 $ -- $ 468,472 ================ =============== ================ =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the periods for: Interest $ -- $ -- $ 12,936 $ -- Income Taxes $ -- $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. F-6 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS UNAUDITED] - -------------------------------------------------------------------------------- [1] ORGANIZATION AND OPERATIONS United Film Distributors, Inc. [formerly Hit Entertainment, Inc.] [the "Company"] was incorporated under the laws of the State of Delaware on May 10, 1995. The Company is engaged in the development, production, and distribution of motion pictures on a world-wide basis. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries Hit Productions, United Film Distributors, HEP I, L.P. and HEP II, L.P. Amounts invested by and income attributable to third party limited partners HEP I, L.P. and HEP II, L.P. are presented as minority interest in the accompanying financial statements. All other significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION - Amounts received as fees for projects in production are deferred until the project becomes available for release in accordance with the terms of the agreement and are recognized as revenues at such time. Revenues from the sale of completed productions are recognized upon their sale. CASH EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at July 31, 1996. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash. The Company places its cash with high credit quality financial institutions. At times the cash in any one bank may exceed the FDIC $100,000 limit. At July 31, 1996, there was approximately $50,300 in financial institutions which was subject to such risk. The Company does not require collateral or other security to support financial instruments. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FILM COSTS AND AMORTIZATION - Film costs include the cost of completed projects, costs of projects in production and costs expended on projects in development. Film costs are stated at the lower of amortized cost or estimated net realizable value. Amortization of completed projects is charged to operations on an individual project basis in a ratio that the current year's revenue bears to management's estimate of total revenues [current and future years] from all sources. This is commonly referred to as the individual-film-forecast method. Adjustments of amortization resulting from changes in estimates of total revenues are recognized in the current year's amortization. When a completed project is fully amortized, its cost and related accumulated amortization are removed from the accounts. If, in the opinion of management, any property in the development stage is not planned for use, the net carrying value of such property is charged to current year's operations. DEPRECIATION AND AMORTIZATION - Depreciation and amortization of fixed assets [consisting of furniture, and computer equipment] is provided on the straight-line method over the estimated useful lives of the related assets which range from three to seven years. STOCK OPTIONS ISSUED TO EMPLOYEES - The Company adopted Statement of Financial Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation" on January 1, 1996 for financial statement note disclosure purposes and will continue to apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees" for financial reporting purposes. F-7 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2 [INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS UNAUDITED] - -------------------------------------------------------------------------------- [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] OPERATIONS IN FOREIGN COUNTRIES - The Company is subject to numerous factors relating to conducting business in a foreign country [including, without limitation, economic, political and currency risks] any of which could have a significant impact on the Company's operations. MINORITY INTEREST - Minority interest represents the amount due to outside parties for their investment in the financing of the films through the Company's two limited partnership subsidiaries. For the six months ended January 31, 1997 and the year ended July 31, 1996, the amount due to the minority interest shareholders was $3,132,193 and $4,137,795, respectively. EARNINGS PER SHARE - Earnings per share are computed based on the weighted average number of shares outstanding during each period presented. Common stock equivalents are included in the computation when there effect is considered dilutive. [3] EQUIPMENT Equipment consists of the following: January 31, July 31, ----------- -------- 1 9 9 7 1 9 9 6 ------- ------- Computer Equipment $ 23,433 $ 23,433 Office Equipment 55,746 55,746 -------------- --------------- Totals 79,179 79,179 Less: Accumulated Depreciation 18,981 12,653 -------------- --------------- TOTAL - NET $ 60,198 $ 66,526 ----------- ============== =============== Depreciation expense for the six months ended January 31, 1997 and the year ending July 31, 1996 was $6,328 and $12,653, respectively. [4] FILM COSTS Film costs consist of the following: January 31, July 31, ----------- -------- 1 9 9 7 1 9 9 6 ------- ------- Completed Projects $ 8,671,897 $ 4,221,003 Less: Accumulated Amortization 4,794,742 1,609,466 -------------- --------------- Net of Amortization 3,877,155 2,611,537 Productions in Progress 2,847,621 6,588,782 -------------- --------------- TOTALS $ 6,724,776 $ 9,200,319 ------ ============== =============== Based on management's present estimate of future revenues at July 31, 1996, substantially all of the unamortized costs of completed projects will be amortized by July 31, 1998. F-8 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3 [INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS UNAUDITED] - -------------------------------------------------------------------------------- [5] RELATED PARTY TRANSACTIONS LEASES - The Company leases office space from a related party, an entity whose major stockholder is also a major stockholder of the Company [See Note 8]. The rent expense for the year ended July 31, 1996 and the six months ended January 31, 1997 was $147,747 and $63,750, respectively. ADVANCES - The Company received advances from two stockholders and or entities affiliated with the stockholders to fund its operations. Interest payable at July 31, 1996 and interest expense on these advances for the year then ended amounted to $114,038. Interest was calculated at 7% interest during the period. It is anticipated that these advances will be repaid from an initial public offering [See Note 12]. [6] FAIR VALUE OF FINANCIAL INSTRUMENTS At its inception, the Company adopted SFAS No. 107, fair value of financial instruments which requires disclosing fair value to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed therein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
January 31, 1997 July 31, 1996 ----------------------------- --------------------- Carrying Carrying -------- -------- Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Advances from Stockholders $ 1,809,333 $ 1,809,333 $ 2,359,333 $ 2,359,333 Accrued Interest Payable - Stockholders 190,664 212,381 114,038 145,430 -------------- --------------- -------------- --------------- $ 1,999,997 $ 2,021,714 $ 2,473,371 $ 2,504,763 ============== =============== ============== ===============
For certain financial instruments, including cash, trade receivables and payables and short-term debt, the carrying amount approximates fair value because of the near term maturities of such obligations. Interest was calculated on all debt at 7% per annum. The prime rate at July 31, 1996 was 8-1/4%. [7] INCOME TAXES Temporary differences between financial reporting and tax bases of assets and liabilities related to depreciation, vacation and sick pay accruals are immaterial. Provision for income taxes has been made as follows:
FOR THE PERIOD -------------- MAY 10, 1995 ------------ [DATE OF -------- SIX MONTHS INCEPTION] ---------- ---------- ENDED YEAR ENDED THROUGH ----- ---------- ------- JANUARY 31, JULY 31, JULY 31, ----------- -------- -------- 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- Income [Loss] Before Income Taxes $ (97,756) $ 94,548 $ (31,528) Net Operating [Loss] Carryforward -- (31,528) -- ------------ ------------ ------------ TAXABLE [LOSS] INCOME $ (97,756) $ 63,020 $ (31,528) --------------------- ============ ============ ============ Federal Income Tax $ 33,237 $ (20,840) $ -- State Income Tax 9,023 (5,817) -- Tax Benefit Reserve (15,602) -- -- ------------ ------------ ------------ TOTAL INCOME TAX BENEFIT [EXPENSE] $ 26,658 $ (26,657) $ -- ---------------------------------- ============ ============ ============
F-9 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4 [INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS UNAUDITED] - -------------------------------------------------------------------------------- [7] INCOME TAXES [CONTINUED] A reconciliation between the statutory federal income tax rate and the effective income tax rates is as follows:
SIX MONTHS ---------- ENDED YEAR ENDED ----- ---------- JANUARY 31, JULY 31, ----------- -------- 1 9 9 7 1 9 9 6 ------- ------- Statutory Federal Income Tax Rate (34.0)% 34.0 % State and Local Taxes, Net of Federal Tax Benefits (9.2)% 9.2 % Net Operating [Loss] Carryforward -- (15.0)% Tax Benefit Reserve 16.0 % -- % EFFECTIVE INCOME TAX RATE (27.2)% 28.2 % ------------------------- ========= =========
[8] COMMITMENTS AND CONTINGENCIES The Company's leases office from a related party at a monthly rental of $9,477 per month. The lease term expires June 30, 2001 [See Note 5]. Future minimum lease payments are as follows: 1997 $ 127,500 1998 119,075 1999 46,200 2000 46,200 2001 46,200 Thereafter 42,350 ------------ Total $ 427,525 ----- ============ [9] SIGNIFICANT CUSTOMERS For the six months ended January 31, 1997, revenue from one customer amounted to $1,290,000 or 32% of total revenues. Revenues from two customers accounted for $1,225,000 and $275,000, or 47% and 10%, respectively, of total revenues for the year ended July 31, 1996. [10] FOREIGN SALES Export sales for the six months ended January 31, 1997 and the year ended July 31, 1996, are principally concentrated in the following areas: SIX MONTHS ---------- ENDED YEAR ENDED ----- ---------- JANUARY 31, JULY 31, ----------- -------- 1 9 9 7 1 9 9 6 ------- ------- Asia $ 543,850 $ 486,000 South America $ 32,970 $ 275,000 Europe $ 1,071,238 $ 495,500 These amounts collectively account for 41% and 48%, respectively, of total revenues for the six months ended January 31, 1997 and the year ended July 31, 1996. F-10 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5 [INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS UNAUDITED] - -------------------------------------------------------------------------------- [11] NEW AUTHORITATIVE PRONOUNCEMENT The Financial Accounting Standards Board ["FASB"] has issued Statement of Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. Earlier application is not allowed. The provisions of SFAS No. 125 must be applied prospectively; retroactive application is prohibited. Adoption on January 1, 1997 is not expected to have a material impact on the Company. The FASB deferred some provisions of SFAS No. 125, which are not expected to be relevant to the Company. The FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital Structure" in February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations, by replacing the presentation of primary EPS with a presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. When adopted, SFAS No. 128 will require restatement of all prior-period EPS data presented; however, the Company has not sufficiently analyzed SFAS No. 128 to determine what effect SFAS No. 128 will have on its historically reported EPS amounts. SFAS No. 129 does not change any previous disclosure requirements, but rather consolidates existing disclosure requirements for ease of retrieval. [12] SUBSEQUENT EVENTS [UNAUDITED] [A] PROPOSED INITIAL PUBLIC OFFERING - The Company is offering for public sale 800,000 common shares at $5.00 per share. Although no assurance can be given that the offering will be successful, the Company intends to utilize the net proceeds from the proposed offering of approximately $3,073,000 to develop, produce and distribute movies, to repay certain indebtedness, and for general working capital needs. The following supplementary earnings per share reflects on a pro forma basis the repayment of indebtedness of $2,000,000 and the resulting reduction of interest expense and increase in net income as if it had taken place at the beginning of the respective periods. Six months ended Year ended ---------------- ---------- January 31, July 31, ----------- -------- 1 9 9 7 1 9 9 6 ------- ------- [Loss] Income $ (27,572) $ 132,665 =============== ============== [Loss] Income Per Share $ (.01) $ 0.05 =============== ============== Number of Shares 3,000,000 2,313,512 =============== ============== [B] STOCK SPLIT - In May of 1997, the Company declared a five-for-one stock split. All share data has been retroactively restated for the split. F-11 UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6 [INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS UNAUDITED] - -------------------------------------------------------------------------------- [12] SUBSEQUENT EVENTS [UNAUDITED] [CONTINUED] [C] EMPLOYMENT AGREEMENT - On April 1, 1997, the Company entered into a three year employment agreement with the Company's president and chief executive officer and a director. The agreement is for a term of three years and provides for an annual salary of two hundred six thousand four hundred dollars [$206,400]. Subject to annual increases at the sole discretion of the Board of Directors. [D] STOCK OPTION PLAN - In May of 1997, the Board of Directors adopted the 1997 Stock Option Plan, whereby, the aggregate number of shares which may be issued upon exercise of options shall not exceed 360,000 shares. Any nonemployee director, employee or consultant of the Company shall be eligible to be granted options. On May 28, 1997, the Board of Directors granted two directors 10,000 options each at an option price of $5.00 per share and expire May 28, 2007. [13] UNAUDITED INTERIM STATEMENTS The financial statements as of January 31, 1997 and for the six months ended January 31, 1997 and 1996 are unaudited; however, in the opinion of management all adjustments [consisting solely of normal recurring adjustments] necessary in order to make the interim financial statements not misleading have been made. The results of the interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. . . . . . . . . . . F-12 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Articles of Incorporation provide that the liability of Directors for monetary damages shall be limited to the fullest extent permissible under Delaware law. The Articles and the Company's Bylaws provide for indemnification of its officers and Directors to the fullest extent permitted under Delaware law. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses payable in connection with the registration of the Common Stock that is the subject of this Registration Statement, all of which shall be borne by the Company. All the amounts shown are estimates except for the Securities and Exchange Commission registration fee and the National Association of Securities Dealers listing and filing fees.
To Be Paid By ------------- Registrant ---------- Securities and Exchange Commission registration fee............... $1,394 National Association of Securities Dealers filing fee............. 960 Blue sky fees and expenses........................................ * Printing and engraving expenses................................... * Legal fees and expenses........................................... * Accounting fees and expenses...................................... 90,000 Miscellaneous..................................................... * ------------- Total......................................................... $ * =============
---------- *To be filed by Amendment ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The registrant has sold the following unregistered securities: 1. In connection with the Company's organization in June 1995, the registrant sold 1,000,000 shares of Common Stock to one of its founders, Ms. Nadine Belfort, for approximately $.05 per share. The transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). 2. In September 1995, the registrant sold 1,000,000 shares of Common Stock to its other founder, Mr. Harry Shuster, for approximately $.05 per share. The transaction was exempt from registration under Section 4(2) of the Securities Act. 3. In October 1995, the registrant sold 132,382 and 211,303 shares of Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively, for approximately $1.96 per share. The transactions were exempt from registration under Section 4(2) of the Securities Act. 4. In November 1995, the registrant sold 138,493 shares of Common Stock to Mr. Harry Shuster for approximately $1.96 per share. The transaction was exempt from registration under Section 4(2) of the Securities Act. 5. In February 1996, the registrant sold 50,916 and 127,291 shares of Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively, for approximately $1.96 per share. The transactions were exempt from registration under Section 4(2) of the Securities Act. II-1 6. In March 1996, the registrant sold 89,104 shares of Common Stock to Ms. Nadine Belfort for approximately $1.96 per share. The transaction was exempt from registration under Section 4(2) of the Securities Act. 7. In June 1996, the registrant sold 178,208 and 72,301 shares of Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively, for approximately $1.96 per share. The transactions were exempt from registration under Section 4(2) of the Securities Act. The numbers of shares and exercise prices set forth above reflect a 5-for-1 stock split effective in May 1997. ITEM 27. EXHIBITS. (a) The following is a list of exhibits furnished:
Exhibit Page ------- ---- Number Exhibit Number ------ ------- ------ 1.1 Form of Underwriting Agreement** 1.2 Letter of Intent between the Company and Millennium Securities Corp.* 3.1 Restated Articles of Incorporation* 3.2 Certificate of Amendment of Certificate of Incorporation** 3.3 Bylaws* 4.1 Specimen Stock Certificate** 5 Opinion of Counsel as to legality of the securities being registered** 10.1 Employment Agreement between the Company and Brian Shuster dated April 1, 1997* 10.2 Revolving Demand Note between the Company and Harry Shuster** 10.3 Revolving Demand Note between the Company and Nadine Belfort** 10.4 Lease agreement between the Company and 1990 Westwood Blvd., Inc. dated July 1, 1995 and Addendum to Lease dated November 1, 1996* 10.5 Lease Agreement between the Company and 1990 Westwood Blvd., Inc. dated July 1, 1996 and Addendum to Lease dated November 1, 1996* 10.6 1997 Stock Option Plan* 10.7 Distribution Agreement between the Company and HEP I, L.P. dated July 17, 1995* 10.8 Distribution Agreement between the Company and HEP II, L.P. dated March 4, 1996* 10.9 Agreement of Limited Partnership of HEP I, L.P. dated as of July 17, 1995* 10.10 Agreement of Limited Partnership of HEP II, L.P. dated as of March 4, 1996* 10.11 Amendment No. 1 to Agreement of Limited Partnership of HEP II, L.P. dated as of April 23, 1996* 21.1 List of Subsidiaries* 23.1 Consent of independent accountants* 23.2 Consent of counsel (included as part of Exhibit 5)** 24.1 Power of attorney (included as part of signature page) 27.1 Financial Data Schedule* - --------------- * Filed herewith. ** To be filed by amendment.
II-2 ITEM 28. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To provide to the Underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (2) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) For purposes of determining any liability under the Securities Act of 1933, as amended (the "Securities Act"), the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. II-3 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California on June 12, 1997. UNITED FILM DISTRIBUTORS, INC. By: /s/ Brian Shuster ----------------------------- Brian Shuster Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brian Shuster and David M. Kane, and each of them, his attorney-in-fact with power of substitution for him in any and all capacities, to sign any amendments, supplements, subsequent registration statements relating to the offering to which this Registration Statement relates, or other instructions he deems necessary or appropriate, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute may do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ Brian Shuster President, Director and Chief June 12, 1997 --------------------------- Executive Officer (Principal Brian Shuster Executive Officer) /s/ Harry Shuster Chairman and Director June 12, 1997 --------------------------- Harry Shuster /s/ David M. Kane Chief Financial Officer and June 12, 1997 --------------------------- Secretary (Principal Financial David M. Kane Officer) /s/ J. Brooke Johnston, Jr. Director June 12, 1997 ------------------------------ J. Brooke Johnston, Jr. /s/ George Folsey, Jr. Director June 12, 1997 --------------------------- George Folsey, Jr.
II-4 EX-1.2 2 EXHIBIT 1.2 MILLENNIUM SECURITIES CORP. United Films Distributors, Inc. June 11, 1997 1990 Westwood Boulevard Penthouse Los Angeles, California 90025 Re: Proposed Public Offering of United Films Distributors, Inc. (the Company") Pursuant to a Registration Statement (the "Registration Statement") under The Securities Act of 1933, as amended (the "Act") Gentlemen: We are pleased to submit this Letter of Intent with respect to a proposed public offering (the "Offering") by the Company of 800,000 Shares of its Common Stock (the "Shares"). The Offering price shall be $5.00 per Share, or such other price as shall be mutually agreed upon by Millennium Securities Corp. (the "Co-Underwriter") and by the "Lead Underwriter", as defined below, and by the Company immediately prior to the effective date (the "Effective Date") of the Registration Statement, based upon a due diligence review of the Company's business, operations, industry and prospects. This letter states certain conditions and assumptions upon which the proposed Offering by us and the Lead Underwriter (collectively the "Underwriters"), as the Underwriters or as representatives (the "Representative") of several other underwriters is intended. It is the Underwriters' intent, immediately prior to the Effective Date, to enter into a "firm commitment" Underwriting Agreement with the Company and, upon execution thereof, to immediately commence a bona fide public offering of the Shares. The Underwriters may, at their discretion, negotiate with other underwriters who shall be members in good standing of the NASD (as defined herein) who, acting severally, would contract to purchase as principals, portions of the Shares directly from the Underwriters. The Underwriting Agreement shall provide that the Underwriters (or the underwriters if we determine to act as Representative) shall be committed to take and pay for all of the Shares, if any are purchased. You acknowledge that we have advised you that although we have the ability to co-manage the Offering, we do not have the authority under applicable regulations to act as the lead managing underwriter of the Offering. Following execution hereof we shall enter into an arrangement with an Underwriter in good standing with the NASD who is authorized to act as managing underwriter, acceptable to you, in your sole discretion, to act as managing underwriter (the "Lead Underwriter"). The obligation of Co-Underwriter and the Company (except for your obligations pursuant to paragraphs A and C below) are subject to retention of the Lead Underwriter, which Millennium will use its reasonable efforts to retain (and with respect to which efforts the Company will provide its cooperation and facilitation) prior to filing of Pre-Effective Amendment No. 1 to the Registration Statement. The provisions hereof applicable to the payment of compensation to and expenses entering into agreements with Underwriters shall be the subject of separate allocation arrangements between the Co-Underwriter and the Lead Underwriter, to be determined in their sole discretion and subject to applicable laws and regulations; provided however, it is acknowledged that the compensation payable to the Underwriters' hereunder is the aggregate compensation to be paid by the Company to the Underwriters, and that the Lead Underwriter shall agree to the compensation to be paid to the Underwriters as set forth herein prior to the engagement of such Lead Underwriter. The Underwriting Agreement and related agreements shall contain such terms and conditions as are customarily contained in agreements of such character, including the following: (A) $50,000.00 (payable upon acceptance of this Agreement) as an advance against the non-accountable expense provided for below, which is intended to cover actual out-of-pocket expenses actually anticipated to be incurred by the Underwriter in connection with the preparation of this Offering. (B) There shall be an underwriting discount of 10%. The proceeds of the Offering shall be used for purposes reasonably acceptable to the Underwriters, including but not limited to, the repayment of approximately $2,000,000.00 in indebtedness to certain promoters of the Company and other creditors of the Company. (C) The Company will bear all fees, disbursements and expenses in connection with the proposed Offering, including without limitation, the Company's legal and accounting fees and disbursements, the costs of preparing, printing, mailing and delivering the Registration Statements, prospectus and amendments, post-effective amendments and supplements thereto, the Underwriting Agreement and related documents and "Blue Sky" memoranda (all in such quantities as the Underwriters may require), preparing and printing stock certificates, filing fees (including the filing fees incurred in registering the Offering with the National Association of Securities Dealers, Inc. (the "NASD")), seeking listing of the Shares on such Exchanges as the Underwriters may suggest, filing fees, costs and expenses (including reasonable fees and disbursements of counsel) incurred in qualifying the Offering under the "blue sky" laws of the States specified by the Underwriters, transfer taxes, transfer agent and registrar fees. 2 (D) In order to reimburse those costs, fees and expenses customarily incurred by an underwriter during the registration process the Company shall pay to the Underwriters, a nonaccountabie expense allowance in the amount of 3% of the gross proceeds of the Offering (including the over-allotment option to the extent actually exercised by the Underwriters), without deduction for any expenses enumerated in the next preceding paragraph. The balance shall be paid upon consummation of the Offering. The sum when paid, shall be non-refundable and non-accountable until the Underwriting Agreement is signed, after which time they shall become accountable in accordance with the terms of the Underwriting Agreement. (E) For the purpose of covering over-allotments, if any, which may occur during the distribution and sale of Shares, the Company shall grant to the Underwriters an option to purchase all or part of an additional number of Shares as will be equal to 15% of the total number of Shares initially offered to the public, for a period of 45 days from the Effective Date (the "Over-Allotment Option"). Such Over-Allotment shall be exercisable by the Underwriters pursuant to the terms of the Underwriting Agreement and shall be resold to the public on the same terms as the Shares initially offered. (F) The Company and all the stockholders of the Company agree not to cause a private or public offering of any its Shares in any manner, including pursuant to Rule 144 under the Act, of shares owned nominally or beneficially by the Company s officers and directors and holders of in excess of 10% of the Company's outstanding common stock after the public offering, for a period of 24 months following the Effective Date (or such longer period not to exceed 36 months as may be required by any applicable state blue sky laws) without obtaining prior approval of the Underwriters (and, if required by applicable blue sky laws, and the securities commissions in any such states). The Company shall cause such persons to execute an agreement with the Underwriters in form and substance satisfactory to the Underwriters and our counsel regarding such restrictions. (G) The Company shall retain as its lawyers, a firm expert in securities laws matters acceptable to the Underwriters, such as Richman, Lawrence, Mann, Greene, Chizever, Friedman & Phillips which shall have the responsibility for drafting the Registration Statement. The Company shall also retain independent certified public accountants acceptable to the Underwriters. Such accounting firm shall have the responsibility for reviewing financial statements and schedules to be included in the Registration Statement, shall certify such financial statements and schedules which are required to be audited and included in the Registration Statement and shall provide certain "comfort" with respect thereto and with respect to financial and other information included therein as is usual and common in initial public offerings. (H) The Company shall apply to have its common stock approved for quotation on the so called "OTC Bulletin Board," to be effective on the Effective Date. 3 (I) Concurrently with the delivery of the Underwriting Agreement, the Company shall provide the Underwriters with an opinion of counsel reasonably satisfactory to the Underwriters and their counsel, in form and substance customary in initial public offerings. (L) If the sale of Shares is completed: (1) The Company will engage the Underwriters as its investment banker for a period of 12 months on the first day of the month following the Closing Date, at an aggregate monthly fee of $5,000.00 for the first eight months and $6,000 for the ninth month for a total of $46,000 (exclusive of any accountable out-of-pocket expenses). In addition, the consulting agreement (or separate M&A agreement) shall provide that the Company will pay the Underwriters a finder s fee in the event that we originate, and the Company accepts, within 3 years of the Closing Date, a merger, acquisition, joint venture or other transaction to which the Company is a party in an amount equal to 5% of the first $5,000,000.00, 4% of the next $5,000,000.00 and 3% of the excess, if any, over $10,000,000.00 of the consideration received or paid to the other party by the Company in any such transactions. (2) During the two year period following the Effective Date, the Underwriters shall have the right to purchase for the Underwriters' own accounts or to sell for the account of the Company s officers and directors any securities sold pursuant to Rule 144 under the Act by the officers and directors of the Company. Each of the officers and directors (the ' 144 Seller") will agree to consult with the Underwriters with regard to any such sales and will offer to the Underwriters the exclusive opportunity to purchase or sell such securities on terms at least favorable to the 144 Sellers as they can secure elsewhere. If the Underwriters fail to accept in writing any such proposal for sale by the 144 Sellers within S business days after receipt of a copy of the proposal, the Underwriters shall be deemed to have released any claim or right with respect to any such sales contained in the proposal. If, thereafter, the proposal is modified in any material respect, the 144 Sellers shall adopt the procedure set forth in this paragraph with respect to the original proposal. (3) By the Effective Date, the Company shall have registered its Common Stock with the SEC under the provisions of Section 12(b) of the Securities of 1934 and will use its best efforts to maintain such registration in effect for a period of three years from the Effective Date. (4) The Company shall retain a transfer agent acceptable to the Underwriters for the Shares, for a period of three years following the Effective Date. At the Underwriters' request, the Company shall provide the Underwriters with copies of the Company's daily stock transfer sheets from 4 such transfer agent and from the Depository Trust Company, at the Company's sole cost and expense. (5) For a period of three years from the Effective Date, the Company will provide to the Underwriters, on a timely basis, quarterly statements setting forth such information regarding the Company's results of operations and financial position (including balance sheet, profit and loss statements) as is regularly prepared by management of the Company and filed with the SEC. (M) Prior to the filing of the Registration Statement, the Company will provide: (i) documentation to the Underwriter to substantiate that no less than $2,000,000.00 in equity has been paid into the Company; and (ii) documentation to the Underwriter to substantiate that the capitalization of the Company is in accordance with the foregoing subparagraph (i) and prior to the Offering there shall be 3,000,000 shares outstanding. Prior to the filing of Pre-Effective Amendment No. 1 to the Registration Statement the Company will provide the Underwriters with satisfactory results of a UCC lien and title search effected in all appropriate jurisdictions, showing that Company's assets, including its intellectual properties, if any, are unencumbered except to the extent set forth in the financial statements for the year ended July 31, 1996. (N) Commencing on the date hereof and continuing for a period prescribed by Rule 174 promulgated under the Securities Act of 1933, as amended, the Company will not issue a press release or engage in other publicity without prior written notification to us. The Underwriters reserve the right, in their sole discretion, to reduce any item of the Underwriters' compensation or adjust for the benefit of the Company the terms thereof as specified herein in the event that a determination should be made by the NASD and/or the securities department of any jurisdiction to which the Offering is submitted to the effect that the Underwriters' aggregate compensation is excessive or that the terms thereof require adjustment. Any such reduction or adjustment shall not effect any other terms or provisions of this Letter of Intent. The Company represents and warrants to the Underwriters that it is not obligated to pay a finder's fee to anyone in connection with the introduction of the Company to the Underwriters and that it has not paid or delivered any monies, securities or other compensation to any member of the NASD or to any affiliate of such a member during the prior 12 months. It is understood that his letter is merely a letter and statement of intent and not a legally binding agreement except as to matters set forth in paragraphs (A) and (C) above, and that if this Letter of Intent should be terminated by either party, and/or if the Underwriting Agreement shall not be entered into, for whatever cause, then the Company shall only be obligated to pay to the Underwriters the advance of non-accountable expenses 5 as set forth in paragraph (A) above, and any additional actual costs as set forth in paragraph (C) above actually incurred by the Underwriter in excess of the amount previously paid by the Company pursuant to paragraph (A) above. Except as otherwise expressly set forth herein neither the Company nor the Underwriters will be under any obligation to the other until the Company and the Underwriters have executed and delivered the Underwriting Agreement. It is understood that, except as otherwise expressly indicated herein, this letter is merely a statement of intent and any legal obligations between the parties shall be deemed in existence only if, as and when the Underwriting Agreement is executed and delivered. This letter shall be deemed to have been made and delivered in New York City and shall be governed as to its validity, interpretation, construction, effect and in all other respects by the laws of the State of New York. The Company and the Underwriters (i) agree that any legal suit, action or proceeding arising out or relating to this letter shall be instituted exclusively in New York State Supreme Court, County of New York or in the United States District Court of the Southern District of New York; (ii) waives any objection to venue or inconvenient forum of any such suit, action or proceeding; and (iii) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York or in the United States District Court of the Southern District of New York in any such suit, action or proceeding. The Company and the Underwriters further accept to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York State Supreme Court, County of New York or in the United States District Court of the Southern District of New York and agree that service of process upon it mailed by certified mail, return receipt requested, to its address shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding. Any notice, election or demand given or made pursuant hereto shall be given or made in writing and signed by the sending party or its attorney, and shall be deemed given when: (i) personally delivered; (ii) one business following delivery to a reputable courier service, or (iii) two days following the day when sent concurrently with such mailing, in all cases to the respective party at its address given above, with copies to counsel. If the foregoing correctly sets forth your understanding with respect to the proposed Offering on behalf of the Company, please so confirm by signing and returning one copy of this letter, whereupon we will instruct our counsel to cooperate with counsel for the Company in the preparation of the appropriate Registration Statement under the Act, the Underwriting Agreement and other related documents so as to expedite the successful consummation of the Offering. This Agreement supersedes any and all prior agreements between the parties hereto respecting the subject matter hereof, may be amended only in writing and shall be binding upon our respective legal representatives and assigns. 6 This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. Very truly yours, MILLENNIUM SECURITIES CORP. By: /s/ Richard A. Sitomer --------------------------- Richard A. Sitomer Chief Executive Officer Accepted & Agreed to: UNITED FILM DISTRIBUTORS, INC. By: /s/ Harry Shuster -------------------------- Harry Shuster Chairman of the Board 7 EX-3.1 3 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 OF HIT ENTERTAINMENT, INC. Hit Entertainment, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is Hit Entertainment, Inc. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on May 10, 1995. 2. This Restated Certificate of Incorporation amends and restates the Certificate of Incorporation of the Corporation by inserting therein a new Article FIFTH, removing Article SIXTH and renumbering the subsequent Articles contained therein, and amending new Article SIXTH to delete language therefrom. 3. That by Unanimous Written Consent of the Board of Directors of this Corporation resolutions were duly adopted setting forth the proposed amended and restated Certificate of Incorporation of this Corporation, declaring said amendment and restatement to be advisable and providing that the written consent of the stockholders to such amendment and restatement should be obtained. 4. That thereafter, pursuant to resolution of its Board of Directors, the written consent of the stockholders of the Corporation was obtained in accordance with Section 228 of the General Corporation Law, by which consent all of the shares unanimously consented to the amendment and restatement, which consent satisfied the necessary number of shares as required by statute to consent to the amendment. 5. That said amendment and restatement was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. 6. The text of the Certificate of Incorporation, as amended or supplemented heretofore, is further amended hereby to read as herein set forth in full: FIRST: The name of the Corporation is Hit Entertainment, Inc. SECOND: The Corporation shall have perpetual duration. THIRD: The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. FOURTH: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of the State of Delaware. FIFTH: The total number of shares which the Corporation shall have authority to issue is 23,000,000 shares (23,000,000), consisting of Twenty-Million (20,000,000) shares of Common Stock, par value $.01 per share, and Three Million (3,000,0000) shares of Preferred Stock, par value $.01 per share. Shares of Preferred Stock may be issued form time to time in one or more series, each such series to have such distinctive designation or title as may be stated and expressed in this Article Fifth or as may be fixed by the Board of Directors prior to the issuance of any shares thereof. Each such series of Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and such relative, participating, optional or other special rights (including, without limitation, the right to convert the shares of such Preferred Stock into shares of the Corporation's Common Stock at such rate and upon such terms and conditions as may be fixed by the Corporations' Board of Directors), with such qualifications, limitations or restrictions of such preferences or rights as shall be stated and expressed in this Article Fifth or in the resolution or resolutions providing for the issue of such series of Preferred Stock as may be adopted from time by the Board of Directors prior to the issuance of any shares thereof, in accordance with the laws of the State of Delaware. Except as may be otherwise provided in this Article FIFTH or in the resolution or resolutions providing for the issue of a particular series, the Board of Directors may from time to time increase the number of shares of any series already created by providing that any unissued shares of Preferred Stock shall constitute part of such series, or may decrease (but not below the number of shares thereof then outstanding) the number of shares of any series already created by providing that any unissued shares previously assigned to such series shall no longer constitute part thereof. Each share of Common Stock, par value $.01 per share, of the Corporation outstanding at the time this Restated Certificate of Incorporation becomes effective is hereby changed into 5 shares of Common Stock, par value $.01 per share, of the Corporation. No fractional shares will be issued in connection with such change. Each stockholder of the Corporation at the time this Restated Certificate of Incorporation becomes effective will become the holder of that number of whole shares of Common Stock to which the change entitles such stockholder, rounded to the nearest whole share. SIXTH: The Board of Directors shall have the power to make, alter or repeal the Bylaws of the Corporation at any meeting at which a quorum is present by the affirmative vote of a majority of the whole Board of Directors. Election of Directors need not be by written ballot. SEVENTH: A Director of the Corporation shall have no personal liability to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director; provided, however, that this Article SEVENTH shall not eliminate or limit the liability of a Director, except to the extent permitted by applicable law (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware as the same now exists or may hereafter be amended, or (iv) for any transaction from which the Director derived an improper personal benefit. No amendment to, or repeal of, this 2 Article SEVENTH shall apply to, or have an effect on the liability or alleged liability of any Director for, or with respect to, any acts or omissions of such director occurring prior to such amendment or repeal. IN WITNESS WHEREOF, said Hit Entertainment, Inc. has caused this Certificate to be executed by its duly authorized officers as of the 7th day of May, 1997 HIT ENTERTAINMENT, INC. By /s/ Brian Shuster --------------------------------- Brian Shuster, President ATTEST: /s/ David M. Kane -------------------------- David M. Kane Secretary 3 EX-3.3 4 EXHIBIT 3.3 BYLAWS Exhibit 3.3 OF HIT ENTERTAINMENT, INC. (a Delaware corporation) ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation. Any or all the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. The corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate or uncertificated shares. 2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General Corporation Law, the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the corporation shall be uncertificated shares. Within a reasonable time after the issuance or transfer of any uncertificated shares, the corporation shall send to the registered owner thereof any written notice prescribed by the General Corporation Law. 3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose. 4. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the corporation shall be made only on the stock ledger of the corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. 5. TRANSFER AGENT. The Board of Directors shall have power to appoint one or more Transfer Agents and Registrars for the transfer and registration of certificates of stock of any class, and may require that stock certificates shall be countersigned and registered by one or more of such Transfer Agents and Registrars. 6. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors 2 may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 7. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the certificate of incorporation, except as any provision of law may otherwise require. 3 8. STOCKHOLDER MEETINGS. (a) TIME. The annual meeting shall be held on the date and at the time fixed, from time to time, by the directors, provided, that the first annual meeting shall be held on a date within thirteen months after the organization of the corporation, and each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. A special meeting shall be held on the date and at the time fixed by the directors. (b) PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware. (c) CALL. Annual meetings and special meetings may be called by the directors or by any officer instructed by the directors to call the meeting. (d) NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. The notice of any meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the General Corporation Law. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States Mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. 4 (e) STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders. (f) CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. (g) PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. (h) INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and 5 shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by him or them and execute a certificate of any fact found by him or them. Except as otherwise required by subsection (e) of Section 231 of the General Corporation Law, the provisions of that Section shall not apply to the corporation. (i) QUORUM. The holders of a majority of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. (j) VOTING. Each share of stock shall entitle the holder thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation and these Bylaws. In the election of directors, and for any other action, voting need not be by ballot. 9. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law. ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors of the corporation. The use of the phrase "whole board" herein refers to the total number of directors which the corporation would have if there were no vacancies. 6 2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The Board of Directors shall consist of a minimum of one member and a maximum of 7 members, as may be fixed from time to time by the vote of a majority of the Board. 3. ELECTION AND TERM. The first Board of Directors, unless the members thereof shall have been named in the certificate of incorporation, shall be elected by the incorporator or incorporators and shall hold office until the first annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Except as the General Corporation Law may otherwise require, in the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director. 4. MEETINGS. (a) TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. (b) PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board. (c) CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, of the President, or of a majority of the directors in office. (d) NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice need not be given to any director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 7 Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. (e) QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law and these Bylaws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors. Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. (f) CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside. 5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the General Corporation Law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 6. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the corporation with the exception of any authority the delegation of which is prohibited by Section 141 of the General Corporation Law, and may authorize the seal of the corporation to be affixed to all papers which may require it. 8 7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 8. COMPENSATION. The directors shall receive such compensation for their services as directors and as members of any committee appointed by the Board as may be prescribed by the Board of Directors and shall be reimbursed by the corporation for ordinary and reasonable expenses incurred in the performance of their duties. ARTICLE III OFFICERS The officers of the corporation shall consist of a President, a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive Vice-President, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as may otherwise be provided in the resolution of the Board of Directors choosing him, no officer other than the Chairman or Vice-Chairman of the Board, if any, need be a director. Any number of offices may be held by the same person, as the directors may determine. Unless otherwise provided in the resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until his successor shall have been chosen and qualified. All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an Assistant Secretary of the corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign to him. Any officer may be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors. Unless otherwise ordered by the Board of Directors, the President or a Vice- President thereunto duly authorized by the President shall have full power and authority on behalf of the corporation to attend and to vote at any meeting of stockholders of any corporation in which this corporation may hold stock, and may exercise on behalf of this corporation any and all of the rights and powers incident to the ownership of such stock at 9 any such meeting, and shall have power and authority to execute and deliver proxies and consents on behalf of this corporation in connection with the exercise by this corporation of the rights and powers incident to the ownership of such stock. The Board of Directors, from time to time, may confer like powers upon any other person or persons. ARTICLE IV INDEMNIFICATION OF DIRECTORS AND OFFICERS AND OTHER PERSONS 1. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 2. The corporation shall indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. 10 3. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in sections 1 or 2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 4. Any indemnification under sections 1 or 2 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in such section. Such determination shall be made: (a) By the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) If such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) By the stockholders. 5. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. 6. The indemnification and advancement of expenses provided by, or granted pursuant to the other sections of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 7. The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. 11 8. For purposes of this Article, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation of its separate existence had continued. 9. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article. 10. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 11. No director or officer of the corporation shall be personally liable to the corporation or to any stockholder of the corporation for monetary damages for breach of fiduciary duty as a director or officer, provided that this provision shall not limit the liability of a director or officer (i) for any breach of the director's or the officer's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director or officer derived an improper personal benefit. ARTICLE V RELIANCE UPON BOOKS, REPORTS AND RECORDS Each Director, each member of any committee designated by the Board of Directors, and each officer of the Corporation, shall, in the performance of his duties,-be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. 12 ARTICLE VI CORPORATE SEAL The corporate seal shall be in such form as the Board of Directors shall prescribe. ARTICLE VII FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VIII CONTROL OVER BYLAWS Subject to the provisions of the certificate of incorporation and the provisions of the General Corporation Law, the power to amend, alter, or repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors or by the stockholders. 13 I HEREBY CERTIFY that the foregoing is a full, true, and correct copy of the Bylaw of Hit Entertainment, Inc., a Delaware corporation, as in effect on the date hereof. Dated: As of May 10, 1995 /s/ David M. Kane --------------------------------- David M. Kane, Secretary (SEAL) 14 EX-10.1 5 EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 1st day of April, 1997, between Hit Entertainment, Inc., with its principal place of business at 1990 Westwood Boulevard, Penthouse, Los Angeles, California 90025 ("Employer") and Brian Shuster, whose address is 1990 Westwood Boulevard, Penthouse, Los Angeles, California 90025 ("Employee"). 1 TERM OF EMPLOYMENT 1.1 Employer hereby employs Employee, and Employee hereby accepts employment with Employer, beginning on the date first above written and continuing thereafter until March 31, 2000 (the "Term") subject to earlier termination as provided in this Agreement. The Term hereunder shall be automatically extended additional one (1) year periods (each an "Option Period"), each commencing April 1 and continuing until March 31 of the following year, unless Employer or Employee notifies the other party by written notice as provided hereunder on or before January 31 immediately preceding the next Option Period of an election not to extend the Term and to terminate this Agreement as of the expiration of the original Term or the current Option Period, as the case may be. 2 DUTIES OF EMPLOYEE 2.1 Employee is hired and employed as President and Chief Executive Officer of Employer. Employee shall do and perform all services, acts or things necessary or advisable to fulfill the duties of a corporate President and Chief Executive Officer. Employee shall also serve as a member of the Board of Directors of Employer. Employee shall, at all times, be subject to all policies established by the Board of Directors of Employer. 2.2 Employee agrees that to the best of his ability and experience he will at all times loyally and conscientiously perform all of the duties and obligations required of him either expressly or implicitly by the terms of this Agreement. 2.3 The specific duties to be performed by Employee shall be determined from time to time by the Board of Directors of Employer. 2.4 Employee shall be required to devote only so much of his time and energies to the business of Employer during the employment term as shall be necessary to fulfill his duties as President and Chief Executive Officer of Employer. 3 COMPENSATION TO EMPLOYEE 3.1 As compensation for his services hereunder, Employee shall receive an annual base salary of Two Hundred Six Thousand Four Hundred Dollars ($206,400.00) payable in equal bi-monthly installments in accordance with Employer's normal payroll policies. The base salary of Employee shall be subject to annual increases at the sole discretion of the Board of Directors. 3.2 Employer shall have the right to deduct from the compensation due to Employee hereunder any and all sums required for social security and withholding taxes, and for any other federal, state or local charge which may now be in effect or hereafter enacted or required as a charge on the compensation of Employee. 4 EMPLOYEE BENEFITS 4.1 Employee shall be entitled to coverage under the Employer's group medical insurance plan, in the same manner as other executive officers of Employer. - 2 - 4.2 Employee shall be eligible to participate in the Employer's retirement plans (if any) and in any incentive compensation plans now or hereafter established by Employer, in the same manner as other executive officers of Employer. 4.3 If Employee becomes disabled during the employment term because of sickness, physical or mental disability, or for any other reason, so that he is unable to materially perform his duties hereunder, Employer agrees to continue Employee's salary during such disability until disability payments commence under the disability insurance maintained for Employee, if any, but in no event for more than one hundred and eighty (180) calendar days. 4.4 Employee shall be entitled to such other fringe benefits (including, but not limited to vacation pay) as are now or hereafter afforded to other executive officers of Employer, or as shall be agreed to from time to time by Employer and Employee. 4.5 Employer agrees to provide Employee with a private office, stenographic and secretarial help, office equipment and supplies, and such other facilities and services, which are suitable to Employee's position and adequate for the performance of his duties. 5 REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE 5.1 Employer will promptly reimburse Employee for all reasonable business expenses incurred by Employee in promoting the business of Employer, including expenditures for entertainment, gifts, and travel, provided that: (a) Each such expenditure is of a nature qualifying it as a proper deduction on the federal and state income tax return of Employer or such expenditure was incurred at the express request of Employer, whether or not deductible; and - 3 - (b) Employee furnishes to Employer adequate records and other documentary evidence required by federal and state statutes and regulations issued by the appropriate taxing authorities for the substantiation of each such expenditure as an income tax deduction, or similar records if the expenditure is not deductible. 6 TERMINATION OF EMPLOYMENT 6.1 This Agreement may be terminated by Employer "for good cause" by giving thirty (30) days' written notice of termination to Employee. Termination "for good cause" shall mean the willful and continued failure to follow Employer's directions following Employer's written notice to Employee directing Employee to follow Employer's instructions and requests and Employee's failure to take appropriate and timely corrective action; dishonesty; improper disclosure of confidential information; or failure to perform Employee's duties under this Agreement following Employer's written notice to Employee of such failure and Employee's failure to take appropriate and timely corrective action. Upon such termination, Employee shall forfeit any and all rights to compensation beyond the date upon which this Agreement shall have been so terminated by Employer. In addition, in the event of any of the above-mentioned offenses, at the election of Employer the operation of this Agreement may be suspended for and during the continuance of Employee's period of failure, neglect or refusal, and Employer may, at its election, add a period of time equal to all or any part of such period of suspension to the applicable year of the term of this Agreement, and the dates for the commencement of any subsequent years of the Agreement, and the dates for the exercise and commencement of any subsequent option thereof, shall be correspondingly postponed. 6.2 This Agreement shall terminate immediately on the occurrence of any of the following events: - 4 - (a) Death of Employee; (b) Loss by Employee of legal capacity; (c) Permanent mental or physical disability of Employee such that he is unable to materially perform the duties of his employment 6.3 If during the term of this Agreement Employee should become incapable of fulfilling his obligations hereunder because of injury or physical or mental illness and such incapacity shall exist for on hundred and eighty (180) calendar days in the aggregate during any one (1) contract year, Company may, at its option and upon five (5) days' written notice to Employee, terminate this Agreement. The reasonable good faith determination by Employer that Employee is incapable of fulfilling his obligations under this Agreement because of injury or physical or mental illness shall be final and binding. In addition, during any period of disability, Employer shall have the right to reduce Employee's salary by the amount of the disability benefits to which Employee is entitled to under applicable law. 6.4 This Agreement may be terminated by Employee for any reason upon sixty (60) days' written notice to Employer. 6.5 In the event of the termination of this Agreement prior to the completion of the employment term specified herein, Employee shall be entitled to the full compensation earned by him prior to the date of termination as provided for in this Agreement, computed pro-rata up to and including that date. 6.6 This Agreement shall not be terminated by any: (a) Transfer of all or substantially all of the assets of Employer; or (b) Merger by Employer with another company. - 5 - In the event of any such merger or transfer of assets, the surviving corporation or the transferee of Employer's assets shall be bound by and shall have the benefit of the provisions of this Agreement; Employer agrees to take all actions necessary to insure that such corporation or transferee is so bound. 7 GENERAL PROVISIONS 7.1 All notices required or permitted to be given pursuant to this Agreement shall be in writing, and shall be delivered either personally, by overnight delivery service or by U.S. certified mail, postage prepaid, return-receipt requested and addressed to the parties at their respective addresses as they appear in the first paragraph of this Agreement. The parties may change their addresses for notice by giving notice of such change in accordance with this paragraph. Notices sent by overnight delivery service shall be deemed received on the business day following the date of deposit with the delivery service. Mailed notices shall be deemed received upon the earlier of the date of delivery shown on the return receipt, or the second business day after the date of mailing. 7.2 This Agreement has been executed in and is to be performed in the State of California, and this Agreement shall be interpreted in accordance with the laws of the State of California. 7.3 This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective heirs, assigns, successors-in-interest, and legal representatives, subject to any restrictions on assignment set forth herein. 7.4 This Agreement may not be amended, modified or altered except by a written instrument executed by all parties hereto. 7.5 None of the rights of any party hereunder (except the right to receive money) may be assigned without the prior written consent of the non-assigning party. None of the duties of - 6 - any party hereunder may be delegated by either party without the prior written consent of the non- delegating party. 7.6 No party has made any representations, warranties, covenants or promises relating to the subject matter of this Agreement except as set forth herein, and any prior agreements or understandings not specifically set forth herein shall be of no force or effect. This Agreement constitutes the entire agreement of the parties relative to the subject matter hereof. 7.7 If any provision of this Agreement is declared by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall nevertheless be given full force and effect. 7.8 Captions are for convenience only and shall not be considered in interpreting any of the provisions hereof. 7.9 As used herein, the masculine, feminine or neuter gender, and the singular or plural number, shall each be deemed to include the others whenever the context so indicates. 7.10 Should any party be required to bring legal action (including arbitration) to enforce his rights under this Agreement, the prevailing party in such action shall be entitled to recover from the losing party his reasonable attorneys' fees and costs in addition to any other relief to which he is entitled. Such recovery of attorneys' fees shall include any attorneys' fees incurred in connection with any bankruptcy or reorganization proceeding, including stay litigation. The parties further agree that any attorneys' fees incurred in enforcing any judgment are recoverable as a separate item, and that this provision is intended to be severable from the other provisions of this Agreement, shall survive the judgment, and is not to be deemed merged into the judgment. 7.11 Any controversy or claim arising out of or relating to this Agreement, or breach thereof, shall be settled by binding arbitration in Los Angeles, California, in accordance with - 7 - the Commercial Arbitration Rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator(s) may be entered in any court of competent juris diction. The cost of arbitration shall be borne by the losing party, or, if there is no losing party, as the arbitrator(s) shall determine. In any arbitration proceedings relative to this Agreement, or breach thereof, all parties shall have the right to take depositions and to obtain discovery regarding the subject matter of the arbitration pursuant to California Code of Civil Procedure Section 1283.05, or any successor statute. Service of any Petition to confirm or vacate the Arbitration award and Notice of Hearing thereon may be made by certified or registered mail, return-receipt requested, or by personal delivery. The arbitrator'(s) award may be limited to a statement that one party pay to the other a sum of money. The arbitrator(s) will not be deemed to exceed their powers (per California Code of Civil Procedure Sections 1286.2 or 1286.6) by committing an error of law or legal reasoning, it being agreed that the decision of the arbitrator(s) shall be final and unreviewable for error of law or legal reasoning of any kind. 7.12 This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one (1) and the same instrument. 7.13 The failure of any party, at any time, to require timely performance by any other party of any provision of this Agreement shall not affect such party's rights thereafter to enforce the same, nor shall the waiver by any party of any breach of any provision of this Agreement, whether or not agreed to in writing, be taken or held to be a waiver of the breach of any other provision or a waiver of any subsequent breach of the same provision of this Agreement. No extension of time for - 8 - the performance of any obligation or act hereunder shall be deemed to be an extension of time for the performance of any other obligation or act hereunder. 7.14 The parties agree to perform such further acts and to execute, acknowledge and deliver such documents as may be necessary to effectuate the provisions of this Agreement. Executed at Los Angeles, California, on the day and year first above-written. EMPLOYER: HIT ENTERTAINMENT, INC. By /s/ Harry S. Shuster ---------------------------- Harry S. Shuster, its Chairman EMPLOYEE: /s/ Brian Shuster ------------------------------- Brian Shuster - 9 - EX-10.4 6 EXHIBIT 10.4 COMMERCIAL LEASE (GENERAL FORM) 1. PARTIES. This Lease is made and entered into this 1st day of July, 1995 by and between 1990 Westwood Blvd., Inc. (hereinafter referred to as "Landlord") and Hit Entertainment, Inc. (hereinafter referred to as "Tenant"). 2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, on the terms and conditions hereinafter set forth that certain real property and the building and other improvements located thereon situated in the City of Los Angeles, County of Los Angeles, State of CA, commonly known as Shanalee Plaza, 1990 Westwood Blvd., Penthouse (said real property is hereinafter called the "Premises"). 3. TERM. The term of this Lease shall be for 3 years, commencing on July 1, 1995 and ending on June 30, 1998, unless sooner terminated as hereinafter provided. 4. RENT. Tenant shall pay Landlord as rent for the Premises the following sums per month, in advance on the first day of each month during the term of this Lease: During the first through third year of the term of this Lease, the sum of Four Thousand Five Hundred and xx/100 ($4,500) dollars per month. During the _________ through _________ year of the term of this Lease, the sum of ($______________) dollars per month. During the _________ through _________ year of the term of this Lease, the sum of ($______________) dollars per month. Tenant shall pay to Landlord upon the execution of this Lease the sum of N/A ($______________) dollars as rent for . Rent for any period during the term of this Lease which is for less than one (1) month, shall be a pro rata portion of the monthly installment. Rent shall be payable without notice or demand and without any deduction, off-set, or abatement in lawful money of the United States to the Landlord at the address stated herein for notices or to such other persons or such other places as the Landlord may designate to Tenant in writing. 5. SECURITY DEPOSIT. Tenant shall deposit with Landlord upon the execution of this Lease the sum of Nil ($______________) dollars as a security deposit for the Tenant's faithful performance of the provisions of this Lease. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use the security deposit, or any portion of it, to cure the default or compensate Landlord for all damages sustained by Landlord resulting from Tenant's default. Tenant shall immediately on demand pay to Landlord the sum equal to that portion of the security deposit expended or applied by Landlord which was provided for in this paragraph so as to maintain the security deposit in the sum initially deposited with Landlord. Landlord shall not be required to keep the security deposit separate from its general account nor shall Landlord be required to pay Tenant any interest on the security deposit. If Tenant performs all of Tenant's obligations under this Lease, the security deposit or that portion thereof which has not previously been applied by the Landlord, shall be returned to Tenant within fourteen (14) days after the expiration of the term of this Lease, or after Tenant has vacated the Premises, whichever is later. 6. USE. Tenant shall use the Premises only for ________________________________ and for no other purpose without the Landlord's prior written consent.Tenant shall not do, bring or keep anything in or about the Premises that will cause a cancellation of any insurance covering the Premises or the building in which the Premises are located. If the rate of any insurance carried by the Landlord is increased as a result of Tenant's use, Tenant shall pay to Landlord within ten (10) days after written demand from Landlord, the amount of any such increase. Tenant shall comply with all laws concerning the Premises or Tenant's use of the Premises, including without limitation, the obligation at Tenant's cost to alter, maintain, or restore the Premises in compliance and conformity with all laws relating to the condition, use, or occupancy of the Premises by Tenant during the term of this Lease. Tenant shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance or, if there shall be more than one tenant of the building containing the Premises, which shall unreasonably disturb any other tenant. Tenant hereby accepts the Premises in their condition existing as of the date that Tenant possesses the Premises, subject to all applicable zoning, municipal, county and state laws, ordinances, regulations governing or regulating the use of the Premises and accepts this Lease subject thereto and to all matters disclosed thereby. Tenant hereby acknowledges that neither the Landlord nor the Landlord's agent has made any representation or warranty to Tenant as to the suitability of the Premises for the conduct of Tenant's business. 2 7. TAXES. (a) Real Property Taxes. Landlord shall pay all real property taxes and general assessments levied and assessed against the Premises during the term of this Lease. If it shall be Tenant's obligation to pay such real property taxes and assessments hereunder, Landlord shall use its best efforts to cause the Premises to be separately assessed from other real property owned by the Landlord. If Landlord is unable to obtain such a separate assessment, the assessor's evaluation based on the building and other improvements that are a part of the Premises shall be used to determine the real property taxes. If this evaluation is not available, the parties shall equitably allocate the property taxes between the building and other improvements that are a part of the Premises and all buildings and other improvements included in the tax bill. In making the allocation, the parties shall reasonably evaluate the factors to determine the amount of the real property taxes so that the allocation of the building and other improvements that are a part of the Premises will not be less than the ratio of the total number of square feet of the building and other improvements that are a part of the Premises bears to the total number of square feet in all buildings and other improvements included in the tax bill. Real property taxes attributable to land in the Premises shall be determined by the ratio that the total number of square feet in the Premises bears to the total number of square feet of land included in the tax bill. (b) Personal Property Taxes. Tenant shall pay prior to the delinquency all taxes assessed against and levied upon the trade fixtures, furnishings, equipment and other personal property of Tenant contained in the Premises. Tenant shall endeavor to cause such trade fixtures, furnishings and equipment and all other personal property to be assessed and billed separately from the property of the Landlord. If any of Tenant's said personal property shall be assessed with Landlord's property, Tenant shall pay to Landlord the taxes attributable to Tenant within ten (10) days after the receipt of a written statement from Landlord setting forth the taxes applicable to Tenant's property. 8. UTILITIES. Tenant shall make all arrangements and pay for all water, gas, heat, light, power, telephone and other utility services supplied to the Premises together with any taxes thereon and for all connection charges. If any such services are not separately metered to Tenant, the Tenant shall pay a reasonable proportion, to be determined by Landlord, of all charges jointly metered with other premises. 3 9. MAINTENANCE AND REPAIRS. (a) Landlord's Obligations. Except as provided in Article 12, and except for damage caused by any negligent or intentional act or omission of Tenant, Tenant's agents, employees, or invitees, Landlord at its sole cost and expense shall keep in good condition and repair the foundations, exterior walls, and exterior roof of the Premises. Landlord shall also maintain the unexposed electrical, plumbing and sewage systems including, without limitation, those portions of the systems lying outside the Premises; window frames, gutters and down spouts on the building, all sidewalks, landscaping and other improvements that are a part of the Premises or of which the Premises are a part. The Landlord shall also maintain the heating, ventilating and air-conditioning systems servicing the Premises. Landlord shall resurface and restripe the parking area on or adjacent to the Premises when necessary. Landlord shall have thirty 130) days after notice from Tenant to commence to perform its obligations under this Article 9, except that Landlord shall perform its obligations immediately if the nature of the problem presents a hazard or emergency situation. 11 the Landlord does not perform its obligations within the time limit set forth in this paragraph, Tenant can perform said obligations and shall have the right to be reimbursed for the amount that Tenant actually expends in the performance of Landlord's obligations. If Landlord does not reimburse Tenant within thirty 130) days after demand from Tenant, Tenant's sold remedy shall be to institute suit against the Landlord, and Tenant shall not have the right to withhold from future rent the sums Tenant has expended. (b) Tenant's Obligations. Subject to the provisions of Sub-paragraph la) above and Article 12, Tenant at Tenant's sole cost and expense shall keep in good order, condition and repair the Premises and every part thereof including, without limitation, all Tenant's personal property, fixtures, signs, store fronts, plate glass, show windows, doors, interior walls, interior ceiling, and lighting facilities. If Tenant fails to perform Tenant's obligation as stated herein, Landlord may at its option (but shall not be required to), enter the Premises, after ten (10) days prior written notice to Tenant, put the same in good order, condition and repair, and the costs thereof together with interest thereon at the rate of ten (10%) percent per annum shall become due and payable as additional rental to Landlord together with Tenant's next rental installment. 10. ALTERATIONS AND ADDITIONS. (a) Tenant shall not, without the Landlord s prior written consent, make any alterations, improvements or additions in or about the Premises except for non-structural work which does not exceed $1,000.00 in cost. As a condition to giving any such consent, the Landlord may require the Tenant to remove any such alterations, improvements, or additions at the expiration of the term, and to restore the Premises to their prior condition by giving Tenant thirty (30) days written notice prior to the expiration of the term that 4 Landlord requires Tenant to remove any such alterations, improvements, or additions that Tenant has made to the Premises. If Landlord so elects, Tenant at its sole cost shall restore the Premises to the condition designated by Landlord in its election before the last day of the term of the Lease. Before commencing any work relating to the alterations, additions, or improvements affecting the Premises, Tenant shall notify Landlord in writing of the expected date of the commencement of such work so that Landlord can post and record the appropriate notices of non-responsibility to protect Landlord from any mechanic's liens, materialman liens, or any other liens. In any event, Tenant shall pay, when due, all claims for labor and materials furnished to or for Tenant at or for use in the Premises. Tenant shall not permit any mechanic's liens or materialman's liens to be levied against the Premises for any labor or material furnished to Tenant or claimed to have been furnished to Tenant or Tenant's agents or contractors in connection with work of any character performed or claimed to have been performed on the Premises by or at the direction of Tenant. Tenant shall have the right to assess the validity of any such lien if, immediately on demand by Landlord, Tenant procures and records a lien release bond meeting the requirements of California Civil Code Section 3143 and shall provide for the payment of any sum that the claimant may recover on the claim (together with the costs of suit, if it is recovered in the action). Unless the Landlord requires their removal as set forth above, all alterations, improvements or additions which are made on the Premises by the Tenant shall become the property of the Landlord and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of this paragraph, Tenant's trade fixtures, furniture, equipment and other machinery, other than that which is affixed to the Premises so that it cannot be removed without material or structural damage to the Premises, shall remain the property of the Tenant and removed by Tenant at the expiration of the term of this Lease. 11. INSURANCE; INDEMNITY. (a) Fire Insurance. Landlord at its cost shall maintain during the term of this Lease on the Premises a policy or policies of standard fire and extended coverage insurance to the extent of at least ninety (90%) percent of full replacement value thereof. Said insurance policies shall be issued in the names of Landlord and Tenant, as their interests may appear. Tenant at its cost shall maintain the during the term is this Lease on all its personal property, Tenant's improvements, and alterations in or about the Premises, a policy of standard fire and extended coverage insurance, with vandalism and malicious mischief endorsements, to the extent of their full replacement value. The proceeds from any such policy shall be used by Tenant for the replacement of personal property or the restoration of Tenant's improvements or alterations. 5 (b) Liability Insurance. Tenant at its sole cost and expense shall maintain during the term of this Lease public liability and property damage insurance with a single combined liability limit of five hundred thousand ($500,000.00) dollars, and property damage limits of not less that one hundred thousand ($100,000.00) dollars, insuring against all liability of Tenant and its authorized representatives arising out of and in connection with Tenant's use or occupancy of the Premises. Both public liability insurance and property damage insurance shall insure performance by Tenant of the indemnity provisions in Sub-paragraph (d) below, but the limits of such insurance shall not, however, limit the liability of Tenant hereunder. Both Landlord and Tenant shall be named as additional insureds, and the policies shall contain cross-liability endorsements. If Tenant shall fail to procure and maintain such insurance the Landlord may, but shall not be required to, procure and maintain same at the expense of Tenant and the cost thereof, together with interest thereon at the rate of ten (10%) percent per annum, shall become due and payable as additional rental to Landlord together with Tenant's next rental installment. (c) Waiver of Subrogation. Tenant and Landlord each waives any and all rights of recovery against the other, or against the officers, employees, agents, and representatives of the other, for loss of or damage to such waiving party or its property or the property of others under its control, where such loss or damage is insured against under any insurance policy in force at the time of such loss or damage. Each party shall cause each insurance policy obtained by it hereunder to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with am/ damage covered by any such policy. (d) Hold Harmless. Tenant shall indemnify and hold Landlord harmless from and against any and all claims arising from Tenant's use or occupancy of the Premises or from the conduct of its business or from any activity, work, or things which may be permitted or suffered by Tenant in or about the Premises including all damage, costs, attorney's fees, expenses and liabilities incurred in the defense of any claim or action or proceeding arising therefrom. Except for Landlord's willful or grossly negligent conduct, Tenant hereby assumes all risk of damage to property or injury to person in or about the Premises from any cause, and Tenant hereby waives all claims in respect thereof against Landlord. (e) Exemption of Landlord from Liability. Except for Landlord's willful or grossly negligent conduct, Tenant hereby agrees that Landlord shall not be liable for any injury to Tenant's business or loss of income therefrom or for damage to the goods, wares, merchandise, or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Premises; nor shall Landlord be liable for injury to the person of Tenant. Tenant's employees, agents, contractors, or invitees, whether such damage or injury is caused by or results from fire, 6 steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air-conditioning, or lighting fixtures, or from any other cause, whether such damage results from conditions arising upon the Premises or upon other portions of the building in which the Premises are a part, or from any other sources or places. Landlord shall not be liable to Tenant for any damages arising from any act or neglect of any other tenant, if any, of the building in which the Premises are located. 12. DAMAGE OR DESTRUCTION. (a) Damage - Insured. If, during the term of this Lease, the Premises and/or the building and other improvements in which the Premises are located are totally or partially destroyed rendering the Premises totally or partially inaccessible or unusable, and such damage or destruction was caused by a casualty covered under an insurance policy required to be maintained hereunder, Landlord shall restore the Premises and/or the building and other improvements in which the Premises are located into substantially the same condition as they were in immediately before such damage or destruction, provided that the restoration can be made under the existing laws and can be completed within one hundred twenty 11201 working days after the date of such destruction or damage. Such destruction or damage shall not terminate this Lease. If the restoration cannot be made in said 120 day period, then within fifteen (15) days after the parties hereto determine that the restoration cannot be made in the time stated in this paragraph, Tenant may terminate this Lease immediately by giving notice to Landlord and the Lease will be deemed cancelled as of the date of such damage or destruction. If Tenant fails to terminate this Lease and the restoration is permitted under the existing laws, Landlord, at its option, may terminate this Lease or restore the Premises and/or any other improvements in which the Premises are located within a reasonable time and this Lease shall continue in full force and effect. If the existing laws do not permit the restoration, either party can terminate this Lease immediately by giving notice to the other party. Notwithstanding the above, if the Tenant is the insuring party and if the insurance proceeds received by Landlord are not sufficient to effect such repair, Landlord shall give notice to Tenant of the amount required in addition to the insurance proceeds to effect such repair. Tenant may, at Tenant's option, contribute the required amount, but upon failure to do so within thirty (30) days following such notice, Landlord's sole remedy shall be, at Landlord's option and with no liability to Tenant, to cancel and terminate this Lease. If Tenant shall contribute such amount to Landlord within said thirty (30) day period, Landlord shall make such repairs as soon as reasonably possible and this Lease shall continue in full force and effect. Tenant shall in no event have any right to reimbursement for any amount so contributed. 7 (b) Damage - Uninsured. In the event that the Premises are damaged or destroyed by a casualty which is not covered by the fire and extended coverage insurance which is required to be carried by the party designated in Article 11(a) above, then Landlord shall restore the same; provided that if the damage or destruction is to an extent greater than ten (10%) percent of the then replacement cost of the improvements on the Premises (exclusive of Tenant's trade fixtures and equipment and exclusive of foundations and footings), then Landlord may elect not to restore and to terminate this Lease. Landlord must give to Tenant written notice of its intention not to restore within thirty (30) days from the date of such damage or destruction and, if not given, Landlord shall be deemed to have elected to restore and in such event shall repair any damage as soon as reasonably possible. In the event that Landlord elects to give such notice of Landlord's intention to cancel and terminate this Lease, Tenant shall have the right, within ten (10) days after receipt of such notice, to give written notice to Landlord of Tenant's intention to repair such damage at Tenant's expense, without reimbursement from Landlord, in which event the Lease shall continue in full force and effect and Tenant shall proceed to make such repairs as soon as reasonably possible. If the Tenant does not give such notice within such 10 day period, this Lease shall be cancelled and be deemed terminated as of the date of the occurrence of such damage or destruction. (c) Damage Near the End of the Term. If the Premises are totally or partially destroyed or damaged during the last twelve (12) months of the term of this Lease, Landlord may, at Landlord's option, cancel and terminate this Lease as of the date of the cause of such damage by giving written notice to Tenant of Landlord's election to do so within 30 days after the date of the occurrence of such damage; provided, however, that, if the damage or destruction occurs within the last 12 months of the term and if within fifteen (15) days after the date of such damage or destruction Tenant exercises any option to extend the term provided herein, Landlord shall restore the Premises if obligated to do so as provided in subparagraph (a) or (b) above. (d) Abatement of Rent. If the Premises are partially or totally destroyed or damaged and Landlord or Tenant repairs or restores them pursuant to the provisions of this Article 12, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Tenant's reasonable use of the Premises is impaired. Except for the abatement of rent, if any, Tenant shall have no claim against Landlord for any damages suffered by reason of any such damage, destruction, repair or restoration. (e) Trade Fixtures and Equipment. If Landlord is required or elects to restore the Premises as provided in this Article, Landlord shall not be required to restore Tenant's improvements, trade fixtures, equipment 8 or alterations made by Tenant, such excluded items being the sole responsibility of the Tenant to restore hereunder . (f) Total Destruction - Multitenant Building. If the Premises are a part of a multitenant building and there is destruction to the Premises and/or the building of which the Premises are a part that exceeds Fifty (50%) percent of the then replacement value of the Premises and/or the building in which the Premises are a part from any cause whether or not covered by the insurance described in Article ll above, Landlord may, at its option, elect to terminate this Lease (whether or not the Premises are destroyed) so long as Landlord terminates the leases of all other tenants in the building of which the Premises are a part, effective as of the date of such damage or destruction. 13. CONDEMNATION. If the Premises or any portion thereof are taken by the power of eminent domain, or sold by Landlord under the threat of exercise of said power (all of which is herein referred to as "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever occurs first. If more than twenty (20%) percent of the floor area of any buildings on the Premises, or more than twenty (20%) percent of the land area of the Premises not covered with buildings, is taken by condemnation, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes possession by notice in writing of such election within twenty (20) days after Landlord shall have notified Tenant of such taking or, in the absence of such notice, then within twenty (20) days after the condemning authority shall have taken possession. If this Lease is not terminated by either Landlord or Tenant as provided hereinabove, then it shall remain in full force and effect as to the portion of the Premises remaining, provided that the rental shall be reduced in proportion to the floor area of the buildings taken within the Premises as it bears to the total floor area of all buildings located on the Premises. In the event this Lease is not so terminated, then Landlord agrees at Landlord's sole cost and expense, to as soon as reasonably possible restore the Premises to a complete unit of like quality and character as existed prior to the condemnation. All awards for the taking of any part of the Premises or any payment made under the threat of the exercise of the power of eminent domain shall be the property of the Landlord, whether made as compensation for the diminution of the value of the leasehold or for the taking of the fee or as severance damages; provided, however, that Tenant shall be entitled to any award for loss or damage to Tenant's trade fixtures and removable personal property. Each party hereby waives the provisions of Code of Civil Procedure 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. 9 Rent shall be abated or reduced during the period from the date of taking until the completion of restoration by Landlord, but all other obligations of Tenant under this Lease shall remain in full force and effect. The abatement or reduction of the rent shall be based on the extent to which the restoration interferes with Tenant's use of the Premises. 14. ASSIGNMENT AND SUBLETTING. Tenant shall not voluntarily or by operation of law assign, transfer, sublet, mortgage, or otherwise transfer or encumber all or any part of Tenant's interest in this Lease or in the Premises without Landlord's prior written consent which consent shall not be unreasonably withheld. Any attempted assignment, transfer, mortgage, encumbrance, or subletting without such consent shall be void and shall constitute a breach of this Lease. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or other transfer of a controlling percentage of the capital stock of Tenant, or the sale of at least fifty-one (51%) percent of tile value of the assets of Tenant, shall be deemed a voluntary assignment. The phrase "controlling percentage" means the ownership of, and the right to vote, stock possessing at least fifty-one (51%) percent of the total combined voting power of all classes of Tenant's capital stock issued, outstanding, and entitled to vote for the election of directors. This paragraph shall not apply to corporations the stock of which is traded through an exchange or over the counter. Regardless of Landlord's consent, no subletting or assignment shall release Tenant or Tenant's obligation to pay the rent and to perform all other obligations to be performed by Tenant hereunder for the term of this Lease. The acceptance of rent by Landlord from any other person shall not be deemed a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. 15. DEFAULT. (a) Events of Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: (1) Failure to pay rent when due, if the failure continues for five (5) days after written notice has been given to Tenant. (2) Abandonment and vacation of the Premises (failure to occupy the Premises for fourteen (14) consecutive days shall be deemed an abandonment and vacation). (3) Failure to perform any other provision of this Lease if the failure to perform is not cured within thirty (30) days after written notice thereof has been given to Tenant by Landlord. If the default cannot reasonably be cured within said thirty (30) day period, Tenant shall not be in default under this Lease if Tenant 10 commences to cure the default within the thirty 1301 day period and diligently prosecutes the same to completion. (4) The making by Tenant of any general assignment, or general arrangement for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy unless the same is dismissed within sixty (60) days; the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease, where such seizure is not discharged within thirty (30) days. Notices given under this paragraph shall specify the alleged default and the applicable lease provisions, and shall demand that Tenant perform the provisions of this Lease or pay the rent that is in arrears as the case may be, within the applicable period of time. No such notice shall be deemed a forfeiture or a termination of this Lease unless Landlord so elects in the notice. (b) Landlord's Remedies. The Landlord shall have the following remedies if Tenant commits a default under this Lease. These remedies are not exclusive but are cumulative and in addition to any remedies now or hereafter allowed by law. Landlord can continue this Lease in full force and effect, and the Lease will continue in effect so long as Landlord does not terminate Tenant's right to possession, and the Landlord shall have the right to collect rent when due. During the period that Tenant is in default, Landlord can enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable immediately to the Landlord for all costs the Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Tenant shall pay to Landlord the rent due under this Lease on the dates the rent is due, less the rent Landlord receives from any reletting. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. After Tenant's default and for so long as Landlord has not terminated Tenant's right to possession of the Premises, if Tenant obtains Landlord's consent, Tenant shall have the right to assume or sublet its interest in the Lease, but Tenant shall not be released from liability. Landlord's consent to the proposed assignment or subletting shall not be unreasonably withheld. If Landlord elects to relet the Premises as provided in this paragraph, any rent that Landlord receives from such reletting shall apply first to the payment of any indebtedness from Tenant to Landlord other than the rent due from Tenant to Landlord; secondly, to all 11 costs, including maintenance, incurred by Landlord in such reletting; and third, to any rent due and unpaid under this Lease. After deducting the payments referred to in this paragraph, any sum remaining from the rent Landlord receives from such reletting shall be held by Landlord and applied in payment of future rent as rent becomes due under this Lease. In no event shall tenant be entitled to any excess rent received by Landlord. If, on the date rent is due under this Lease, the rent received from the reletting is less than the rent due on that date, Tenant shall pay to Landlord, in addition to the remaining rent due, all costs, including maintenance, that Landlord shall have incurred in reletting that remain after applying the rent received from reletting as provided in this paragraph. Landlord can, at its option, terminate Tenant's right to possession of the Premises at any time. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest in this Lease shall not constitute a termination of Tenant's right to possession. In the event of such termination, Landlord has the right to recover from Tenant: (1) The worth, at the time of the award, of the unpaid rent that had been earned at the time of the termination of this Lease; (2) The worth, at the time of the award, of the amount by which the unpaid rent that would have been earned after the date of the termination of this Lease until the time of the award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; (3) The worth, at the time of the award, of the amount by which the unpaid rent for the balance of the term after the time of the award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; and (4) Any other amount, including court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. "The worth at the time of the award," as used in (1) and (2) of this paragraph is to be computed by allowing interest at the maximum rate an individual is permitted by law to charge. "The worth at the time of the award," as referred to in (3) of this paragraph is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one (1%) percent. If Tenant is in default under the terms of this Lease, Landlord shall have the additional right to have a receiver appointed to collect rent and conduct Tenant's business. Neither the filing of a petition for the appointment of a receiver nor the appointment itself shall constitute an election by Landlord to terminate this Lease. Landlord at any time after Tenant commits a default, can cure the default at Tenant's cost and expense. If Landlord at any time, by reason of Tenant's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due 12 immediately from Tenant to Landlord at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest thereon, shall be considered additional rent. 16. SIGNS. Tenant shall not have the right to place, construct or maintain any sign, advertisement, awning, banner, or other exterior decorations on the building or other improvements that are a part of the Premises without Landlord's prior, written consent, which consent shall not be unreasonably withheld. 17. EARLY POSSESSION. In the event that the Landlord shall permit Tenant to occupy the Premises prior to the commencement date of the term of this Lease, such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the termination date of this Lease. 18. SUBORDINATION. This Lease, at Landlord's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation for security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to all renewal, modifications, and extensions thereof. Notwithstanding any such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all the other provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or ground lessor shall elect to have this Lease prior to the lien of its mortgage or deed of trust or ground lease, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease is dated prior to or subsequent to the date of such mortgage, deed of trust or ground lease, or the date of recording thereof. Tenant agrees to execute any documents requiring to effect such subordination or to make this Lease prior to the lien of any mortgage, deed of trust, or ground lease, as the case may be, and failing to do so within ten (10) days after written demand from Landlord does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney in fact and in Tenant s name, place and stead to do so. 19. SURRENDER. On the last day of the term hereof, or on any sooner termination, Tenant shall surrender the Premises to Landlord In good condition, broom clean, ordinary wear and tear accepted. Tenant shall repair any damage to the Premises occasioned by its use thereof, or by the removal of Tenant's trade fixtures, furnishings and equipment which repair shall include the patching and tilling of holes and repair of structural damage. Tenant shall 13 remove all of its personal property and fixtures on the Premises prior to the expiration of the term of this Lease and if required by Landlord pursuant to Article 10(a) above, any alterations, improvements or additions made by Tenant to the Premises. If Tenant fails to surrender the Premises to Landlord on the expiration of the Lease as required by this paragraph, Tenant shall hold Landlord harmless from all damages resulting from Tenant's failure to vacate the Premises, including, without limitation, claims made by any succeeding tenant resulting from Tenant's failure to surrender the Premises. 20. HOLDING OVER. If the Tenant, with the Landlord's consent, remains in possession of the Premises after the expiration or termination of the term of this Lease, such possession by Tenant shall be deemed to be a tenancy from month-to-month at a rental in the amount of the last monthly rental plus all other charges payable hereunder, upon all the provisions of this Lease applicable to month-to-month tenancy. 21. BINDING ON SUCCESSORS AND ASSIGNS. The terms, conditions and covenants of this Lease shall be binding upon and shall inure to the benefit of each of the parties hereto, their heirs, personal representatives, successors and assigns. 22. NOTICES. Whenever under this Lease a provision is made for any demand, notice or declaration of any kind, it shall be in writing and served either personally or sent by registered or certified United States mail, postage prepaid, addressed at the addresses set forth below: to landlord at: 1990 Westwood Blvd., Inc. 1990 Westwood Blvd. Penthouse LA, CA 90025 to tenant at: Hit Entertainment, Inc. 1990 Westwood Blvd. Penthouse LA, CA 90025 Such notices shall be deemed to be received within forty-eight (48) hours from the time of mailing, if mailed as provided for in this paragraph. 23. LANDLORD'S RIGHT TO INSPECTION. Landlord and Landlord's agent shall have the right to enter the Premises at reasonable times for the purpose of inspecting same, showing the same to prospective purchasers or lenders, and making such alterations, repairs, improvements or additions to 14 the Premises or to the building of which the Premises are a part as Landlord may deem necessary or desirable. Landlord may at any time place on or about the Premises any ordinary "For Sale" signs and Landlord may at any time during the last one hundred twenty 1120) days of the term of this Lease place on or about the Premises any ordinary "For Sale or Lease" signs, all without rebate of rent or liability to Tenant. 24. CHOICE OF LAW. This Lease shall be governed by the laws of the state where the Premises are located. 25. ATTORNEY'S FEES. If either Landlord or Tenant becomes a party to any litigation or arbitration concerning this Lease, the Premises, or the building or other improvements in which the Premises are located, by reason of any act or omission of the other party or its authorized representatives, and not by reason of any act or omission of the party that becomes a party to that litigation or any act or omission of its authorized representatives, the party that causes the other party to become involved in the litigation shall be liable to that party for reasonable attorney's fees and court costs incurred by it in the litigation. If either party commences an action against the other party arising out of or in connection with this Lease, the prevailing party shall be entitled to have and recover from the losing party reasonable attorney's fees and costs of suit. 26. LANDLORD'S LIABILITY. The term "Landlord" as used in this Lease shall mean only the owner or owners at the time in question of the fee title or a Lessee's interest in a ground lease of the Premises, and in the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers to the then successor) shall be relieved from and after the date of such transfer of all liability in respect to Landlord's obligations thereafter to be performed. The obligations contained in this Lease to be performed by Landlord shall be binding upon the Landlord's successors and assigns, only during their respective periods of ownership. 27. WAIVERS. No waiver by Landlord of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of any provision hereof, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of its acceptance of such rent. 15 28. INCORPORATION OF PRIOR AGREEMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified only in writing, and signed by the parties in interest at the time of such modification. 29. TIME. Time is of the essence of this Lease. 30. SEVERABILITY. The unenforceability, invalidity, or illegality of any provision of this Lease shall not render the other provisions hereof unenforceable, invalid or illegal. 31. ESTOPPEL CERTIFICATES. Each party, within ten (10) days after notice from the other party, shall execute and deliver to the other party a certificate stating that this Lease is unmodified and in full force and effect, or in full force and effect as modified, and stating the modification. The certificate shall also state the amount of minimum monthly rent, the dates to which rent has been paid in advance, and the amount of any security deposit o prepaid rent, if any, as well as acknowledging that there are not, to that party's knowledge, any uncured defaults on the part of the other party, or specifying such defaults, if any, which are claimed. Failure to deliver such a certificate within the ten (10) day period shall be conclusive upon the party failing to deliver the certificate to the benefit of the party requesting the certificate that this Lease is in full force and effect, that there are no uncured defaults hereunder, and has not been modified except as may be represented by the party requesting the certificate. 32. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Tenant shall be deemed both a covenant and a condition. 33. SINGULAR AND PLURAL. When required by the context of this Lease, the singular shall indicate the plural. 34. JOINT AND SEVERAL OBLIGATIONS. "Party" shall mean Landlord and Tenant; and if more than one person or entity is the Landlord or Tenant, the obligations imposed on that party shall be joint and several. 16 35. OPTION TO EXTEND. Provided that Tenant shall not then be in default hereunder, Tenant shall have the option to extend the term of this Lease for ____________ additional ____________ year periods upon the same terms and conditions herein contained, except for fixed minimum monthly rentals, upon delivery by Tenant to Landlord of written notice of its election to exercise such option(s) at lease ninety (90) days prior to the expiration of the original (or extended) term hereof. The parties hereto shall have thirty (30) days after the Landlord receives the option notice in which to agree on the minimum monthly rental during the extended term(s). If the parties agree on the minimum monthly rent for the extended term(s) during the period, they shall immediately execute an amendment to this Lease stating the minimum monthly rent. In the event that there is more than one option to extend the term of this Lease, the parties hereto shall negotiate the minimum monthly rent as set forth herein for each extended term of this Lease. If the parties hereto are unable to agree on the minimum monthly rent for the extended term(s) within said thirty (30) day period, the option notice shall be of no effect and this Lease shall expire at the end of the term. Neither party to this Lease shall have the right to have a court or other third party set the minimum monthly rent. 36. ADDENDUM. Any addendum attached hereto and either signed or initialled by the parties shall be deemed a part hereof and shall supersede any conflicting terms or provisions contained in this Lease. The parties hereto have executed this Lease on the date first above written. LANDLORD: TENANT: By: /s/ 2/27/96 By: /s/ 17 RENT ADJUSTMENT Addendum to Commercial Office Lease Dated: November 1, 1996 By and between (Lessor) 1990 Westwood Blvd., Inc. and (Lessee) Hit Entertainment, Inc. The monthly rent for each month of the adjustment period(s) is as follows. During the 1st year through the 3rd year of the term of the Lease, commencing on November 1, 1996 and ending on June 30, 1998, the sum of Three Thousand Five Hundred Thirty Seven Dollars ($3,537) per month. During the _____ year through the __________ year of the term of the Lease, commencing on _____________ and ending on ___________________ the sum of _______________ ($_________) per month. The description of Lessee's space is as follows: 1055 sq. ft of usable office space and 966.12 sq. ft. of common area which equals to 58.2% of the Lessee's pro rate share for a total of 2,021.12 sq. ft. (see Exhibit #__________). This Addendum shall supersede any conflicting terms, conditions or provisions contained in the original Lease dated July 1, 1995. Lessor /s/ Lessee /s/ -------------------- -------------------- 18 EX-10.5 7 EXHIBIT 10.5 COMMERCIAL LEASE (GENERAL FORM) 1. PARTIES. This Lease is made and entered into this 1st day of July, 1996 by and between 1990 Westwood Blvd., Inc. (hereinafter referred to as "Landlord") and United Film Distributors, Inc. (hereinafter referred to as "Tenant"). 2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, on the terms and conditions hereinafter set forth that certain real property and the building and other improvements located thereon situated in the City of Los Angeles, County of Los Angeles, State of CA, commonly known as Shanalee Plaza, 1990 Westwood Blvd., Penthouse (said real property is hereinafter called the "Premises"). 3. TERM. The term of this Lease shall be for 5 years, commencing on July 1, 1996 and ending on June 30, 2001, unless sooner terminated as hereinafter provided. 4. RENT. Tenant shall pay Landlord as rent for the Premises the following sums per month, in advance on the first day of each month during the term of this Lease: During the first through second year of the term of this Lease, the sum of Three Thousand Five Hundred and xx/100 ($3,500) dollars per month. During the 3rd through fifth year of the term of this Lease, the sum of Three Thousand Eight Hundred and Fifty xx/100 ($3,850) dollars per month. During the _________ through _________ year of the term of this Lease, the sum of ($______________) dollars per month. Tenant shall pay to Landlord upon the execution of this Lease the sum of Three Thousand Five Hundred Dollars ($3,500) dollars as rent for July 1996. Rent for any period during the term of this Lease which is for less than one (1) month, shall be a pro rata portion of the monthly installment. Rent shall be payable without notice or demand and without any deduction, off-set, or abatement in lawful money of the United States to the Landlord at the address stated herein for notices or to such other persons or such other places as the Landlord may designate to Tenant in writing. 5. SECURITY DEPOSIT. Tenant shall deposit with Landlord upon the execution of this Lease the sum of Nil ($0) dollars as a security deposit for the Tenant's faithful performance of the provisions of this Lease. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use the security deposit, or any portion of it, to cure the default or compensate Landlord for all damages sustained by Landlord resulting from Tenant's default. Tenant shall immediately on demand pay to Landlord the sum equal to that portion of the security deposit expended or applied by Landlord which was provided for in this paragraph so as to maintain the security deposit in the sum initially deposited with Landlord. Landlord shall not be required to keep the security deposit separate from its general account nor shall Landlord be required to pay Tenant any interest on the security deposit. If Tenant performs all of Tenant's obligations under this Lease, the security deposit or that portion thereof which has not previously been applied by the Landlord, shall be returned to Tenant within fourteen (14) days after the expiration of the term of this Lease, or after Tenant has vacated the Premises, whichever is later. 6. USE. Tenant shall use the Premises only for General Office Purposes and for no other purpose without the Landlord's prior written consent.Tenant shall not do, bring or keep anything in or about the Premises that will cause a cancellation of any insurance covering the Premises or the building in which the Premises are located. If the rate of any insurance carried by the Landlord is increased as a result of Tenant's use, Tenant shall pay to Landlord within ten (10) days after written demand from Landlord, the amount of any such increase. Tenant shall comply with all laws concerning the Premises or Tenant's use of the Premises, including without limitation, the obligation at Tenant's cost to alter, maintain, or restore the Premises in compliance and conformity with all laws relating to the condition, use, or occupancy of the Premises by Tenant during the term of this Lease. Tenant shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance or, if there shall be more than one tenant of the building containing the Premises, which shall unreasonably disturb any other tenant. Tenant hereby accepts the Premises in their condition existing as of the date that Tenant possesses the Premises, subject to all applicable zoning, municipal, county and state laws, ordinances, regulations governing or regulating the use of the Premises and accepts this Lease subject thereto and to all matters disclosed thereby. Tenant hereby acknowledges that neither the Landlord nor the Landlord's agent has made any representation or warranty to Tenant as to the suitability of the Premises for the conduct of Tenant's business. 2 7. TAXES. (a) Real Property Taxes. Landlord shall pay all real property taxes and general assessments levied and assessed against the Premises during the term of this Lease. If it shall be Tenant's obligation to pay such real property taxes and assessments hereunder, Landlord shall use its best efforts to cause the Premises to be separately assessed from other real property owned by the Landlord. If Landlord is unable to obtain such a separate assessment, the assessor's evaluation based on the building and other improvements that are a part of the Premises shall be used to determine the real property taxes. If this evaluation is not available, the parties shall equitably allocate the property taxes between the building and other improvements that are a part of the Premises and all buildings and other improvements included in the tax bill. In making the allocation, the parties shall reasonably evaluate the factors to determine the amount of the real property taxes so that the allocation of the building and other improvements that are a part of the Premises will not be less than the ratio of the total number of square feet of the building and other improvements that are a part of the Premises bears to the total number of square feet in all buildings and other improvements included in the tax bill. Real property taxes attributable to land in the Premises shall be determined by the ratio that the total number of square feet in the Premises bears to the total number of square feet of land included in the tax bill. (b) Personal Property Taxes. Tenant shall pay prior to the delinquency all taxes assessed against and levied upon the trade fixtures, furnishings, equipment and other personal property of Tenant contained in the Premises. Tenant shall endeavor to cause such trade fixtures, furnishings and equipment and all other personal property to be assessed and billed separately from the property of the Landlord. If any of Tenant's said personal property shall be assessed with Landlord's property, Tenant shall pay to Landlord the taxes attributable to Tenant within ten (10) days after the receipt of a written statement from Landlord setting forth the taxes applicable to Tenant's property. 8. UTILITIES. Tenant shall make all arrangements and pay for all water, gas, heat, light, power, telephone and other utility services supplied to the Premises together with any taxes thereon and for all connection charges. If any such services are not separately metered to Tenant, the Tenant shall pay a reasonable proportion, to be determined by Landlord, of all charges jointly metered with other premises. 3 9. MAINTENANCE AND REPAIRS. (a) Landlord's Obligations. Except as provided in Article 12, and except for damage caused by any negligent or intentional act or omission of Tenant, Tenant's agents, employees, or invitees, Landlord at its sole cost and expense shall keep in good condition and repair the foundations, exterior walls, and exterior roof of the Premises. Landlord shall also maintain the unexposed electrical, plumbing and sewage systems including, without limitation, those portions of the systems lying outside the Premises; window frames, gutters and down spouts on the building, all sidewalks, landscaping and other improvements that are a part of the Premises or of which the Premises are a part. The Landlord shall also maintain the heating, ventilating and air-conditioning systems servicing the Premises. Landlord shall resurface and restripe the parking area on or adjacent to the Premises when necessary. Landlord shall have thirty 130) days after notice from Tenant to commence to perform its obligations under this Article 9, except that Landlord shall perform its obligations immediately if the nature of the problem presents a hazard or emergency situation. 11 the Landlord does not perform its obligations within the time limit set forth in this paragraph, Tenant can perform said obligations and shall have the right to be reimbursed for the amount that Tenant actually expends in the performance of Landlord's obligations. If Landlord does not reimburse Tenant within thirty 130) days after demand from Tenant, Tenant's sold remedy shall be to institute suit against the Landlord, and Tenant shall not have the right to withhold from future rent the sums Tenant has expended. (b) Tenant's Obligations. Subject to the provisions of Sub-paragraph la) above and Article 12, Tenant at Tenant's sole cost and expense shall keep in good order, condition and repair the Premises and every part thereof including, without limitation, all Tenant's personal property, fixtures, signs, store fronts, plate glass, show windows, doors, interior walls, interior ceiling, and lighting facilities. If Tenant fails to perform Tenant's obligation as stated herein, Landlord may at its option (but shall not be required to), enter the Premises, after ten (10) days prior written notice to Tenant, put the same in good order, condition and repair, and the costs thereof together with interest thereon at the rate of ten (10%) percent per annum shall become due and payable as additional rental to Landlord together with Tenant's next rental installment. 10. ALTERATIONS AND ADDITIONS. (a) Tenant shall not, without the Landlord s prior written consent, make any alterations, improvements or additions in or about the Premises except for non-structural work which does not exceed $1,000.00 in cost. As a condition to giving any such consent, the Landlord may require the Tenant to remove any such alterations, improvements, or additions at the expiration of the term, and to restore the Premises to their prior condition by giving Tenant thirty (30) days written notice prior to the expiration of the term that 4 Landlord requires Tenant to remove any such alterations, improvements, or additions that Tenant has made to the Premises. If Landlord so elects, Tenant at its sole cost shall restore the Premises to the condition designated by Landlord in its election before the last day of the term of the Lease. Before commencing any work relating to the alterations, additions, or improvements affecting the Premises, Tenant shall notify Landlord in writing of the expected date of the commencement of such work so that Landlord can post and record the appropriate notices of non-responsibility to protect Landlord from any mechanic's liens, materialman liens, or any other liens. In any event, Tenant shall pay, when due, all claims for labor and materials furnished to or for Tenant at or for use in the Premises. Tenant shall not permit any mechanic's liens or materialman's liens to be levied against the Premises for any labor or material furnished to Tenant or claimed to have been furnished to Tenant or Tenant's agents or contractors in connection with work of any character performed or claimed to have been performed on the Premises by or at the direction of Tenant. Tenant shall have the right to assess the validity of any such lien if, immediately on demand by Landlord, Tenant procures and records a lien release bond meeting the requirements of California Civil Code Section 3143 and shall provide for the payment of any sum that the claimant may recover on the claim (together with the costs of suit, if it is recovered in the action). Unless the Landlord requires their removal as set forth above, all alterations, improvements or additions which are made on the Premises by the Tenant shall become the property of the Landlord and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of this paragraph, Tenant's trade fixtures, furniture, equipment and other machinery, other than that which is affixed to the Premises so that it cannot be removed without material or structural damage to the Premises, shall remain the property of the Tenant and removed by Tenant at the expiration of the term of this Lease. 11. INSURANCE; INDEMNITY. (a) Fire Insurance. Tenant at its cost shall maintain during the term of this Lease on the Premises a policy or policies of standard fire and extended coverage insurance to the extent of at least ninety (90%) percent of full replacement value thereof. Said insurance policies shall be issued in the names of Landlord and Tenant, as their interests may appear. Tenant at its cost shall maintain the during the term is this Lease on all its personal property, Tenant's improvements, and alterations in or about the Premises, a policy of standard fire and extended coverage insurance, with vandalism and malicious mischief endorsements, to the extent of their full replacement value. The proceeds from any such policy shall be used by Tenant for the replacement of personal property or the restoration of Tenant's improvements or alterations. 5 (b) Liability Insurance. Tenant at its sole cost and expense shall maintain during the term of this Lease public liability and property damage insurance with a single combined liability limit of five hundred thousand ($500,000.00) dollars, and property damage limits of not less that one hundred thousand ($100,000.00) dollars, insuring against all liability of Tenant and its authorized representatives arising out of and in connection with Tenant's use or occupancy of the Premises. Both public liability insurance and property damage insurance shall insure performance by Tenant of the indemnity provisions in Sub-paragraph (d) below, but the limits of such insurance shall not, however, limit the liability of Tenant hereunder. Both Landlord and Tenant shall be named as additional insureds, and the policies shall contain cross-liability endorsements. If Tenant shall fail to procure and maintain such insurance the Landlord may, but shall not be required to, procure and maintain same at the expense of Tenant and the cost thereof, together with interest thereon at the rate of ten (10%) percent per annum, shall become due and payable as additional rental to Landlord together with Tenant's next rental installment. (c) Waiver of Subrogation. Tenant and Landlord each waives any and all rights of recovery against the other, or against the officers, employees, agents, and representatives of the other, for loss of or damage to such waiving party or its property or the property of others under its control, where such loss or damage is insured against under any insurance policy in force at the time of such loss or damage. Each party shall cause each insurance policy obtained by it hereunder to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with am/ damage covered by any such policy. (d) Hold Harmless. Tenant shall indemnify and hold Landlord harmless from and against any and all claims arising from Tenant's use or occupancy of the Premises or from the conduct of its business or from any activity, work, or things which may be permitted or suffered by Tenant in or about the Premises including all damage, costs, attorney's fees, expenses and liabilities incurred in the defense of any claim or action or proceeding arising therefrom. Except for Landlord's willful or grossly negligent conduct, Tenant hereby assumes all risk of damage to property or injury to person in or about the Premises from any cause, and Tenant hereby waives all claims in respect thereof against Landlord. (e) Exemption of Landlord from Liability. Except for Landlord's willful or grossly negligent conduct, Tenant hereby agrees that Landlord shall not be liable for any injury to Tenant's business or loss of income therefrom or for damage to the goods, wares, merchandise, or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Premises; nor shall Landlord be liable for injury to the person of Tenant. Tenant's employees, agents, contractors, or invitees, whether such damage or injury is caused by or results from fire, 6 steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air-conditioning, or lighting fixtures, or from any other cause, whether such damage results from conditions arising upon the Premises or upon other portions of the building in which the Premises are a part, or from any other sources or places. Landlord shall not be liable to Tenant for any damages arising from any act or neglect of any other tenant, if any, of the building in which the Premises are located. 12. DAMAGE OR DESTRUCTION. (a) Damage - Insured. If, during the term of this Lease, the Premises and/or the building and other improvements in which the Premises are located are totally or partially destroyed rendering the Premises totally or partially inaccessible or unusable, and such damage or destruction was caused by a casualty covered under an insurance policy required to be maintained hereunder, Landlord shall restore the Premises and/or the building and other improvements in which the Premises are located into substantially the same condition as they were in immediately before such damage or destruction, provided that the restoration can be made under the existing laws and can be completed within one hundred twenty 11201 working days after the date of such destruction or damage. Such destruction or damage shall not terminate this Lease. If the restoration cannot be made in said 120 day period, then within fifteen (15) days after the parties hereto determine that the restoration cannot be made in the time stated in this paragraph, Tenant may terminate this Lease immediately by giving notice to Landlord and the Lease will be deemed cancelled as of the date of such damage or destruction. If Tenant fails to terminate this Lease and the restoration is permitted under the existing laws, Landlord, at its option, may terminate this Lease or restore the Premises and/or any other improvements in which the Premises are located within a reasonable time and this Lease shall continue in full force and effect. If the existing laws do not permit the restoration, either party can terminate this Lease immediately by giving notice to the other party. Notwithstanding the above, if the Tenant is the insuring party and if the insurance proceeds received by Landlord are not sufficient to effect such repair, Landlord shall give notice to Tenant of the amount required in addition to the insurance proceeds to effect such repair. Tenant may, at Tenant's option, contribute the required amount, but upon failure to do so within thirty (30) days following such notice, Landlord's sole remedy shall be, at Landlord's option and with no liability to Tenant, to cancel and terminate this Lease. If Tenant shall contribute such amount to Landlord within said thirty (30) day period, Landlord shall make such repairs as soon as reasonably possible and this Lease shall continue in full force and effect. Tenant shall in no event have any right to reimbursement for any amount so contributed. 7 (b) Damage - Uninsured. In the event that the Premises are damaged or destroyed by a casualty which is not covered by the fire and extended coverage insurance which is required to be carried by the party designated in Article 11(a) above, then Landlord shall restore the same; provided that if the damage or destruction is to an extent greater than ten (10%) percent of the then replacement cost of the improvements on the Premises (exclusive of Tenant's trade fixtures and equipment and exclusive of foundations and footings), then Landlord may elect not to restore and to terminate this Lease. Landlord must give to Tenant written notice of its intention not to restore within thirty (30) days from the date of such damage or destruction and, if not given, Landlord shall be deemed to have elected to restore and in such event shall repair any damage as soon as reasonably possible. In the event that Landlord elects to give such notice of Landlord's intention to cancel and terminate this Lease, Tenant shall have the right, within ten (10) days after receipt of such notice, to give written notice to Landlord of Tenant's intention to repair such damage at Tenant's expense, without reimbursement from Landlord, in which event the Lease shall continue in full force and effect and Tenant shall proceed to make such repairs as soon as reasonably possible. If the Tenant does not give such notice within such 10 day period, this Lease shall be cancelled and be deemed terminated as of the date of the occurrence of such damage or destruction. (c) Damage Near the End of the Term. If the Premises are totally or partially destroyed or damaged during the last twelve (12) months of the term of this Lease, Landlord may, at Landlord's option, cancel and terminate this Lease as of the date of the cause of such damage by giving written notice to Tenant of Landlord's election to do so within 30 days after the date of the occurrence of such damage; provided, however, that, if the damage or destruction occurs within the last 12 months of the term and if within fifteen (15) days after the date of such damage or destruction Tenant exercises any option to extend the term provided herein, Landlord shall restore the Premises if obligated to do so as provided in subparagraph (a) or (b) above. (d) Abatement of Rent. If the Premises are partially or totally destroyed or damaged and Landlord or Tenant repairs or restores them pursuant to the provisions of this Article 12, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Tenant's reasonable use of the Premises is impaired. Except for the abatement of rent, if any, Tenant shall have no claim against Landlord for any damages suffered by reason of any such damage, destruction, repair or restoration. (e) Trade Fixtures and Equipment. If Landlord is required or elects to restore the Premises as provided in this Article, Landlord shall not be required to restore Tenant's improvements, trade fixtures, equipment 8 or alterations made by Tenant, such excluded items being the sole responsibility of the Tenant to restore hereunder . (f) Total Destruction - Multitenant Building. If the Premises are a part of a multitenant building and there is destruction to the Premises and/or the building of which the Premises are a part that exceeds Fifty (50%) percent of the then replacement value of the Premises and/or the building in which the Premises are a part from any cause whether or not covered by the insurance described in Article ll above, Landlord may, at its option, elect to terminate this Lease (whether or not the Premises are destroyed) so long as Landlord terminates the leases of all other tenants in the building of which the Premises are a part, effective as of the date of such damage or destruction. 13. CONDEMNATION. If the Premises or any portion thereof are taken by the power of eminent domain, or sold by Landlord under the threat of exercise of said power (all of which is herein referred to as "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever occurs first. If more than twenty (20%) percent of the floor area of any buildings on the Premises, or more than twenty (20%) percent of the land area of the Premises not covered with buildings, is taken by condemnation, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes possession by notice in writing of such election within twenty (20) days after Landlord shall have notified Tenant of such taking or, in the absence of such notice, then within twenty (20) days after the condemning authority shall have taken possession. If this Lease is not terminated by either Landlord or Tenant as provided hereinabove, then it shall remain in full force and effect as to the portion of the Premises remaining, provided that the rental shall be reduced in proportion to the floor area of the buildings taken within the Premises as it bears to the total floor area of all buildings located on the Premises. In the event this Lease is not so terminated, then Landlord agrees at Landlord's sole cost and expense, to as soon as reasonably possible restore the Premises to a complete unit of like quality and character as existed prior to the condemnation. All awards for the taking of any part of the Premises or any payment made under the threat of the exercise of the power of eminent domain shall be the property of the Landlord, whether made as compensation for the diminution of the value of the leasehold or for the taking of the fee or as severance damages; provided, however, that Tenant shall be entitled to any award for loss or damage to Tenant's trade fixtures and removable personal property. Each party hereby waives the provisions of Code of Civil Procedure 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. 9 Rent shall be abated or reduced during the period from the date of taking until the completion of restoration by Landlord, but all other obligations of Tenant under this Lease shall remain in full force and effect. The abatement or reduction of the rent shall be based on the extent to which the restoration interferes with Tenant's use of the Premises. 14. ASSIGNMENT AND SUBLETTING. Tenant shall not voluntarily or by operation of law assign, transfer, sublet, mortgage, or otherwise transfer or encumber all or any part of Tenant's interest in this Lease or in the Premises without Landlord's prior written consent which consent shall not be unreasonably withheld. Any attempted assignment, transfer, mortgage, encumbrance, or subletting without such consent shall be void and shall constitute a breach of this Lease. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or other transfer of a controlling percentage of the capital stock of Tenant, or the sale of at least fifty-one (51%) percent of tile value of the assets of Tenant, shall be deemed a voluntary assignment. The phrase "controlling percentage" means the ownership of, and the right to vote, stock possessing at least fifty-one (51%) percent of the total combined voting power of all classes of Tenant's capital stock issued, outstanding, and entitled to vote for the election of directors. This paragraph shall not apply to corporations the stock of which is traded through an exchange or over the counter. Regardless of Landlord's consent, no subletting or assignment shall release Tenant or Tenant's obligation to pay the rent and to perform all other obligations to be performed by Tenant hereunder for the term of this Lease. The acceptance of rent by Landlord from any other person shall not be deemed a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. 15. DEFAULT. (a) Events of Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: (1) Failure to pay rent when due, if the failure continues for five (5) days after written notice has been given to Tenant. (2) Abandonment and vacation of the Premises (failure to occupy the Premises for fourteen (14) consecutive days shall be deemed an abandonment and vacation). (3) Failure to perform any other provision of this Lease if the failure to perform is not cured within thirty (30) days after written notice thereof has been given to Tenant by Landlord. If the default cannot reasonably be cured within said thirty (30) day period, Tenant shall not be in default under this Lease if Tenant 10 commences to cure the default within the thirty 1301 day period and diligently prosecutes the same to completion. (4) The making by Tenant of any general assignment, or general arrangement for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy unless the same is dismissed within sixty (60) days; the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease, where such seizure is not discharged within thirty (30) days. Notices given under this paragraph shall specify the alleged default and the applicable lease provisions, and shall demand that Tenant perform the provisions of this Lease or pay the rent that is in arrears as the case may be, within the applicable period of time. No such notice shall be deemed a forfeiture or a termination of this Lease unless Landlord so elects in the notice. (b) Landlord's Remedies. The Landlord shall have the following remedies if Tenant commits a default under this Lease. These remedies are not exclusive but are cumulative and in addition to any remedies now or hereafter allowed by law. Landlord can continue this Lease in full force and effect, and the Lease will continue in effect so long as Landlord does not terminate Tenant's right to possession, and the Landlord shall have the right to collect rent when due. During the period that Tenant is in default, Landlord can enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable immediately to the Landlord for all costs the Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Tenant shall pay to Landlord the rent due under this Lease on the dates the rent is due, less the rent Landlord receives from any reletting. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. After Tenant's default and for so long as Landlord has not terminated Tenant's right to possession of the Premises, if Tenant obtains Landlord's consent, Tenant shall have the right to assume or sublet its interest in the Lease, but Tenant shall not be released from liability. Landlord's consent to the proposed assignment or subletting shall not be unreasonably withheld. If Landlord elects to relet the Premises as provided in this paragraph, any rent that Landlord receives from such reletting shall apply first to the payment of any indebtedness from Tenant to Landlord other than the rent due from Tenant to Landlord; secondly, to all 11 costs, including maintenance, incurred by Landlord in such reletting; and third, to any rent due and unpaid under this Lease. After deducting the payments referred to in this paragraph, any sum remaining from the rent Landlord receives from such reletting shall be held by Landlord and applied in payment of future rent as rent becomes due under this Lease. In no event shall tenant be entitled to any excess rent received by Landlord. If, on the date rent is due under this Lease, the rent received from the reletting is less than the rent due on that date, Tenant shall pay to Landlord, in addition to the remaining rent due, all costs, including maintenance, that Landlord shall have incurred in reletting that remain after applying the rent received from reletting as provided in this paragraph. Landlord can, at its option, terminate Tenant's right to possession of the Premises at any time. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest in this Lease shall not constitute a termination of Tenant's right to possession. In the event of such termination, Landlord has the right to recover from Tenant: (1) The worth, at the time of the award, of the unpaid rent that had been earned at the time of the termination of this Lease; (2) The worth, at the time of the award, of the amount by which the unpaid rent that would have been earned after the date of the termination of this Lease until the time of the award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; (3) The worth, at the time of the award, of the amount by which the unpaid rent for the balance of the term after the time of the award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; and (4) Any other amount, including court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. "The worth at the time of the award," as used in (1) and (2) of this paragraph is to be computed by allowing interest at the maximum rate an individual is permitted by law to charge. "The worth at the time of the award," as referred to in (3) of this paragraph is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one (1%) percent. If Tenant is in default under the terms of this Lease, Landlord shall have the additional right to have a receiver appointed to collect rent and conduct Tenant's business. Neither the filing of a petition for the appointment of a receiver nor the appointment itself shall constitute an election by Landlord to terminate this Lease. Landlord at any time after Tenant commits a default, can cure the default at Tenant's cost and expense. If Landlord at any time, by reason of Tenant's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due 12 immediately from Tenant to Landlord at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest thereon, shall be considered additional rent. 16. SIGNS. Tenant shall not have the right to place, construct or maintain any sign, advertisement, awning, banner, or other exterior decorations on the building or other improvements that are a part of the Premises without Landlord's prior, written consent, which consent shall not be unreasonably withheld. 17. EARLY POSSESSION. In the event that the Landlord shall permit Tenant to occupy the Premises prior to the commencement date of the term of this Lease, such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the termination date of this Lease. 18. SUBORDINATION. This Lease, at Landlord's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation for security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to all renewal, modifications, and extensions thereof. Notwithstanding any such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all the other provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or ground lessor shall elect to have this Lease prior to the lien of its mortgage or deed of trust or ground lease, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease is dated prior to or subsequent to the date of such mortgage, deed of trust or ground lease, or the date of recording thereof. Tenant agrees to execute any documents requiring to effect such subordination or to make this Lease prior to the lien of any mortgage, deed of trust, or ground lease, as the case may be, and failing to do so within ten (10) days after written demand from Landlord does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney in fact and in Tenant s name, place and stead to do so. 19. SURRENDER. On the last day of the term hereof, or on any sooner termination, Tenant shall surrender the Premises to Landlord In good condition, broom clean, ordinary wear and tear accepted. Tenant shall repair any damage to the Premises occasioned by its use thereof, or by the removal of Tenant's trade fixtures, furnishings and equipment which repair shall include the patching and tilling of holes and repair of structural damage. Tenant shall 13 remove all of its personal property and fixtures on the Premises prior to the expiration of the term of this Lease and if required by Landlord pursuant to Article 10(a) above, any alterations, improvements or additions made by Tenant to the Premises. If Tenant fails to surrender the Premises to Landlord on the expiration of the Lease as required by this paragraph, Tenant shall hold Landlord harmless from all damages resulting from Tenant's failure to vacate the Premises, including, without limitation, claims made by any succeeding tenant resulting from Tenant's failure to surrender the Premises. 20. HOLDING OVER. If the Tenant, with the Landlord's consent, remains in possession of the Premises after the expiration or termination of the term of this Lease, such possession by Tenant shall be deemed to be a tenancy from month-to-month at a rental in the amount of the last monthly rental plus all other charges payable hereunder, upon all the provisions of this Lease applicable to month-to-month tenancy. 21. BINDING ON SUCCESSORS AND ASSIGNS. The terms, conditions and covenants of this Lease shall be binding upon and shall inure to the benefit of each of the parties hereto, their heirs, personal representatives, successors and assigns. 22. NOTICES. Whenever under this Lease a provision is made for any demand, notice or declaration of any kind, it shall be in writing and served either personally or sent by registered or certified United States mail, postage prepaid, addressed at the addresses set forth below: to landlord at: 1990 Westwood Blvd., Inc. 1990 Westwood Blvd. Penthouse LA, CA 90025 to tenant at: United Film Distributors, Inc. 1990 Westwood Blvd. Penthouse LA, CA 90025 Such notices shall be deemed to be received within forty-eight (48) hours from the time of mailing, if mailed as provided for in this paragraph. 23. LANDLORD'S RIGHT TO INSPECTION. Landlord and Landlord's agent shall have the right to enter the Premises at reasonable times for the purpose of inspecting same, showing the same to prospective purchasers or lenders, and making such alterations, repairs, improvements or additions to 14 the Premises or to the building of which the Premises are a part as Landlord may deem necessary or desirable. Landlord may at any time place on or about the Premises any ordinary "For Sale" signs and Landlord may at any time during the last one hundred twenty 1120) days of the term of this Lease place on or about the Premises any ordinary "For Sale or Lease" signs, all without rebate of rent or liability to Tenant. 24. CHOICE OF LAW. This Lease shall be governed by the laws of the state where the Premises are located. 25. ATTORNEY'S FEES. If either Landlord or Tenant becomes a party to any litigation or arbitration concerning this Lease, the Premises, or the building or other improvements in which the Premises are located, by reason of any act or omission of the other party or its authorized representatives, and not by reason of any act or omission of the party that becomes a party to that litigation or any act or omission of its authorized representatives, the party that causes the other party to become involved in the litigation shall be liable to that party for reasonable attorney's fees and court costs incurred by it in the litigation. If either party commences an action against the other party arising out of or in connection with this Lease, the prevailing party shall be entitled to have and recover from the losing party reasonable attorney's fees and costs of suit. 26. LANDLORD'S LIABILITY. The term "Landlord" as used in this Lease shall mean only the owner or owners at the time in question of the fee title or a Lessee's interest in a ground lease of the Premises, and in the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers to the then successor) shall be relieved from and after the date of such transfer of all liability in respect to Landlord's obligations thereafter to be performed. The obligations contained in this Lease to be performed by Landlord shall be binding upon the Landlord's successors and assigns, only during their respective periods of ownership. 27. WAIVERS. No waiver by Landlord of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of any provision hereof, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of its acceptance of such rent. 15 28. INCORPORATION OF PRIOR AGREEMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified only in writing, and signed by the parties in interest at the time of such modification. 29. TIME. Time is of the essence of this Lease. 30. SEVERABILITY. The unenforceability, invalidity, or illegality of any provision of this Lease shall not render the other provisions hereof unenforceable, invalid or illegal. 31. ESTOPPEL CERTIFICATES. Each party, within ten (10) days after notice from the other party, shall execute and deliver to the other party a certificate stating that this Lease is unmodified and in full force and effect, or in full force and effect as modified, and stating the modification. The certificate shall also state the amount of minimum monthly rent, the dates to which rent has been paid in advance, and the amount of any security deposit o prepaid rent, if any, as well as acknowledging that there are not, to that party's knowledge, any uncured defaults on the part of the other party, or specifying such defaults, if any, which are claimed. Failure to deliver such a certificate within the ten (10) day period shall be conclusive upon the party failing to deliver the certificate to the benefit of the party requesting the certificate that this Lease is in full force and effect, that there are no uncured defaults hereunder, and has not been modified except as may be represented by the party requesting the certificate. 32. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Tenant shall be deemed both a covenant and a condition. 33. SINGULAR AND PLURAL. When required by the context of this Lease, the singular shall indicate the plural. 34. JOINT AND SEVERAL OBLIGATIONS. "Party" shall mean Landlord and Tenant; and if more than one person or entity is the Landlord or Tenant, the obligations imposed on that party shall be joint and several. 16 35. OPTION TO EXTEND. Provided that Tenant shall not then be in default hereunder, Tenant shall have the option to extend the term of this Lease for 5 additional 1 year periods upon the same terms and conditions herein contained, except for fixed minimum monthly rentals, upon delivery by Tenant to Landlord of written notice of its election to exercise such option(s) at lease ninety (90) days prior to the expiration of the original (or extended) term hereof. The parties hereto shall have thirty (30) days after the Landlord receives the option notice in which to agree on the minimum monthly rental during the extended term(s). If the parties agree on the minimum monthly rent for the extended term(s) during the period, they shall immediately execute an amendment to this Lease stating the minimum monthly rent. In the event that there is more than one option to extend the term of this Lease, the parties hereto shall negotiate the minimum monthly rent as set forth herein for each extended term of this Lease. If the parties hereto are unable to agree on the minimum monthly rent for the extended term(s) within said thirty (30) day period, the option notice shall be of no effect and this Lease shall expire at the end of the term. Neither party to this Lease shall have the right to have a court or other third party set the minimum monthly rent. 36. ADDENDUM. Any addendum attached hereto and either signed or initialled by the parties shall be deemed a part hereof and shall supersede any conflicting terms or provisions contained in this Lease. The parties hereto have executed this Lease on the date first above written. LANDLORD: TENANT: By: /s/ 2/27/96 By: /s/ 17 RENT ADJUSTMENT Addendum to Commercial Office Lease Dated: November 1, 1996 By and between (Lessor) 1990 Westwood Blvd., Inc. and (Lessee) United Film Distributors. The monthly rent for each month of the adjustment period(s) is as follows. During the 1st year through the 2nd year of the term of the Lease, commencing on November 1, 1996 and ending on June 30, 1998, the sum of Two Thousand Four Hundred and Ninety-Four Dollars ($2,494) per month. During the 3rd year through the 5th year of the term of the Lease, commencing on July 1, 1998 and ending on June 30, 2001 the sum of Two Thousand Seven Hundred and Forth Three Dollars ($2,743) per month. The description of Lessee's space is as follows: 731 sq. ft of usable office space and 693.9 sq. ft. of common area which equals to 41.8% of the Lessee's pro rata share for a total of 1,424.9 sq. ft. (see Exhibit #__________). This Addendum shall supersede any conflicting terms, conditions or provisions contained in the original Lease dated July 1, 1996. Lessor /s/ Lessee /s/ 18 EX-10.6 8 EXHIBIT 10.6 1997 STOCK OPTION PLAN OF HIT ENTERTAINMENT, INC. Hit Entertainment, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), hereby adopts this 1997 Stock Option Plan (the "Plan"). The purposes of this Plan are as follows: (1) To further the growth, development and financial success of the Company by providing additional incentives to its Non-Employee Directors, Employees (as such terms are defined below) and consultants by assisting them to become owners of capital stock of the Company and thus permitting them to benefit directly from its growth, development and financial success. (2) To enable the Company to obtain and retain the services of the type of directors, employees and consultants considered essential to the long-range success of the Company by providing and offering them an opportunity to become owners of capital stock of the Company under options, including options that are intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended. ARTICLE I DEFINITIONS 1.1 General. Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. 1.2 Board. "Board" shall mean the Board of Directors of the Company. 1.3 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.4 Committee. "Committee" shall mean the Compensation Committee of the Board, appointed as provided in Section 6.1 or, if a Committee is not appointed, the Board. 1.5 Company. "Company" shall mean Hit Entertainment, Inc. In addition, "Company" shall mean any corporation assuming or issuing new employee stock options in substitution for Options outstanding under the Plan, in a transaction to which Section 424(a) of the Code applies. 1.6 Employee. "Employee" shall mean any employee (as defined in accordance with the regulations and revenue rulings then applicable under Section 3401(c) of the Code) of the Company or its subsidiaries, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan, and includes employees who are directors or officers of the Company. 1.7 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.8 Incentive Stock Option. "Incentive Stock Option" shall mean an Option which qualifies under Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. 1.9 Non-Employee Director. "Non-Employee Director" shall have the same meaning as such term has under Rule 16b-3 of the Securities Exchange Act of 1934, as amended. 1.10 Non-Qualified Option. "Non-Qualified Option" shall mean an Option which is not an Incentive Stock Option and which is designated as a Non-Qualified Option by the Committee. 1.11 Option. "Option" shall mean an option to purchase capital stock of the Company granted under the Plan. "Options" include both Incentive Stock Options and Non-Qualified Options. 1.12 Optionee. "Optionee" shall mean a Non-Employee Director, Employee or consultant to whom an Option is granted under the Plan. 1.13 Plan. "Plan" shall mean this 1997 Stock Option Plan of the Company. 1.14 Secretary. "Secretary" shall mean the Secretary of the Company. 1.15 Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended. 1.16 Termination of Consultancy. "Termination of Consultancy" shall mean the time when the engagement of Optionee, as a consultant to the Company or a subsidiary, is terminated for any reason, with or without cause, including without limitation, resignation, discharge, death or retirement; but excluding terminations where there is a simultaneous commencement of employment with the Company. The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Consultancy, including, but not by way of limitation, the question of whether a Termination of Consultancy resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Consultancy. Notwithstanding any other provision of this Plan, the Company has an absolute and unrestricted right to terminate a consultant's service at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. 1.17 Termination of Employment. "Termination of Employment" shall mean the time when the employee-employer relationship or directorship between the Optionee and the Company or its subsidiaries is terminated for any reason, with or without cause, including, but not by way of limitation, a termination by resignation, discharge, death or retirement, but excluding (i) terminations where there is a simultaneous reemployment or continuing employment of an Optionee by the Company, (ii) at the discretion of the Committee, terminations which result in a temporary severance of the employee-employer relationship, and (iii) at the discretion of the Committee, terminations which are followed by the simultaneous establishment of a consulting relationship by the Company or a subsidiary with the former employee. The Committee, in its absolute discretion, shall determine 2 the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Employment; provided, however, that, with respect to Incentive Stock Options, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. Notwithstanding any other provision of this Plan, the Company has an absolute and unrestricted right to terminate an Employee's employment at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. ARTICLE II SHARES SUBJECT TO PLAN 2.1 Shares Subject to Plan. The shares of stock subject to Options shall be shares of the Company's no par value Common Stock. The aggregate number of such shares which may be issued upon exercise of Options shall not exceed 360,000. 2.2 Annual Dollar Limits on Grants of Incentive Stock Options. The aggregate fair market value (determined as of the time the option is granted) of stock with respect to which "Incentive Stock Options" (within the meaning of Section 422 of the Code) are exercisable for the first time by any Employee in any calendar year (under the Plan and all other incentive stock option plans of the Company) shall not exceed $100,000. 2.3 Unexercised Options. If any Option expires or is canceled without having been fully exercised, the number of shares subject to such Option but as to which such Option was not exercised prior to its expiration or cancellation may again be optioned or granted hereunder, subject to the limitations of Sections 2.1 and 2.2. 2.4 Changes in Company's Shares. In case the Company shall (i) pay a dividend in shares of common stock or make a distribution in shares of common stock, (ii) subdivide its outstanding shares of common stock, (iii) combine its outstanding shares of common stock into a smaller number of shares of common stock, or (iv) issue by reclassification of its shares of common stock, other securities of the Company (including any such reclassification in connection with a consolidation or merger in which the Company is the surviving corporation), the number of shares of common stock purchasable upon exercise of the Option immediately prior thereto shall be adjusted so that the Optionee shall be entitled to receive the kind and number of shares of common stock or other securities of the Company which Optionee would have owned or have been entitled to receive after the happening of any of the events described above, had such Option been exercised immediately prior to the happening of such event or any record date with respect thereto. Such adjustment in the Option shall be made without change in the total exercise price applicable to the Option or the unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) but with any necessary corresponding adjustment in Option exercise price per share; provided, however, in the case of Incentive Stock Options, each such 3 adjustment shall be made in such manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. By way of example, if an Option to purchase 100 shares at an exercise price of $2.00 per share had been granted and a 2 for 1 stock split occurred, the number of shares purchasable upon exercise of such Option would be adjusted to 200 shares and the exercise price for each share subject to the Option would be reduced to $1.00 per share. An adjustment made pursuant to this Section 2.4 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Any such adjustment made by the Committee shall be final and binding on the Optionee, the Company and all interested parties. ARTICLE III GRANTING OF OPTIONS 3.1 Eligibility. Any Non-Employee Director, Employee or consultant of the Company shall be eligible to be granted Options, except as provided in Sections 3.3 and 6.1. Each Non- Employee Director of the Company shall be eligible to be granted Options at the times and in the manner set forth in Section 3.4(d). 3.2 Disqualification for Stock Ownership. No person may be granted an Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any then existing subsidiary unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 3.3 Qualification of Incentive Stock Options. No Incentive Stock Option shall be granted unless such Option, when granted, qualifies as an "incentive stock option" under Section 422 of the Code. No Incentive Stock Option shall be granted to any person who is not an Employee. 3.4 Granting of Options. (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which individuals are Non-Employee Directors, Employees or consultants, and select from among those persons (including those to whom Options have been previously granted under the Plan) such of them as in its opinion should be granted Options; (ii) Determine the number of shares to be subject to such Options granted to such selected persons, and determine whether such Options are to be Incentive Stock Options or Non-Qualified Options; and (iii) Determine the terms and conditions of such Options, consistent with the Plan. (b) Upon the selection of a Non-Employee Director, Employee or consultant to be granted an Option, the Committee shall instruct the Secretary to issue such Option and may 4 impose such conditions on the grant of such Option as it deems appropriate. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee or consultant that the Employee or consultant surrender for cancellation some or all of the unexercised Options which have been previously granted to him under this Plan or otherwise. An Option, the grant of which is conditioned upon such surrender, may have an option price lower (or higher) than the exercise price of such surrendered Option or other award, may cover the same (or a lesser or greater) number of shares as such surrendered Option or other award, may contain such other terms as the Committee deems appropriate, and shall be exercisable in accordance with its terms, without regard to the number of shares, price, exercise period or any other term or condition of such surrendered Option or other award. (c) Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such option from treatment as an "incentive stock option" under Section 422 of the Code. (d) When a person is initially elected to the Board and is then a Non-Employee Director, each such new Non-Employee Director automatically shall be granted an Option to purchase ten thousand (10,000) shares of Common Stock (subject to adjustment as provided in Section 2.4) on the date of his or her election to the Board at an exercise price of 100% of the Fair Market Value (as defined in Section 4.2(b) herein). Members of the Board who are Employees who subsequently retire from the Company and remain on the Board will not receive an Option grant pursuant to this Section 3.4(d). All the foregoing Option grants authorized by this Section 3.4(d) are subject to stockholder approval of the Plan. ARTICLE IV TERMS OF OPTIONS 4.1 Option Agreement. Each Option shall be evidenced by a written Stock Option Agreement, which shall be executed by the Optionee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan. Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to qualify such Options as "Incentive Stock Options" under Section 422 of the Code. 4.2 Option Price. --- ------------- (a) The price of the shares subject to each Option shall be set by the Committee; provided, however, that the price per share for an Incentive Stock Option shall not be less than 100% of the fair market value of such shares on the date such Option is granted, or 110% of the fair market value of such shares on the date such Option is granted in the case of an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary, and that the price per share subject to a Non-Qualified Option shall not be less than 85% of the fair market value of such shares on the date such Option is granted. 5 (b) For purposes of the Plan, the fair market value of a share of the Company's stock as of a given date ("Fair Market Value") shall be: (i) the closing price of a share of the Company's stock on the principal exchange on which shares of the Company's stock are then trading, if any, on such date, or, if shares were not traded on such date, then on the next preceding trading day during which a sale occurred; or (ii) if such stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, (1) the last sales price (if the stock is then listed as a National Market Issue under the NASD National Market System) or (2) the mean between the closing representative bid and asked price (in all other cases) for the stock on such date as reported by NASDAQ or such successor quotation system; or (iii) if such stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing bid and asked prices for the stock on such date as determined in good faith by the Committee; or (iv) if the Company's stock is not publicly traded, the fair market value established by the Committee acting in good faith. 4.3 Option Vesting. -------------- (a) The period during which the right to exercise an Option in whole or in part vests in the Optionee shall be set by the Committee and the Committee may determine that an Option may not be exercised in whole or in part for a specified period after it is granted; provided, however, that no Option granted to a person subject to Section 16 of the Exchange Act shall be exercisable until at least six (6) months have elapsed from (but excluding) the date on which the Option was granted. At any time after grant of an Option, the Committee (or the Board) may, in its sole discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option vests. Notwithstanding the foregoing, all Options granted to Non-Employee Directors shall become exercisable in cumulative annual installments of 25% on each of the first, second, third and fourth anniversaries of the date of Option grant, and the term of each such Option shall be ten (10) years without variation or acceleration, except as provided in Section 4.5 and except that the Board may authorize the acceleration of Options granted to a Non-Employee Director upon the retirement of a Non-Employee Director. (b) No portion of an Option which is unexercisable at Termination of Employment or Termination of Consultancy, as applicable, shall thereafter become exercisable, except as may be otherwise provided by the Committee with respect to Options granted to Employees or consultants, in the Stock Option Agreement or in a resolution adopted following the grant of the Option. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company) exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.3(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. 6 4.4 Expiration of Options. --------------------- (a) No Incentive Stock Option may be exercised to any extent by anyone after the first to occur of the following events: (i) the later of the expiration of ten (10) years from the date the Option was granted (five (5) years in case of an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary) or the expiration of one year from the date of the Optionee's death; or (ii) except in the case of any Optionee who is disabled (within the meaning of Section 22(e)(3) of the Code), the expiration of one month from the date of the Optionee's Termination of Employment for any reason other than such Optionee's death unless the Optionee dies within said one-month period; or (iii) in the case of an Optionee who is disabled (within the meaning of Section 22(e)(3) of the Code), the expiration of three months from the date of the Optionee's Termination of Employment for any reason other than such Optionee's death unless the Optionee dies within said three-month period. (b) Subject to the provisions of Section 4.4(a), the Committee shall provide, in the terms of each individual Option, when such Option expires and becomes unexercisable. 4.5 Merger, Consolidation, Acquisition or Change in Control. In the event of the merger or consolidation of the Company with or into another corporation in which the Company is not the surviving corporation, or the acquisition by another corporation or person of all or substantially all of the Company's assets (collectively, a "Change Transaction"), Optionees shall thereafter be entitled, upon exercise of the Options, to receive the kind and amount of shares, other securities, cash or property receivable upon such Change Transaction by a holder of the number of shares of Common Stock which might have been purchased upon exercise of the Option immediately prior to such Change Transaction and shall have no other conversion rights. In any such event, effective provision shall be made in the certificate or articles of incorporation of the surviving corporation, in any contract of sale or conveyance, or otherwise, so that so far as appropriate and as nearly as reasonably may be, the provisions set forth herein for the protection of the rights of Optionees shall thereafter be made applicable. Anything provided in this Section 4.5 to the contrary notwithstanding, if upon the consummation of any such Change Transaction, or within a period of twelve (12) months thereafter, the Optionee's employment with the Company is terminated, or the Optionee fails to be re-elected as a director, as the case may be, then, upon such termination of employment or failure to re-elect Optionee as a director, as the case may be, the Option shall immediately fully vest and become exercisable as to all shares of Common Stock covered thereby, notwithstanding Section 4.3(a) or 4.3(b), and/or any installment provisions of such Option, and such Option shall be and remain exercisable for a period of sixty (60) days following such termination of employment or failure to be re-elected as a director, as the case may be. 7 ARTICLE V EXERCISE OF OPTIONS 5.1 Person Eligible to Exercise. During the lifetime of the Optionee, only he or she or a legal representative thereof may exercise an Option granted to him or her, or any portion thereof. After the death of the Optionee, any exercisable portion of an Option may, prior to the time when such portion becomes unexercisable under Section 4.4, be exercised by his or her personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 5.2 Partial Exercise. At any time from time to time prior to the time when any exercisable Option or exercisable portion thereof becomes unexercisable under Section 4.4, such Option or portion thereof may be exercised in whole or in part; provided, however that the Company shall not be required to issue fractional shares and the Committee may, by the terms of the Option, require any partial exercise to be with respect to a specified minimum number of shares. 5.3 Manner of Exercise. An exercisable Option, or any exercisable porion thereof, may be exercised solely by delivery to the Secretary or his or her office of all of the following prior to the time when such Option or such portion becomes unexercisable under Section 4.4: (a) Notice in writing signed by the Optionee or other person then entitled to exercise such Option or portion, stating that such Option or portion is exercised, such notice complying with all applicable rules established by the Committee; (b) Full payment (in cash or by check) for the shares with respect to which such Option or portion is thereby exercised. However, at the discretion of the Committee (or the Board, in the case of Options granted to Non-Employee Directors), the terms of the Option may (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of shares of common stock owned by the Optionee, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) subject to the timing requirements of Section 5.4, allow payment, in whole or in part, through the surrender of shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iv) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration; (v) allow payment, in whole or in part, through the delivery of a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee or the Board, or (vi) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii), (iv) and (v). In the case of a promissory note, the Committee or the Board may also prescribe the form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law. 8 (c) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance, including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (d) In the event that the Option or portion thereof shall be exercised pursuant to Section 5.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option or portion thereof. 5.4 Certain Timing Requirements. At the discretion of the Committee (or Board, as the case may be), shares of common stock issuable to the Optionee upon exercise of the Option may be used to satisfy the Option exercise price or the tax withholding consequences of such exercise, in the case of persons subject to Section 16 of the Exchange Act, only (i) during the period beginning on the third business day following the date of release of the quarterly or annual summary statement of sales and earnings of the Company and ending on the twelfth business day following such date or (ii) pursuant to an irrevocable written election by the Optionee to use shares of common stock issuable to the Optionee upon exercise of the Option to pay all or part of the Option price or the withholding taxes made at least six (6) months prior to the payment of such Option price or withholding taxes. 5.5 Conditions to Issuance of Stock Certificates. The shares of stock issuable and deliverable upon the exercise of an Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) There is available an exemption from registration or other qualification of such shares under any state or federal securities laws, or there has been completed a registration or other qualification of such shares under any state or federal securities laws or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (b) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; (c) The payment to the Company of all amounts which it is required to withhold under federal, state, or local law in connection with the exercise of the Option; and (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience. 9 5.6 Transfer Restrictions. The Committee, in its absolute discretion, may impose such restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of stock acquired by exercise of an Incentive Stock Option, within two years from the date of granting such Option or one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirements to give prompt notice of disposition. 5.7 Rights as Stockholders. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. The Company shall provide to each Optionee a copy of the Company's annual report when released to the Company's stockholders. ARTICLE VI ADMINISTRATION 6.1 Compensation Committee. The Compensation Committee shall consist of at least two Non-Employee Directors, appointed by and holding office at the pleasure of the Board. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board and may be replaced at any time by the Board. Vacancies in the Committee shall be filled by the Board. No person shall be eligible to serve on the Compensation Committee unless he is then a "Non- Employee Director" within the meaning of Rule 16b-3 which has been adopted by the Securities and Exchange Commission under the Exchange Act, if and as such Rule is then in effect and an "outside director" for purposes of Section 162(m) of the Code. This paragraph may be waived for successive six (6) month periods by the Board of Directors. 6.2 Duties and Powers of Committee. It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the Options and to adopt or amend such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. The Committee may accelerate the exercise date of any Option and determine the right of any person to exercise the rights on behalf of any Optionee. Notwithstanding the foregoing, the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Options granted to Non-Employee Directors. Any such interpretations and rules in regard to Incentive Stock Options shall be consistent with the basic purpose of the Plan to grant "Incentive Stock Options" within the meaning of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. 10 6.3 Majority Rule. The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee. 6.4 Compensation; Professional Assistance; Good Faith Actions. Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinions, or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Optionees, the Company, and all other interested persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or the Options, and all members of the Committee shall be fully protected by the Company in respect to any such action, determination, or interpretation. ARTICLE VII OTHER PROVISIONS 7.1 Options Not Transferable. Options shall not be transferable except by testamentary will or the laws of descent and distribution, and shall be exercisable during an Optionee's lifetime only by the Optionee. Except as permitted by the preceding sentence, no Option granted under the Plan or any of the rights and privileges thereby conferred shall be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise), and no such Option, right or privilege shall be subject to execution, attachment, or similar process. Upon any attempt to so transfer, assign, pledge, hypothecate or otherwise dispose of the Option, or of any right or privilege conferred thereby, contrary to the provisions hereof, or upon the levy of any attachment or similar process upon such Option, right or privilege, the Option and such rights and privileges shall immediately become null and void. 7.2 Amendment, Suspension or Termination of the Plan. The Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board or the Committee. However, without approval of the Company's stockholders given within twelve (12) months before or after the action by the Committee, no action of the Committee may, except as provided in Section 4.5, increase the limits imposed in Section 2.1 on the maximum number of shares which may be issued under this Plan, and no action of the Committee may be taken that would otherwise require stockholder approval as a matter of applicable law, regulation or rule. Notwithstanding the foregoing, the provisions of this Plan relating to Option grants to Non-Employee Directors, including the amount, price and timing thereof, shall not be amended more than once in any six-month period other than to comport with changes, in the Code, the Employee Retirement Income Security Act, or the respective rules thereunder. Neither the amendment, suspension, nor termination of the Plan shall, without the consent of the holder of the Option, alter or impair any rights or obligations under any Option theretofore granted. No Option may be granted during any 11 period of suspension nor after termination of the Plan, and in no event may any Incentive Stock Option be granted under this Plan after the first to occur of the following events: (a) The expiration of ten (10) years from the date the Plan is adopted by the Board; or (b) The expiration of ten (10) years from the date the Plan is approved by the Company's stockholders under Section 7.3. 7.3 Approval of Plan by Shareholders. This Plan will be submitted for the approval of the Company's shareholders within twelve (12) months after the date of the Board's initial adoption of the Plan. Incentive Stock Options may be granted prior to such shareholder approval; provided, however, that such Incentive Stock Options shall not be exercisable prior to the time when the Plan is approved by the shareholders; provided, further, that if such approval has not been obtained at the end of said twelve (12)-month period, all Incentive Stock Options previously granted under the Plan shall thereupon be canceled and become null and void. 7.4 Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option. Subject to the timing requirements of Section 5.4, the Committee (or the Board, in the case of Options granted to Non-Employee Directors) may in its discretion and in satisfaction of the foregoing requirement allow such Optionee to elect to have the Company withhold shares of common stock (or allow the return of shares of common stock) having a Fair Market Value equal to the sums required to be withheld. 7.5 Loans. The Committee may, in its discretion, extend one or more loans to key Employees in connection with the exercise or receipt of an Option granted under this Plan. The terms and conditions of any such loan shall be set by the Committee. 7.6 Limitations Applicable to Section 16 Persons and Performance-Based Compensation. Notwithstanding any other provision of this Plan, any Option awarded to an Employee or Non- Employee Director who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act that are requirements for the application of such exemptive rule, and this Plan shall be deemed amended to the extent necessary to conform to such limitations. Furthermore, notwithstanding any other provision of this Plan, any Option intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. 12 7.7 Effect of Plan Upon Other Option and Compensation Plans. The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company. Nothing in this Plan shall be construed to limit the right of the Company (a) to establish any other forms of incentives or compensation for employees of the Company or (b) to grant or assume options otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation, or otherwise of the business, stock, or assets of any corporation, firm or association. 7.8 Compliance with Laws. This Plan, the granting and vesting of Options under this Plan and the issuance and delivery of shares of common stock or Options granted or hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan or Options granted hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 7.9 Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Plan. 7.10 Governing Law. This Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Delaware without regard to conflicts of laws thereof. I hereby certify that the foregoing Plan was duly adopted by the Board of Directors and the stockholders of Hit Entertainment, Inc. as of May 16, 1997. /s/ David M. Kane --------------------------- David M. Kane, Secretary 13 EX-10.7 9 EXHIBIT 10.7 Exhibit 10.7 DISTRIBUTOR/SALES AGENT Dated as of July 17, 1995 HEP I PARTNERS Re: THE SECRET AGENT CLUB, starring HULK HOGAN Gentlemen: 1. PARTIES. This letter will confirm the agreement ("Agreement") reached between United Film Distributors, Inc. ("Distributor/Sales Agent") and HEP I PARTNERS ("Owner/Grantor") with respect to the feature film THE SECRET AGENT CLUB (the "Picture") whereby Owner has engaged the services of Distributor as the exclusive authorized international sales, collections and servicing agent of Owner for the Picture in the Territory (as defined below), upon the following terms and conditions. 2. PICTURE. (a) Owner confirms that the Picture will be or is shot in color, in the English language, with a running time of no less than 92 minutes including main and end titles, and shall qualify for an MPAA rating not more restrictive than "R". 3. TERM. The term of this Agreement ("Term") shall commence as the date of this Agreement and shall continue in perpetuity. 4. TERRITORY. Distributor shall have the right to sublicense the Picture during the Term throughout the entire universe. 5. LICENSED RIGHTS. The Licensed Rights in the Picture which Distributor may sublicense ("Rights") are the exclusive rights in the Territory to exhibit the Picture, substantially as produced or represented by Owner other than customary dubbing, subtitling and limited editing for censorship purposes as is customary in each local country) in any and all media, now known or hereafter devised or improved including, but not limited to: theatrical exhibition (35mm), non-theatrical exhibition (as customarily defined in the motion picture industry), television exhibition (including pay, cable, free, satellite and pay-per-view), exhibition by means of video device (videocassette, disc or other format), for private home use (including the right to manufacture, distribute, rent and sell such video devices for such purposes) and any and all other means of exploitation of the Picture and any Rights therein, whatsoever, including merchandising, publication and soundtrack album rights. All other rights are excluded, including, the rights to exploit, license, or represent any and all "derivative works", such as sequels and remakes. 6. DIVISION OF GROSS RECEIPTS. As used in this Agreement, the term "Gross Receipts" shall mean all non-refundable monies or credits payable by foreign distributors once actually received by Distributor in United States Dollars including, without limitation, advances, minimum guarantees, "overages", and other license fees or receipts, net of any withholding or other foreign remittance taxes. Gross Receipts shall be divided between Owner and Distributor as follows: (a) Distributor shall first deduct and retain its fee of Twenty percent (20%) out of total Gross Receipts; (b) Distributor shall next deduct and retain the portion attributable to cover Distributor's general out-of-pocket expenses (e.g., travel, hotels, temporary personnel, sales offices, entertainment, equipment rentals, sales trips, public relations fees and overhead expenses, etc.) incurred in connection with the sale of the Picture and attending various sales markets where the Picture will be offered to foreign distributors. Said amount shall be fairly apportioned in the event the expenses apply to matters other than the Picture. (c) Distributor shall also deduct and retain an amount equal to all direct out-of-pocket distribution expenses applicable to the Picture incurred by Distributor including, without limitation, creative fees, printing, shipping, postage, courier, screening rooms and cassettes, laboratory, legal and accounting fees directly related to agreements with foreign distributors, telephone, telecopier and the like. Distributor shall also be entitled to deduct its expenses incurred including, without limitation, the creation of "additional" technical materials such as, but not limited to, negatives, internegatives, magnetic and optical soundtracks, trailers, television spots, one-sheets, stills and any and all other advertising, publicity and marketing expenses, of any kind, as advanced by Distributor. (d) Provided Owner has complied with all terms and conditions of this Agreement including, without limitation, timely Delivery, the balance shall be Owner's share of Gross Receipts and shall be paid to Owner in accordance with Paragraph 10 of this Agreement. 7. DEPOSIT ACCOUNT. All Agreements shall provide that any and all Gross Receipts under the Agreements shall be paid by each licensee directly to a bank account (the "Deposit Account") established by and under the control of Distributor or its designee. 8. DELIVERY. On or before April 1, 1996, Owner shall deliver to Distributor, at Owner's expense, all those items ("Items") relating to the Picture referred to in Exhibit "A" ("Delivery"). All Items delivered to Distributor by Owner shall be of first class, professional quality, suitable for theatrical exhibition and acceptable to foreign television broadcasters quality control requirements. 9. DISTRIBUTOR'S RIGHTS. Distributor shall have the right to advertise, promote, sell, assign and sublicense, without limitation, the theatrical, video, television and all other rights, and otherwise exploit and deal with the Picture and its title, in Distributor's sole good faith discretion, in connection with Distributor's sublicense of the Picture in the Territory. Distributor shall also have the right to change or edit the Picture and its title, but only to the extent reasonably necessary for the foreign exploitation of the Picture including, without limitation, re-editing, re-mixing, adding to and deleting from, and adding appropriate credits to the Picture as Distributor shall deem reasonably necessary or appropriate provided same does not conflict with subparagraph (a) below. Any and all expenses incurred by Distributor in connection with changes in the Picture shall be deemed 2 distribution expenses recoupable by Distributor pursuant to Paragraph 6 of this Agreement. Distributor shall further have the right to sell the Picture along with other pictures, i.e. in groups or "packages", in which case proceeds from the exploitation of the group or package shall be allocated by Distributor among the various motion pictures in an equitable manner to be determined in good faith by Distributor. (a) Owner will notify Distributor, in writing, of its contractual obligations with respect to credits or advertising of persons, names and/or likenesses in connection with the Picture. Failure by Owner to give written notice, as indicated herein, shall release Distributor from any liability or responsibility in connection therewith and Owner hereby agrees to indemnify and hold Distributor harmless from the consequences of any action with respect thereto. (b) Distributor shall have the right, but not the obligation, to include in the main and end titles of the Picture and in all advertising and publicity materials for the Picture, its corporate logo and the words "Distributed by", "Released by", or a similar indication of Distributor's function. Owner hereby acknowledges its obligation to provide Distributor with a listing of the main and end titles so that Distributor may make a determination as to the placement of its logo and credit in accordance with the provisions of this Paragraph 9. Owner further agrees to consult with Distributor at the time the credits are prepared to determine if Distributor wishes to have its credit and logo included therewith. 10. ACCOUNTING. Distributor shall report to and make appropriate payments to Owner on a calendar quarterly basis, commencing upon collection of first monies, for the first eighteen (18) months of the Term and semi-annually thereafter. Accounting statements shall be sent to Owner within thirty (30) days following the close of the applicable accounting period. Owner shall have customary audit rights with respect to Distributor's records pertaining to the Picture, exercisable at Distributor's offices not more frequently than once every twelve (12) months. Accounting statements shall be incontestible twenty-four (24) months after they are mailed by Distributor to Owner at the above address or such other address as Owner may designate in writing. 11. INDEMNIFICATIONS/REPRESENTATIONS & WARRANTIES. (a) Owner represents and warrants that it has the full right, power and authority to enter into this Agreement and to perform all of its obligations and undertakings herein; that Owner has not entered into any agreement with any third party that is inconsistent with or in derogation of the rights, privileges and benefits being granted to Distributor; that the rights granted are free and clear of any claims, liens or encumbrances whatsoever; and, that it will not, by action or inaction, cause Distributor to be deprived of any of the benefits granted hereunder. (b) Owner represents and warrants that, with respect to any of its obligations hereunder (including, without limitation, any materials supplied hereunder or actions undertaken or omitted herefrom), that neither the Picture, nor any part thereof, nor the title thereof, nor the exercise by Distributor or its licensees or assigns of any right, license or privilege herein granted, violates or infringes or will violate or infringe any trademark, trade name, contract, agreement, copyright (common law or statutory), patent, literary, artistic, dramatic, personal, private, civil or property right 3 or right of privacy or any other right or defames any person, firm, corporation, or association whatsoever. (c) Owner warrants and agrees that it will indemnify and hold Distributor and its successors, licensees and assigns, directors, shareholders, officers, employees, agents, attorneys and other representatives harmless from and against any and all liability, loss, judgments, damages, costs and expenses, including reasonable attorneys' fees, arising solely out of or relating to any breach or alleged breach by Owner hereunder in connection with any suits relating to the Picture. (d) Distributor warrants and agrees that it will indemnify and hold Owner and its successors, licensees and assigns, directors, shareholders, officers, employees, agents, attorneys and other representatives harmless from and against any and all liability, loss, judgments, damages, costs and expenses, including reasonable attorneys' fees, arising solely out of or relating to any breach or alleged breach by Distributor hereunder in connection with any suits relating to the Picture. 12. REMEDIES. In the event of any breach or alleged breach of this Agreement by Distributor, Owner's sole remedy shall be an action at law for damages, if any; Owner shall not have the right to terminate or rescind this Agreement or any sublicenses for the Picture entered into by Distributor. Because of the costs and expenses which will be incurred by Distributor in the marketing and promotion of the Picture, the agency relationship created hereby shall be deemed coupled with an interest. 13. ARBITRATION. Any dispute, controversy or claim arising out of or relating to the enforcement, interpretation or alleged breach of this Agreement shall be submitted to and resolved by binding arbitration in Los Angeles, California before one neutral arbitrator appointed in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the award rendered by the arbitrator may be entered in and enforceable by any court having jurisdiction thereof. 14. THIRD PARTY PAYMENTS. Owner is responsible for all third party payments including, but not limited to, any and all residuals, refuse fees, and any other union or guild payments which may become payable as a result of Distributor's exercise of the Rights granted hereunder. 15. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute any additional documents which may be required or be desirable to fully effectuate the purposes and intents of this Agreement or to carry out the obligations with the parties hereunder, provided that they are not inconsistent with the provisions of this Agreement. Owner hereby appoints Distributor its sole and exclusive attorney-in-fact with full and irrevocable power and authority in Owner's name to execute, acknowledge, deliver, file, register, renew, extend, enforce and defend all copyrights in the Picture in the Territory. Before Distributor may exercise its power of attorney hereunder, it must first submit the documents at issue to Owner with ten (10) business days to return the same. 16. MISCELLANEOUS. This Agreement contains the entire understanding and supersedes all prior understandings of the parties hereto relating to the subject matter hereof, and this agreement may not be modified, nor may any provision be waived, except by an instrument in writing signed by both parties. No payment under this Agreement shall operate as a waiver of any provision hereof. 4 No waiver of any breach or default under this Agreement shall operate as a waiver of any preceding or subsequent breach or default. Neither party shall be deemed a fiduciary, partner, joint venturer, employee, or agent of the other party. Neither party shall hold itself out contrary to the provision of this Agreement or shall become liable by reason of any representation, act or omission of the other party contrary to the provisions hereof. Notwithstanding anything herein or elsewhere contained, this Agreement is solely for the mutual benefit of Owner and Distributor, and no third party (whether or not referred to herein) is intended or shall be deemed to be a third party beneficiary hereof. Paragraph headings used herein are for convenience only and shall not be used in any way to interpret the provisions of this Agreement. All items which have not been addressed shall be negotiated in good faith pursuant to the prevailing customs and standards in the entertainment industry. Any and all estimates or projections as to sales of the Picture by either party shall be deemed statements of opinion only and shall not be binding upon the parties. 17. NOTICES. All notices given may be given by facsimile with conformational receipt, by personal delivery or by certified mail, return receipt requested. The date of any personal delivery or facsimile shall be deemed the date of the giving of notice. Notice shall be addressed to the parties at their respective addresses as follows, subject to change by written notice: TO OWNER: HEP I PARTNERS c/o Hit Entertainment, Inc. 1990 Westwood Boulevard The Penthouse Los Angeles, California 90025 TO DISTRIBUTOR: HIT ENTERTAINMENT 1990 Westwood Boulevard The Penthouse Los Angeles, California 90025 18. APPLICABLE LAW. This Agreement shall be governed and construed in accordance with the laws of the State of California. If the foregoing accurately sets forth your understanding, please indicate your agreement to this Agreement by signing in the space provided below. Very truly yours, United Film Distributors, Inc. By: /s/ ACCEPTED AND AGREED TO HEP I PARTNERS By: Hit Entertainment, Inc., its general partner By: /s/ 5 EX-10.8 10 EXHIBIT 10.8 Exhibit 10.8 DISTRIBUTOR/SALES AGENT Dated as of March 4, 1996 HEP II PARTNERS Re: SANTA WITH MUSCLES, starring HULK HOGAN SKELETONS, starring RON SILVER, JAMES COBURN Gentlemen: 1. PARTIES. This letter will confirm the agreement ("Agreement") reached between United Film Distributors, Inc. ("Distributor/Sales Agent") and HEP II PARTNERS ("Owner/Grantor") with respect to the feature films SANTA WITH MUSCLES and SKELETONS (the "Picture") whereby Owner has engaged the services of Distributor as the exclusive authorized international sales, collections and servicing agent of Owner for the Picture in the Territory (as defined below), upon the following terms and conditions. 2. PICTURE. (a) Owner confirms that the Picture will be or is shot in color, in the English language, with a running time of no less than 92 minutes including main and end titles, and shall qualify for an MPAA rating not more restrictive than "R". 3. TERM. The term of this Agreement ("Term") shall commence as the date of this Agreement and shall continue in perpetuity. 4. TERRITORY. Distributor shall have the right to sublicense the Picture during the Term throughout the entire universe. 5. LICENSED RIGHTS. The Licensed Rights in the Picture which Distributor may sublicense ("Rights") are the exclusive rights in the Territory to exhibit the Picture, substantially as produced or represented by Owner other than customary dubbing, subtitling and limited editing for censorship purposes as is customary in each local country) in any and all media, now known or hereafter devised or improved including, but not limited to: theatrical exhibition (35mm), non-theatrical exhibition (as customarily defined in the motion picture industry), television exhibition (including pay, cable, free, satellite and pay-per-view), exhibition by means of video device (videocassette, disc or other format), for private home use (including the right to manufacture, distribute, rent and sell such video devices for such purposes) and any and all other means of exploitation of the Picture and any Rights therein, whatsoever, including merchandising, publication and soundtrack album rights. All other rights are excluded, including, the rights to exploit, license, or represent any and all "derivative works", such as sequels and remakes. 6. DIVISION OF GROSS RECEIPTS. As used in this Agreement, the term "Gross Receipts" shall mean all non-refundable monies or credits payable by foreign distributors once actually received by Distributor in United States Dollars including, without limitation, advances, minimum guarantees, "overages", and other license fees or receipts, net of any withholding or other foreign remittance taxes. Gross Receipts shall be divided between Owner and Distributor as follows: (a) Distributor shall first deduct and retain its fee of Twenty percent (20%) out of total Gross Receipts; (b) Distributor shall next deduct and retain the portion attributable to cover Distributor's general out-of-pocket expenses (e.g., travel, hotels, temporary personnel, sales offices, entertainment, equipment rentals, sales trips, public relations fees and overhead expenses, etc.) incurred in connection with the sale of the Picture and attending various sales markets where the Picture will be offered to foreign distributors. Said amount shall be fairly apportioned in the event the expenses apply to matters other than the Picture. (c) Distributor shall also deduct and retain an amount equal to all direct out-of-pocket distribution expenses applicable to the Picture incurred by Distributor including, without limitation, creative fees, printing, shipping, postage, courier, screening rooms and cassettes, laboratory, legal and accounting fees directly related to agreements with foreign distributors, telephone, telecopier and the like. Distributor shall also be entitled to deduct its expenses incurred including, without limitation, the creation of "additional" technical materials such as, but not limited to, negatives, internegatives, magnetic and optical soundtracks, trailers, television spots, one-sheets, stills and any and all other advertising, publicity and marketing expenses, of any kind, as advanced by Distributor. (d) Provided Owner has complied with all terms and conditions of this Agreement including, without limitation, timely Delivery, the balance shall be Owner's share of Gross Receipts and shall be paid to Owner in accordance with Paragraph 10 of this Agreement. 7. DEPOSIT ACCOUNT. All Agreements shall provide that any and all Gross Receipts under the Agreements shall be paid by each licensee directly to a bank account (the "Deposit Account") established by and under the control of Distributor or its designee. 8. DELIVERY. On or before April 1, 1996, Owner shall deliver to Distributor, at Owner's expense, all those items ("Items") relating to the Picture referred to in Exhibit "A" ("Delivery"). All Items delivered to Distributor by Owner shall be of first class, professional quality, suitable for theatrical exhibition and acceptable to foreign television broadcasters quality control requirements. 9. DISTRIBUTOR'S RIGHTS. Distributor shall have the right to advertise, promote, sell, assign and sublicense, without limitation, the theatrical, video, television and all other rights, and otherwise exploit and deal with the Picture and its title, in Distributor's sole good faith discretion, in connection with Distributor's sublicense of the Picture in the Territory. Distributor shall also have the right to change or edit the Picture and its title, but only to the extent reasonably necessary for the foreign exploitation of the Picture including, without limitation, re-editing, re-mixing, adding to and deleting from, and adding appropriate credits to the Picture as Distributor shall deem reasonably necessary or appropriate provided same does not conflict with subparagraph (a) below. Any and all expenses incurred by Distributor in connection with changes in the Picture shall be deemed 2 distribution expenses recoupable by Distributor pursuant to Paragraph 6 of this Agreement. Distributor shall further have the right to sell the Picture along with other pictures, i.e. in groups or "packages", in which case proceeds from the exploitation of the group or package shall be allocated by Distributor among the various motion pictures in an equitable manner to be determined in good faith by Distributor. (a) Owner will notify Distributor, in writing, of its contractual obligations with respect to credits or advertising of persons, names and/or likenesses in connection with the Picture. Failure by Owner to give written notice, as indicated herein, shall release Distributor from any liability or responsibility in connection therewith and Owner hereby agrees to indemnify and hold Distributor harmless from the consequences of any action with respect thereto. (b) Distributor shall have the right, but not the obligation, to include in the main and end titles of the Picture and in all advertising and publicity materials for the Picture, its corporate logo and the words "Distributed by", "Released by", or a similar indication of Distributor's function. Owner hereby acknowledges its obligation to provide Distributor with a listing of the main and end titles so that Distributor may make a determination as to the placement of its logo and credit in accordance with the provisions of this Paragraph 9. Owner further agrees to consult with Distributor at the time the credits are prepared to determine if Distributor wishes to have its credit and logo included therewith. 10. ACCOUNTING. Distributor shall report to and make appropriate payments to Owner on a calendar quarterly basis, commencing upon collection of first monies, for the first eighteen (18) months of the Term and semi-annually thereafter. Accounting statements shall be sent to Owner within thirty (30) days following the close of the applicable accounting period. Owner shall have customary audit rights with respect to Distributor's records pertaining to the Picture, exercisable at Distributor's offices not more frequently than once every twelve (12) months. Accounting statements shall be incontestible twenty-four (24) months after they are mailed by Distributor to Owner at the above address or such other address as Owner may designate in writing. 11. INDEMNIFICATIONS/REPRESENTATIONS & WARRANTIES. (a) Owner represents and warrants that it has the full right, power and authority to enter into this Agreement and to perform all of its obligations and undertakings herein; that Owner has not entered into any agreement with any third party that is inconsistent with or in derogation of the rights, privileges and benefits being granted to Distributor; that the rights granted are free and clear of any claims, liens or encumbrances whatsoever; and, that it will not, by action or inaction, cause Distributor to be deprived of any of the benefits granted hereunder. (b) Owner represents and warrants that, with respect to any of its obligations hereunder (including, without limitation, any materials supplied hereunder or actions undertaken or omitted herefrom), that neither the Picture, nor any part thereof, nor the title thereof, nor the exercise by Distributor or its licensees or assigns of any right, license or privilege herein granted, violates or infringes or will violate or infringe any trademark, trade name, contract, agreement, copyright (common law or statutory), patent, literary, artistic, dramatic, personal, private, civil or property right 3 or right of privacy or any other right or defames any person, firm, corporation, or association whatsoever. (c) Owner warrants and agrees that it will indemnify and hold Distributor and its successors, licensees and assigns, directors, shareholders, officers, employees, agents, attorneys and other representatives harmless from and against any and all liability, loss, judgments, damages, costs and expenses, including reasonable attorneys' fees, arising solely out of or relating to any breach or alleged breach by Owner hereunder in connection with any suits relating to the Picture. (d) Distributor warrants and agrees that it will indemnify and hold Owner and its successors, licensees and assigns, directors, shareholders, officers, employees, agents, attorneys and other representatives harmless from and against any and all liability, loss, judgments, damages, costs and expenses, including reasonable attorneys' fees, arising solely out of or relating to any breach or alleged breach by Distributor hereunder in connection with any suits relating to the Picture. 12. REMEDIES. In the event of any breach or alleged breach of this Agreement by Distributor, Owner's sole remedy shall be an action at law for damages, if any; Owner shall not have the right to terminate or rescind this Agreement or any sublicenses for the Picture entered into by Distributor. Because of the costs and expenses which will be incurred by Distributor in the marketing and promotion of the Picture, the agency relationship created hereby shall be deemed coupled with an interest. 13. ARBITRATION. Any dispute, controversy or claim arising out of or relating to the enforcement, interpretation or alleged breach of this Agreement shall be submitted to and resolved by binding arbitration in Los Angeles, California before one neutral arbitrator appointed in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the award rendered by the arbitrator may be entered in and enforceable by any court having jurisdiction thereof. 14. THIRD PARTY PAYMENTS. Owner is responsible for all third party payments including, but not limited to, any and all residuals, refuse fees, and any other union or guild payments which may become payable as a result of Distributor's exercise of the Rights granted hereunder. 15. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute any additional documents which may be required or be desirable to fully effectuate the purposes and intents of this Agreement or to carry out the obligations with the parties hereunder, provided that they are not inconsistent with the provisions of this Agreement. Owner hereby appoints Distributor its sole and exclusive attorney-in-fact with full and irrevocable power and authority in Owner's name to execute, acknowledge, deliver, file, register, renew, extend, enforce and defend all copyrights in the Picture in the Territory. Before Distributor may exercise its power of attorney hereunder, it must first submit the documents at issue to Owner with ten (10) business days to return the same. 16. MISCELLANEOUS. This Agreement contains the entire understanding and supersedes all prior understandings of the parties hereto relating to the subject matter hereof, and this agreement may not be modified, nor may any provision be waived, except by an instrument in writing signed by both parties. No payment under this Agreement shall operate as a waiver of any provision hereof. 4 No waiver of any breach or default under this Agreement shall operate as a waiver of any preceding or subsequent breach or default. Neither party shall be deemed a fiduciary, partner, joint venturer, employee, or agent of the other party. Neither party shall hold itself out contrary to the provision of this Agreement or shall become liable by reason of any representation, act or omission of the other party contrary to the provisions hereof. Notwithstanding anything herein or elsewhere contained, this Agreement is solely for the mutual benefit of Owner and Distributor, and no third party (whether or not referred to herein) is intended or shall be deemed to be a third party beneficiary hereof. Paragraph headings used herein are for convenience only and shall not be used in any way to interpret the provisions of this Agreement. All items which have not been addressed shall be negotiated in good faith pursuant to the prevailing customs and standards in the entertainment industry. Any and all estimates or projections as to sales of the Picture by either party shall be deemed statements of opinion only and shall not be binding upon the parties. 17. NOTICES. All notices given may be given by facsimile with conformational receipt, by personal delivery or by certified mail, return receipt requested. The date of any personal delivery or facsimile shall be deemed the date of the giving of notice. Notice shall be addressed to the parties at their respective addresses as follows, subject to change by written notice: TO OWNER: HEP II PARTNERS c/o Hit Entertainment, Inc. 1990 Westwood Blvd. The Penthouse Los Angeles, California 90025 TO DISTRIBUTOR: United Film Distributors, Inc. 1990 Westwood Boulevard The Penthouse Los Angeles, California 90025 18. APPLICABLE LAW. This Agreement shall be governed and construed in accordance with the laws of the State of California. If the foregoing accurately sets forth your understanding, please indicate your agreement to this Agreement by signing in the space provided below. Very truly yours, United Film Distributors, Inc. By: /s/ ACCEPTED AND AGREED TO HEP II Partners By: Hit Entertainment, Inc., its general partner By: /s/ 5 EX-10.9 11 EXHIBIT 10.9 Exhibit 10.9 THE PARTNERSHIP INTERESTS ISSUED UNDER THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES ACT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION UNLESS, IN THE OPINION OF COUNSEL TO THE GENERAL PARTNER, SUCH REGISTRATION IS NOT REQUIRED. AGREEMENT OF LIMITED PARTNERSHIP OF HEP I, L.P. This AGREEMENT OF LIMITED PARTNERSHIP is made and entered into as of July 17, 1995, by and between Hit Entertainment, Inc., a Delaware corporation (the "General Partner"), and J. Brooke Johnston, Jr., a resident of the State of Alabama, as the organizational limited partner (the "Organizational Limited Partner), and those other parties who from time to time may become limited partners pursuant to the provisions of this Agreement by execution and delivery of this Agreement or counterparts hereof (hereinafter referred to collectively as the "Limited Partners" and referred to individually as a "Limited Partner"). W I T N E S S E T H: WHEREAS, the General Partner and the Original Limited Partner have created the Partnership, and the parties hereto desire to set forth their respective interests in and all rights, duties and obligations in and to the Partnership, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises, and the mutual covenants and promises hereinafter set forth, the parties to this Agreement of Limited Partnership do hereby agree as follows: ARTICLE I DEFINED TERMS The following defined terms used in this Agreement shall have the meanings specified below: 1.1. "ACCOUNTANTS" means any firm of certified public accountants that may be engaged by the General Partner on behalf of the Partnership for any task. 1.2. "ACT" means the Delaware Revised Uniform Limited Partnership Act (6 DEL. C. 6, 17-101, ET SEQ.), and now in effect and as the same may be amended from time to time hereafter. 1.3. "AFFILIATE" means (a) any Person directly or indirectly controlling, controlled by or under common control with, another Person, (b) any Person owning or controlling 10% or more of the outstanding voting securities of such other Person, (c) any officer, director or partner of such Person, or (d) if such other Person is an officer, director or partner, any company for which such Person acts in any such capacity. 1.4. "AGREEMENT" means this Agreement of Limited Partnership, as amended, modified or supplemented from time to time. 1.5. "AVAILABLE CASH FLOW" means all cash and cash equivalent funds of the Partnership on hand at the end of each Year, less (a) provision for payment of all outstanding and unpaid current cash obligations of the Partnership at the end of such year (including those which are in dispute), including, but not limited to, deferred contingent payments due to principal artists and other talent contributing to the Project, and (b) provisions for reserves for reasonably anticipated cash expenses and contingencies (which include debt service on indebtedness of the Partnership, if any, and amounts payable to the General Partner and Affiliates of the General Partner), not including, but not limited to, provisions for depreciation, amortization and other non-cash expenses; provided, however, that Sale Proceeds shall not be included in Available Cash Flow. 1.6. "CAPITAL ACCOUNT" means, with respect to any Partner, the Capital Account maintained for such Person in accordance with the following provisions: (i) To each Person's Capital Account there shall be credited such Person's Capital Contributions, such Person's distributive share of Net Income and any items in the nature of income or gain that are specially allocated hereunder to such Person, and the amount of any Partnership liabilities assumed by such Person or which are secured by any Partnership property distributed to such Person. (ii) To each Person' s Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Partnership property distributed to such Person pursuant.to any provision of this Agreement, such Person's distributive share of Net Loss and any items in the nature of expenses or losses that are specially 2 allocated hereunder to such Person, and the amount of any liabilities of such Person assumed by the Partnership or which are secured by any property contributed by such Person to the Partnership. (iii) In the event any interest in the Partnership is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (iv) In determining the amount of any liability for purposes of Sections 1.6(i) and (ii) hereof, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities that are secured by contributed or distributed property or that are assumed by the Partnership or the General Partner), are computed in order to comply with such Regulations, the General Partner may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Article XIII hereof upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-l(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events (for example, the acquisition by the Partnership of oil or gas properties) might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). 1.7. "CAPITAL CONTRIBUTION" in respect of any Partner or transferee of such Partner means the amount of money and the initial Gross Asset Value of any property (other than money), tangible or intangible, contributed by such Partner to the capital of the Partnership. 1.8. "CERTIFICATE" means the Certificate of Limited Partnership of the Partnership filed pursuant to the Act, as amended from time to time. 1.9. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 1.10. "DEPRECIATION" means, for each Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Year bears to such 3 beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. 1.11. "FINAL PERCENTAGE" Interest Change Date means the day following the earlier to occur of (i) seven years following the date of this Agreement, or (ii) the date as of which the cumulative amount of Available Cash Flow distributed to the Limited Partners by the Partnership equals 200% of the total Capital Contributions of the Limited Partners. 1.12. "GAIN FROM SALE" means gain or loss, as the case may be, determined m accordance with the rules of determining Federal taxable income, gain or loss, arising from a transaction giving rise to Sale Proceeds. 1.13. "GENERAL PARTNER" means the parties designated as the "General Partner" in the first paragraph of this Agreement, including any successor general partner or general partners substituted pursuant to the provisions of this Agreement. 1.14. "GENERAL PARTNER'S PERCENTAGE INTEREST" means (i) 1% until the Percentage Interest Change Date, (ii) 50% upon and after the Percentage Interest Change Date and (iii) 100% upon and after the Final Percentage Interest Change Date. 1.15. "GENERAL PARTNERSHIP INTEREST" means the entire interest of the General Partner in the Partnership, including the General Partner's Percentage Interest in capital, income, gains, losses, deductions, credits and distributions of the Partnership, the General Partner's right to participate in the management of the Partnership and all other rights and obligations accorded under this Agreement or under the Act. 1.16. "GROSS ASSET VALUE" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the Partnership; (ii) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership (other than pursuant to Section 6.3 hereof) by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property as consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Regulations Section 1.704- 1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner reasonably determines that such 4 adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (iii) The Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and (iv) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this Section 1.15(iv) to the extent the General Partner determines that an adjustment pursuant to Section 1.15(ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.15(iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to Section 1.15(i), Section 1.15(ii), or Section 1.15(iv) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Loss. 1.17. "LIMITED PARTNERS" means the Persons who are, from time to time, admitted to the Partnership as Limited Partners, and whose names, mailing addresses, Limited Partnership Percentage or Capital Contribution, number of Units held by, and social security or taxpayer identification numbers appear in Appendix A to this Agreement, as amended from time to time, including, unless the context otherwise specifically states, the Organizational Limited Partner. Such Persons shall become Limited Partners when a duly executed Subscription Agreement, or such other instrument or document as the General Partner may require, has been accepted by the General Partner, except as otherwise required by law. 1.18. "LIMITED PARTNERS' PERCENTAGE INTEREST" means (i) 99% until the Percentage Interest Change Date, (ii) 50% upon and after the Percentage Interest Change Date and (iii) 0% upon and after the Final Percentage Interest Change Date. 1.19. "LIMITED PARTNERSHIP INTEREST" means the entire interest of a Limited Partner in the Partnership expressed in Units, including such Limited Partner' s interest in the Limited Partners' Percentage Interest in capital, income, gains, losses, deductions, credits and distributions of the Partnership. 1.20. "NET INCOME" and "NET LOSS" means, for each Year, an amount equal to the Partnership' s taxable income or loss for such Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: 5 (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Income and Net Loss pursuant to this Section 1.19 shall be added to such taxable income or loss; (ii) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Income or Net Loss pursuant to this Section 1.19, shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.15(ii) or Section 1.15(iv) hereof, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Loss; (iv) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.10 hereof; and (vi) Notwithstanding any other provision of this Section 1.19, any items which are specially allocated hereunder to any Person shall not be taken into account in computing Net Income or Net Loss. 1.21. "ORGANIZATIONAL LIMITED PARTNER" means any party designated as an "Organizational Limited Partner" in the first paragraph of this Agreement. 1.22. "PARTNERS" means, collectively, the General Partner and the Limited Partners. 1.23. "PARTNERSHIP" means the limited partnership formed pursuant to this Agreement by the filing of the Certificate pursuant to the Act. 1.24. "PARTNERSHIP RETURN" means the United States Partnership Information Return of Income of the Partnership. 1.25. "PERCENTAGE INTEREST CHANGE DATE" means the day following the date as of which the cumulative amount of Net Losses allocated to and Available Cash Flow distributed to the Partners equals 110% of the total Capital Contributions of the Partners. 6 1.26. "PERSON" means (i) a person as that term is defined in Section 7701(a)(1) of the Code, namely, an individual, trust, estate, partnership, association, company or corporation, and (ii) those persons who are related by blood or marriage to a person defined in (i), above. 1.27. "PROJECT" means the development, production, distribution and otherwise effectuating the economic exploitation of artistic properties in the form of one or more motion pictures, including, but not limited to, no fewer than two full length motion pictures, and incorporating themes related to physical fitness, self-defense, action and children. 1.28. "REGULATIONS" means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). 1.29. "SALE PROCEEDS" means all proceeds from any sale, exchange, foreclosure or abandonment of all, or substantially all, of the assets of the Partnership, or any portion of such proceeds, or proceeds from condemnation awards or casualty insurance claims, less applicable expenses and any debt paid or prepaid with the proceeds of, or in connection with, such transaction, which proceeds are not used to acquire Partnership assets or in the operation of the business of the Partnership, exclusive of proceeds accruing in the normal course of business. 1.30. "SECTION" means the designated section of this Agreement if no reference is specified; otherwise the designated section of the specified agreement, statute or regulation or the comparable provision of any successor agreement, statute or regulation. 1.31. "SUBSCRIPTION AGREEMENT" means the agreement between the Partnership and each Limited Partner pursuant to which the Limited Partner agrees to subscribe for one or more Units and the Partnership accepts the subscription. 1.32. "UNIT" means an interest in the capital of the Partnership contributed by the Limited Partners. The authorized number of Units of the Partnership is 160. 1.33. "YEAR" means the calendar year, except for the initial and final Year of the Partnership which may begin or end on a date other than January 1 and December 31, respectively. ARTICLE II ORGANIZATION 2.1. FORMATION. The parties hereto hereby form a limited partnership under and pursuant to the Act. As required by the Act, the General Partner and the Original Limited Partner shall promptly cause the Certificate to be filed on behalf of the Partnership as required under the Act. 7 2.2. QUALIFICATION. Promptly after the filing of the Certificate pursuant to the Act as set forth in Section 2.1, the General Partner shall take such action as shall be required by law to qualify the Partnership to transact business as a foreign limited partnership in such other places as shall be necessary to protect the status of the Partnership as a limited partnership, and as otherwise required by law. 2.3. NAME. The name of the Partnership is "HEP I, L.P." The business of the Partnership may be conducted under any name chosen by the General Partner, and the General Partner may, in its sole discretion from time to time, change the name of the Partnership. 2.4. PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Partnership shall be located at 1990 Westwood Boulevard, Third Floor, Los Angeles, California 90025, or at such other place as the General Partner may from time to time designate by written notice to the Limited Partners. The General Partner may establish such other places of business of the Partnership in addition to the Partnership's principal place of business when and where required by the Partnership's business and shall give prompt written notice thereof to the Limited Partners. 2.5. REGISTERED AGENT FOR SERVICE OF PROCESS AND REGISTERED OFFICE; PARTNERSHIP RECORDS. The agent for service of process on the Partnership in the State of Delaware shall be CT Corporation System. The address of the registered agent and the address of the registered office of the Partnership in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801. ARTICLE III BUSINESS The business to be conducted by the Partnership shall be the Project and to license ancillary rights to such motion pictures and to carry on any and all activities necessary, proper, convenient or advisable in connection therewith. ARTICLE IV TERM The term of the Partnership shall be from the date on which the Certificate was originally filed in accordance with the Act, and shall continue until the Final Percentage Interest Change Date, unless sooner terminated by law or as hereafter provided in this Agreement. 8 ARTICLE V NAMES AND ADDRESSES OF PARTNERS 5.1. GENERAL PARTNER. Hit Entertainment, Inc., a Delaware corporation, is the General Partner, and its principal places of business is 1200 AmSouth/Harbert Plaza, Birmingham, Alabama 35203. 5.2. ORGANIZATIONAL LIMITED PARTNER. J. Brooke Johnston, Jr., a resident of the State of Alabama, is the Organizational Limited Partner and his mailing address is 1200 AmSouth/Harbert Plaza, 1901 Sixth Avenue North, Birmingham, Alabama 35203. 5.3. LIMITED PARTNERS. The name, mailing address, the Limited Partnership Percentage or Capital Contribution of, the number of Units held by, and the social security or taxpayer identification number of, each Limited Partner of the Partnership is set forth in Appendix A attached to this Agreement, as amended from time to time, which is incorporated herein by reference and made a part hereof as though set out in full herein. Such information shall always be kept available to any Partner at the principal place of business of the Partnership. ARTICLE VI CAPITAL CONTRIBUTIONS AND ADDITIONAL WORKING CAPITAL 6.1. CAPITAL CONTRIBUTION OF THE GENERAL PARTNER. The General Partner has contributed to the capital of the Partnership the sum of $60,000, which has an Initial Gross Asset Value of and the General Partner's capital account will be credited in the amount of $50,000. The General Partner may make additional Capital Contributions from time to time. 6.2. CAPITAL CONTRIBUTION OF THE ORGANIZATIONAL LIMITED PARTNER. The Organizational Limited Partner has contributed $100 in cash to the capital ofthe Partnership upon the formation of the Partnership and shall be a Limited Partner solely to facilitate the formation of the Partnership. Such contribution shall be returned to him in cash on the day of the admission of any other Person or Persons as a Limited Partner or Limited Partners or upon the dissolution of the Partnership, whichever first occurs, at which time the Organizational Limited Partner shall cease to be a Limited Partner. 6.3. CAPITAL CONTRIBUTIONS OF THE LIMITED PARTNERS. It is contemplated by the parties to this Agreement that at some indeterminate time in the future, it will be in the best interest of the Partnership and its Partners to admit to the Partnership certain parties as Limited Partners. In such event, all Capital Contributions made by such Limited Partners shall be paid to and received by the Partnership and each Limited Partner, other than the Organizational Limited Partner, shall contribute money to the capital of the Partnership in the amount of $100 per Unit subscribed for under a Subscription Agreement. 9 6.4. WITHDRAWAL OF CAPITAL CONTRIBUTIONS. (a) Limited Partners. Subject to the provisions of Section 11.5, no Limited Partner (other than the Organizational Limited Partner) shall have the right to withdraw or reduce his Capital Contribution without the consent of the General Partner. No Limited Partner shall have the right to demand or receive property other than cash in return for his Capital Contribution, and, except as provided in Section 6.2, no Limited Partner (other than the Organizational Limited Partner) shall have priority over any other Limited Partner, either as to the return of his Capital Contribution or as to the allocation of income, gains, losses, deductions, credits or as to distributions. (b) General Partner. The General Partner will not withdraw its Capital Contribution prior to the dissolution and liquidation of the Partnership or sooner than the time the Limited Partners have withdrawn their Capital Contributions hereunder, whichever first occurs. 6.5. ASSESSMENTS. Limited Partners will not be subject to assessments for contributions to the capital of the Partnership in excess of the Capital Contribution required by Sections 6.2 and 6.3. ARTICLE VII EXPENSES OF THE PARTNERSHIP 7.1. NO COMPENSATION TO GENERAL PARTNER AS GENERAL PARTNER. The General Partner shall receive no direct compensation or fees for acting as the general partner of the Partnership. 7.2. REIMBURSEMENT OF EXPENSES INCURRED BY THE GENERAL PARTNER. The General Partner may charge the Partnership for all direct costs and expenses incurred by it in connection with the Partnership's business, including legal and accounting expenses. 7.3. ORGANIZATIONAL AND OFFERING EXPENSES. All expenses incurred in connection with the formation of the Partnership and obtaining the Partnership's capital shall be paid by the Partnership. ARTICLE VIII CAPITAL ACCOUNTS; ALLOCATION OF INCOME AND LOSS; CASH DISTRIBUTIONS 8.1. CAPITAL ACCOUNTS. A Capital Account shall be determined and maintained for each Partner. No interest shall be payable on the Capital Accounts of the Partners. The General Partner shall maintain a minimum balance in its Capital Account equal to one percent of the total positive balance of all Capital Accounts maintained for the Partners. 10 8.2. ALLOCATION OF NET INCOME OR NET LOSS. With respect to each Year, the General Partner shall be allocated the percentage of Net Income or Net Loss for such Year equal to the applicable General Partner's Percentage Interest, and the Limited Partners shall be allocated the percentage of Net Income or Net Loss for such Year equal to the applicable Limited Partners' Percentage Interest. 8.3. DISTRIBUTION OF AVAILABLE CASH FLOW AND PROPERTY OTHER THAN CASH. (a) The General Partner shall make distributions of Available Cash Flow in cash or assets of the Partnership in kind at such times as the General Partner, in its sole discretion, deems such distributions to be advisable and in the best interest of the Partnership to do so. Notwithstanding any contrary provision contained in this Agreement, to the extent any amount of a distribution of Available Cash Flow would create or increase a deficit in the capital account of any Partner, such amount shall not be distributed to such Partner, but shall be distributed to the other Partners in proportion to the amount of the distributions to such other Partners without regard to this proviso. The General Partner shall have the light to withhold any distribution of Available Cash Flow if it deems it to be in the best interest of the Partnership to do so. (b) With respect to each Year, distributions of Available Cash Flow for such Year shall be made to the General Partner in an amount equal to the General Partner's Percentage Interest of such distribution of Available Cash Flow and to the Limited Partners in an amount equal to the Limited Partners' Percentage Interest of such distribution of Available Cash Flow; provided, however, that such distributions of Available Cash Flow shall be made to the General Partner and Limited Partners taking into account their respective varying percentage interests which occur with respect to each such Year. (c) If assets other than cash are distributed by the Partnership, the capital accounts of the Partners shall be adjusted to reflect how much gain or loss would have been allocated to the respective Partners if the property had been sold at the value or values assigned thereto for purposes of making the distribution. 8.4. ALLOCATION OF GAIN FROM SALE AND DISTRIBUTION OF SALE PROCEEDS. The General Partner shall be allocated an amount of the Gain from Sale equal to the applicable General Partner's Percentage Interest, and the Limited Partners shall be allocated an amount of the Gain from Sale equal to the applicable Limited Partners' Percentage Interest. The General Partner shall make distributions of Sale Proceeds as soon after the receipt thereof by the Partnership as the General Partner deems practicable, such distributions to be made to the Partners in proportion to their respective capital accounts, taking into account the allocations of Gain from Sale set forth in this Section 8.4; provided, however, that to the extent that any amount of a cash distribution to any Partner would create or increase a deficit in the capital account of such Partner, such amount shall not be distributed to such Partner, but shall be distributed to the other Partners in proportion to the amounts distributed to such other Partners without regard to this provision. 11 8.5. CONSEQUENCES OF DISTRIBUTIONS. Upon the determination to distribute cash or property other than cash in any manner expressly provided in this Article VIII, made in good faith, the General Partner shall incur no liability on account of such distribution, even though such distribution may have resulted in the Partnership retaining insufficient funds for the operation of its business, which insufficiency resulted in loss to the Partnership or necessitated the borrowing of funds by the Partnership. 8.6. ALLOCATION OF NET INCOME, NET LOSS AND DISTRIBUTIONS IN RESPECT OF UNITS TRANSFERRED OR SOLD BY THE PARTNERSHIP. If one or more Units are transferred during any Year of the Partnership, the Net Income or Net Loss attributable to such Unit or Units for such Year shall be divided and allocated between the transferor and the transferee based on the time each such party was, according to the books and records of the Partnership, the owner of record of the Unit or Units transferred during the Year in which the transfer occurs. Distributions of Partnership assets in respect of Units shall be made only to persons who, according to the books and records of the Partnership, are the owners of such Units on a date selected by the General Partner. The General Partner and the Partnership shall incur no liability for making distributions in accordance with the provisions of the preceding sentence whether or not the General Partner or the Partnership has knowledge or notice of any transfer of ownership of any Unit or Units. For purposes of the foregoing, in the case of a transfer of a Unit, and also in the case of a sale of a Unit by the Partnership (except for the first time any Person or Persons other than the Organizational Limited Partner is admitted to the Partnership as a Limited Partner or Limited Partners), a Limited Partner who becomes a Limited Partner or who acquires a Unit according to the books and records of the Partnership after the 15th day of a month will be treated as becoming a Limited Partner or acquiring such Unit on the first day of the following month, and a Limited Partner who becomes a Limited Partner or who acquires a Unit according to the books and records of the Partnership during the first 15 days of a month shall be treated as becoming a Limited Partner or acquiring such Units on the first day of such month. In the case of a sale of a Unit by the Partnership (except for the first time any Person or Persons other than the Organizational Limited Partner is admitted to the Partnership as a Limited Partner or Limited Partners), the General Partner shall have the right to allocate Net Income and Net Loss to the purchaser of such Unit as of the date such purchaser fully executes and delivers a Subscription Agreement. 8.7. TAX ALLOCATIONS: CODE SECTION 704(C). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value (computed in accordance with Section 1.15). In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.15(ii), subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. 12 Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 8.7 are solely for purposes of federal, state, and local taxes and shall not affect or in any way be taken into account in computing, any Person's Capital Account or share of Net Income or Net Loss, other items or distributions pursuant to any provisions of this Agreement. ARTICLE IX RIGHTS, POWERS AND OBLIGATIONS OF THE GENERAL PARTNER 9.1. POWERS. The management and control of the Partnership and its business and affairs shall rest exclusively with the General Partner, which shall have all the rights and powers which may be possessed by a general partner pursuant to the Act, and such additional rights and powers as are otherwise conferred by law or are necessary, advisable or convenient to the discharge of its duties under this Agreement. The General Partner shall be the "tax matters partner" within the meaning of the Code. Without limiting the generality of the foregoing, the General Partner may, at the cost, expense and risk of the Partnership: (a) spend the capital and net income of the Partnership in the exercise of any rights or powers possessed by the General Partner hereunder pursuant to a production budget for the Project; (b) purchase, hold, manage, distribute and license the Partnership's property, and enter into agreements containing such terms, provisions and conditions as the General Partner in its discretion shall approve; (c) purchase from or through others contracts of liability, casualty and other insurance and a completion bond, which the General Partner deems advisable for the protection of the Partnership or for any purpose convenient or beneficial to the Partnership; (d) incur indebtedness in the ordinary course of business; (e) pledge, grant security interests in, hypothecate or otherwise encumber, under such terms and conditions as the General Partner deems admissible, the assets of the Partnership; (f) sell, distribute, license or otherwise dispose of, under such terms and conditions as the General Partner deems advisable for the Partnership, or for any purpose convenient or beneficial to the Partnership, any of the assets of the Partnership, including, without limitation, the Project; 13 (g) invest such funds as are temporarily not required for the purposes of the Partnership's operations in such investments as the General Partner, in its sole discretion, shall deem prudent; (h) negotiate employment contracts with principal artists and other talent which may contribute to the Project, including negotiating employment contracts providing for profits participation in the Project for such principal artists and other talent, provided, however, such profits participation shall be subordinated to the Limited Partners' right to the return of their total Capital Contribution pursuant to Section 1.24; (i) delegate all and any of its duties hereunder and, in furtherance of any delegation, appoint, employ, or contract with any person (including Affiliates of the General Partner) for the transaction of the business of the Partnership, which persons may, under the supervision of the General Partner, act as distributors, licensees, consultants, accountants, attorneys, brokers or in any other capacity deemed by the General Partner necessary or desirable, and pay appropriate fees to any of such persons. 9.2. INDEPENDENT ACTIVITIES. The General Partner may engage in whatever activities it chooses, whether or not the same be competitive with the Partnership, without having or incurring any obligation to offer any interest in such activities to the Partnership or any party hereto, and, as a material part of the consideration for the General Partner's execution hereof, for the admission of such Limited Partner, each Limited Partner hereby waives, relinquishes and renounces any such right or claim of participation. The Partnership shall be considered to be an entity and business wholly separate, for all purposes, from the business and affairs of the General Partner, it being understood that the only obligations undertaken by the General Partner are those expressly provided in this Agreement and those which are inherent to the role of a general partner. 9.3. DUTIES. The General Partner shall manage and control the Partnership, its business and affairs, including, without limitation, the Project, to the best of its ability and shall use its best efforts to carry out the business of the Partnership. The General Partner shall devote itself to the business of the Partnership to the extent that it, in its discretion, deems necessary for the efficient carrying on thereof The General Partner shall act as a fiduciary with respect to the safekeeping and use of the funds and assets of the Partnership. 9.4. CERTAIN LIMITATIONS. Without obtaining the consent of Limited Partners holding greater than 50% of the issued and outstanding Units, or such greater percentage of the issued and outstanding Units as is required under the Act, the General Partner shall not: (i) act in contravention of this Agreement; (ii) except as provided in Article XIII of this Agreement, do any act which would make it impossible to carry on the ordinary business of the Partnership; 14 (iii) confess a judgment against the Partnership; (iv) possess Partnership property, or assign any rights in specific Partnership property, including any assignment for the benefit of Partnership creditors, for other than a Partnership purpose; (v) admit a person as a Limited Partner other than as provided in this Agreement; (vi) amend this Agreement; (vii) dissolve the Partnership; (viii) sell, pledge or exchange all, or substantially all, of the assets of the Partnership; or (ix) remove a general partner of the Partnership. 9.5. NET WORTH OF THE GENERAL PARTNER. The General Partner shall have and maintain at all times during which it is the general partner of the Partnership a net worth which is sufficient to conduct the business of the Partnership in a prudent manner and to comply with any requirements of the Code or the regulations thereunder or interpretations of the Internal Revenue Service thereof necessary to avoid the taxation of the Partnership as an association taxable as a corporation. 9.6. INDEMNIFICATION. Neither the General Partner nor any of its Affiliates, officers, directors, employees or agents shall be liable to the Partnership or any Limited Partners for any action or inaction of the General Partner in connection with the business or affairs of the Partnership, so long as the person against whom liability is asserted acted in good faith on behalf of the Partnership and in a manner reasonably believed by such person to be in the best interests of the Partnership, but only if such course of conduct does not constitute gross negligence or willful misconduct. The General Partner and its Affiliates, officers, directors, employees and agents shall be indemnified and held harmless by the Partnership for any claim, liability, damage, loss, or other expense (including, without limitation, investigating and defending any claims and lawsuits and settlement thereof, and legal and accounting costs in connection therewith) incurred by them solely by virtue of the performance by any of them of the duties of the General Partner acting as general partner in connection with the Partnership's business, so long as such indemnified person acted in good faith on behalf of the Partnership and in a manner reasonably believed by such person to be in the best interests of the Partnership, but only if such course of conduct does not constitute gross negligence or willful misconduct; provided that such indemnification or agreement to hold harmless shall be recoverable only out of assets of the Partnership and not from the Limited Partners. 9.7. GENERAL PARTNER AS LIMITED PARTNER. The General Partner may be a Limited Partner to the extent that it (a) contributes capital under Section 6.3, or (b) purchases or 15 otherwise acquires or becomes the transferee of all or any part of a Limited Partnership Interest. The General Partner's Capital Contribution pursuant to Section 6.1 shall be made solely in its capacity as general partner and shall not entitle the General Partner to any rights as a Limited Partner. 9.8. SUCCESSION AS GENERAL PARTNER. The General Partner may at any time assign its General Partnership Interest to any subsidiary or other Affiliate of the General Partner without the consent of the Limited Partners. Any corporation into which the General Partner may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the General Partner shall be a party, shall be the successor of the General Partner hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In any such event, the General Partner shall amend the Certificate within 90 days thereafter. ARTICLE X STATUS OF LIMITED PARTNERS 10.1. NO PARTICIPATION IN MANAGEMENT. No Limited Partner shall take part in the management of the business of the Partnership, transact any business for the Partnership, have the power to sign for or to bind the Partnership to any agreement or document, or otherwise act as an agent for the Partnership for any purpose. Such powers to manage and transact Partnership business, to bind the Partnership or otherwise to act as the agent of the Partnership are vested solely and exclusively in the General Partner. 10.2. LIMITED LIABILITY. No Limited Partner shall have any personal liability whatsoever, whether to the Partnership, to the Partners or to the creditors of the Partnership, for the debts of the Partnership or any of its losses beyond the amount committed by him to the capital of the Partnership, as set forth in Section 6.2 and 6.3, and his undistributed balance in his Capital Account. Each Unit shall be fully paid and nonassessable, and no Limited Partner shall have any personal liability whatsoever to another Limited Partner on account of his Capital Contribution. ARTICLE XI TRANSFER OF INTERESTS IN THE PARTNERSHIP 11.1. IN GENERAL. Subject to the rights of first refusal granted to the General Partner, the Partnership and the Limited Partners below, a Limited Partner may sell, assign or otherwise transfer any or all of the Units owned by him; provided, however, that: (a) such Limited Partner and his purchaser, assignee or transferee execute, acknowledge and deliver to the General Partner such instruments of transfer and assignment with respect to such transaction as are in form and substance satisfactory to the General Partner; and 16 (b) such Limited Partner pays the Partnership a transfer fee which is sufficient to pay all reasonable expenses of the Partnership in connection with such transaction; provided, further, that such purchaser, assignee, or transferee shall not become a substituted Limited Partner within the meaning of the Act unless the General Partner consents in writing to such person's becoming a substituted Limited Partner, which consent may be given or withheld in the sole discretion of the General Partner. Neither the Partnership nor the General Partner shall recognize or be bound by any sale, assignment or transfer of any Unit unless the General Partner consents to such sale, assignment or transfer in writing. The General Partner will not consent to any sale, assignment or transfer of any Unit or to the admission of any person as a substituted Limited Partner if, in its opinion, such consent and substitution would result in the Partnership being treated for Federal income tax purposes as an association taxable as a corporation, would result in a termination of the Partnership within the meaning of the Code, or would constitute a violation of any applicable Federal or state law pertaining to securities regulation. Notwithstanding the foregoing, each Limited Partner agrees that at least 60 days prior to any sale, assignment or transfer (by operation of law or otherwise) of any Unit by it, such Limited Partner will give written notice thereof to the General Partner and all Limited Partners, including the name of the proposed purchaser, assignee or transferee and all of the terms, conditions and other material details of such proposed sale, assignment or transfer. The General Partner shall have a right of first refusal for its own account for 30 days after receipt by the General Partner of such written notice in which to elect to consummate such sale, transfer or assignment itself pursuant to the same terms, conditions and material details set forth in such notice. If the General Partner does so purchase the Unit, it may resell such Unit, at any time, on whatever terms and conditions it deems appropriate, to any Person without regard to the rights of first refusal set forth herein. If the General Partner fails to consummate the transaction during such 30-day period, the Partnership shall then have 10 days in which to consummate such sale, transfer or assignment pursuant to such terms, conditions and material details. The right of first refusal in the General Partner provided in this Section 11.1 shall be a right in each party designated as the "General Partner" in the first paragraph of this Agreement, or either of them if the other party designated the "General Partner" fails to exercise its rights thereunder, provided, however, that such disjunctive right in each party designated as the "General Partner" shall not expand the time periods provided for herein with respect to such right of first refusal, and further provided that such right, if jointly exercised by the parties designated the "General Partner", shall be proportionate to the interests in the Partnership of each party designated the "General Partner". If the Partnership does so purchase the Unit, it may resell such Unit, at any time, on whatever terms and conditions it deems appropriate, to any Person without regard to the rights of refusal set forth herein. If the Partnership fails to consummate the transaction during such 10-day period, the General Partner shall give written notice of such failure within two days of the expiration of the above 40-day period to all the Limited Partners. The Limited Partners shall then have 20 days from the end of the above 40-day period in which to consummate such sale, transfer or assignment pursuant to such terms, conditions and material details in proportion to the pro rata Limited 17 Partnership Interests of the Limited Partners participating in such purchase. If any Limited Partner does so purchase a Unit or Units, such Limited Partner may resell such Unit or Units only in accordance with the provisions of this Section 11.1. If none of the General Partner, the Partnership or the other Limited Partners consummate the transaction during such 60-day period, the selling Limited Partner shall then have 30 days from the end of such 60-day period in which to consummate such sale, transfer or assignment pursuant to such terms, conditions and material details and to such named purchaser. If the Limited Partner shall not consummate the sale, transfer or assignment during such 30-day period, such Unit shall again be subject to the rights of first refusal contained herein. 11.2. SUBSTITUTED LIMITED PARTNERS. If none of the General Partner, the Partnership or the Limited Partners exercise their rights of first refusal provided in Section 11.1 and the General Partner consents to the admission of a Person as a substituted Limited Partner within the meaning of the Act, and such Person: (a) elects to become a substituted Limited Partner by deliver- ing a written notice of such election to the General Partner; (b) executes and acknowledges such other instruments as the General Partner may deem necessary or admissible to effect the admission of such Person as a substituted Limited Partner, including, without limitation, the written acceptance and adoption by such Person of the provisions of this Agreement; and (c) pays the Partnership a transfer fee which is sufficient to pay all reasonable expenses of the Partnership in connection with the admission of such Person as a substituted Limited Partner within the meaning of the Act, including, without limitation, the cost of preparing, printing and filing for record an amendment to the Certificate in accordance with the Act; then the General Partner shall take all steps which, in the opinion of the General Partner, are reasonably necessary to admit such Person as a substituted Limited Partner under the Act. Such Person shall thereupon become a substituted Limited Partner within the meaning of the Act. 11.3. PURCHASE OF UNITS BY THE GENERAL PARTNER. The General Partner may acquire one or more Units owned by, or reserved for, Limited Partners, and, if with respect to such additional Unit or Units the General Partner becomes a Limited Partner within the meaning of the Act, the General Partner shall, with respect to such Unit or Units, enjoy all the rights and be subject to all the obligations and duties of a Limited Partner. Any Limited Partnership Interest owned by the General Partner may be sold, in whole or in part, by the General Partner, on whatever terms and conditions it deems appropriate, to any Person without regard to the rights of first refusal set forth in Section 11.1. 18 11.4. INVOLUNTARY TRANSFER OF PARTNER'S INTEREST. (a) If any Limited Partner, or more than 50% of the members, partners or shareholders of a Limited Partner which is not an individual, shall be adjudicated a bankrupt or make a general assignment for the benefit of creditors or take the benefit of any insolvency act, or if a permanent receiver or trustee in bankruptcy be appointed for any such Limited Partner's property, or if a temporary receiver be appointed for any Limited Partner and such appointment is not vacated or set aside within 60 days from the date of such appointment, or in the case of a Limited Partner which is not an individual, such Limited Partner shall be adjudicated a bankrupt or make a general assignment for the benefit of creditors or take the benefit of any insolvency act, or if a permanent receiver or trustee in bankruptcy be appointed for any such Limited Partner's property, or if a temporary receiver be appointed for any such Limited Partner and such appointment is not vacated or set aside within 60 days from the date of such appointment, or in the event of any attempted transfer or other devolution of the interest of any Limited Partner in the Partnership except as specifically provided herein, then such Limited Partner shall become a "defaulting Partner" (which term as used herein shall include any successor to or assignee of the defaulting Partner). (b) If any Limited Partner, or more than 50% of the members, partners or shareholders of a Limited Partner which is not an individual, shall die, or in the case of a Limited Partner which is not an individual, such Limited Partner shall dissolve, then such Limited Partner shall become an "involuntary defaulting Partner" (which term as used herein shall include any successor to or assignee of the involuntary defaulting Partner). (c) The General Partner, at its election, may cause the Partnership to purchase and, if so elected, the defaulting Partner or the involuntary defaulting Partner, as the case may be, shall sell the Limited Partnership Interest of the defaulting Partner or the involuntary defaulting Partner, as the case may be, in the Partnership at the prices and upon the terms specified in Section 11.5 at a closing which shall be held at the principal office of the Partnership within 120 days following the giving of written notice to the defaulting Partner or involuntary defaulting Partner of the election to purchase such Partner's Limited Partnership Interest after receiving appropriate releases and satisfactions. 11.5. PURCHASE PRICE OF DEFAULTING PARTNER'S INTEREST. If the General Partner shall elect to cause the Partnership to purchase the Limited Partnership Interest of a defaulting Partner or an involuntary defaulting Partner pursuant to Section 11.4, the purchase price shall equal the balance of the Capital Account related to said Limited Partnership Interest reduced by the amount of any obligation then due the Partnership by the defaulting Partner or involuntary defaulting Partner (all obligations of the defaulting Partner or involuntary defaulting Partner shall become immediately due and payable immediately preceding liquidation of the defaulting Partner's or the involuntary defaulting Partner's interest), and the excess (if any) of such obligations over the value of such Partner's interest shall be immediately due and payable to the Partnership by such Partner. 19 (a) At the closing ofthe transfer ofthe Limited Partnership Interest, the Partnership shall pay in cash to the defaulting Partner or the involuntary defaulting Partner 20% of the purchase price (net after reduction for any obligations owed by the Partner to the Partnership as above provided), and the balance of the purchase price shall be evidenced by the Partnership's nonnegotiable promissory note payable in eight approximately equal quarterly installments of principal, the first of which installments shall be due and payable three months after the closing, with the remainder being due and payable serially each three months thereafter. The unpaid balance shall bear interest at a rate equal to the lower of (x) the prime rate of Citibank, N.A., New York, New York on the date of closing, or (y) 9% per annum, payable quarterly with each installment of principal. The note shall contain provisions for (i) the acceleration of the entire unpaid balance of principal and accrued interest at the option of the holder in the event of default in payment of any principal or interest when due, (ii) the payment of reasonable attorneys' fees in the event of default, (iii) the prepayment of all or part of the unpaid principal (any prepayment being first applied to then accrued interest), and (iv) no prepayment during the taxable year in which the liquidation of the Limited Partnership Interest occurs. (b) All determinations and allocations required under this Section 11.5 shall be made by the Partnership's Accountants, and any such determination or allocation so made shall be binding on all parties. For the purpose of the computations required in determining the defaulting or involuntary defaulting Partner's Limited Partnership Interest, the books of the Partnership and its Affiliates shall be accepted as correct. (c) No payment other than those specifically provided for herein shall be due or payable with respect to the interest of the defaulting or involuntary defaulting Partner. Any debt due by the Partnership to the defaulting Partner or involuntary defaulting Partner, as the case may be, shall be payable according to its terms. ARTICLE XII RESIGNATION OF THE GENERAL PARTNER 12.1. NO RESIGNATION OF THE GENERAL PARTNER. The General Partner may not resign as general partner of the Partnership. 12.2. LIABILITY OF THE GENERAL PARTNER AFTER RESIGNATION. If, notwithstanding the provisions of Section 12.1, the General Partner resigns as such, its liability as a general partner shall cease upon the appointment of a successor General Partner pursuant to Section 12.3, and the Partnership shall promptly take all steps reasonably necessary under the Act to cause such cessation of liability, provided, however, that, if no successor General Partner is appointed pursuant to Section 12.3, the General Partner shall remain the General Partner of the Partnership for purposes of the winding up of the Partnership pursuant to Section 13.2. Upon its resignation, the General Partner shall not receive its Capital 20 Contribution, nor the repayment of any indebtedness of the Partnership owed it, nor any undistributed balance in its capital account nor its share of any Sale Proceeds as otherwise provided for in Article VIII hereof. 12.3. APPOINTMENT OF SUCCESSOR GENERAL PARTNER. Subject to Section 13.1(i), at any time during the 90-day period after any notice of resignation given by the General Partner, the Limited Partners may, by the affirmative vote of Limited Partners holding 51% of the issued and outstanding Units, voting at a meeting called in accordance with Article XVI hereof, elect a successor General Partner to serve beginning immediately upon the effectiveness of the resignation of the General Partner. ARTICLE XIII DISSOLUTION AND WINDING UP OF THE PARTNERSHIP 13.1. DISSOLUTION OF THE PARTNERSHIP. The resignation of either party designated as the General Partner in the first paragraph of this Agreement shall cause a dissolution of the Partnership unless (i) the other party designated as the General Partner in the first paragraph of this Agreement elects to serve as the sole General Partner and continue the Partnership, or (ii) a successor General Partner is appointed pursuant to Section 12.3. The Partnership shall also be dissolved upon (a) the final judgment by a court having jurisdiction over the General Partner adjudicating either party designated as the General Partner in the first paragraph of this Agreement to be bankrupt, or (b) the expiration of the term of the Partnership. In no event shall the death of any Limited Partner result in dissolution of the Partnership. 13.2. WINDING UP OF THE PARTNERSHIP. Upon the dissolution of the Partnership, the General Partner shall take full account of the Partnership's assets and liabilities and the assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof The proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed as provided in the Act; provided, however, that after payment of all Partnership debts, obligations and liabilities, there shall be distributed to each Partner the balance in his capital account, and the remaining assets of the Partnership, if any, shall be distributed according to the Partners' percentage interest in the Partnership. 13.3. COMPLIANCE WITH CERTAIN REQUIREMENTS OF REGULATIONS. In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article XIII to the Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2), and (b) if any Partner's Capital Account has a deficit balance (after giving effect to all contributions, distributions, and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3). In the discretion of the General Partner, a pro 21 rata portion of the distributions that would otherwise be made to the Partners pursuant to Section 13.2 may be: (a) distributed to a trust established for the benefit of the Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the Partners from time to time, in the reasonable discretion of the General Partner, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the Partners pursuant to this Agreement; or (b) withheld to provide a reasonable reserve of Partnership liabilities (contingent or otherwise) and to reflect the unreaLized portion of any installment obligations owed to the Partnership, provided that such withheld amounts shall be distributed to the Partners as soon as practicable. ARTICLE XIV BOOKS OF ACCOUNT, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX ELECTION 14.1. BOOKS OF ACCOUNT. The Partnership's books and records (including a current list of the names and addresses of all Limited Partners) and an executed copy of this Agreement, as currently in effect, shall be maintained at the principal office of the Partnership at 1990 Westwood Boulevard, Third Floor, Los Angeles, California 90025, and each Partner shall have access thereto at all reasonable times. The books and records of the Partnership shall be kept by the General Partner using the income tax basis method of accounting consistently applied, which shall be the cash method of accounting, if allowed under the Code, and shall reflect all Partnership transactions and be appropriate and adequate for the Partnership's business. The General Partner shall also keep adequate Federal income tax records using an appropriate method of tax accounting, which shall be the cash method of accounting, if allowed under the Code, on a basis consistently applied. Each Limited Partner hereby agrees to submit to the General Partner the name, address and social security or taxpayer identification number of a transferee of the Limited Partner and the date of transfer of the Unit or Units so transferred. 14.2. FINANCIAL REPORTS. The Partnership will send the following reports to each Person who was a Partner during the period covered by such report: (a) A report within 90 days after the end of each Year of the Partnership containing all information necessary for the preparation of the Partner's Federal and state income tax returns; (b) An annual report within 120 days after the end of each Year of the Partnership containing (i) a balance sheet as of the end of the fiscal year, a statement 22 of income and a cash flow statement for the year then ended, all of which, except for the cash flow statement, shall be prepared in accordance with federal income tax principles, and (ii) a report of the activities of the Partnership during the period covered by the report. Such report will set forth distributions to the Limited Partners for the period covered thereby, and shall separately identify distributions of Available Cash Flow, whether such be in cash or non-cash assets during the period, amounts which had been held as reserves, and proceeds from disposition or sublease of assets, if any. The report shall also include a detailed statement of any transaction with the General Partner of the Partnership or its Affiliates and of commissions, compensation and other benefits paid, or accrued to such General Partner or its Affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed; and (c) Semi-annual progress reports on the operations of the Partnership. 14.3. FISCAL YEAR. The fiscal year of the Partnership shall be the Year, as defined in Section 1.32. 14.4. BANKING. All funds of the partnership shall be initially deposited in a separate bank account or accounts or in an account or accounts of a savings and loan association as shall be determined by the General Partner, but such funds may be invested as provided in Section 9.1(g). 14.5. TAX ELECTION. Upon the transfer of an interest in the Partnership or in the event of a distribution of the Partnership's property, the Partnership may elect, but is not required to elect, pursuant to Section 754 of the Code to adjust the basis of the Partnership's property as allowed by Sections 734(b) and 743(b) thereof The General Partner shall have the sole authority and discretion to make such an election. There shall be no requirement that the General Partner make such an election. 14.6. TAX RETURNS. The General Partner shall, for each fiscal year, file on behalf of the Partnership with the Internal Revenue Service a Partnership Return within the time prescribed by law (including any extensions) for such filing. The General Partner shall also file on behalf of the Partnership such state and/or local tax returns as may be required by law. ARTICLE XV POWER OF ATTORNEY 15.1. APPOINTMENT OF ATTORNEY-IN-FACT. Each Limited Partner hereby makes, constitutes and appoints the General Partner and any officer thereof, with full power of substitution and resubstitution, his agent and attorney-in-fact to file for record the Certificate as required by the Act, and to sign, execute, certify, acknowledge, and file for record any other instruments which may be required of the Partnership or of the Limited Partners by law, including, but not limited to, amendments to or cancellations of the 23 Certificate and specifically including the amendments to the Agreement admitting Limited Partners to the Partnership as Limited Partners. Each Limited Partner authorizes such attorney-in-fact to take any further action which such attorney-in-fact shall consider necessary or advisable in connection with the foregoing, hereby giving such attorney-in-fact full power and authority to act to the same extent as if such Limited Partner were himself personally present and hereby ratifying and confirming all that such attorney-in-fact shall lawfully do or cause to be done by virtue hereof. 15.2. EFFECT OF POWER. The power of attorney pursuant to Section 15.1: (a) is a special power of attorney, coupled with an interest, is irrevocable, and shall survive the death, insanity, or incapacity of the granting Limited Partner; (b) may be exercised by such attorney-in-fact for each Limited Partner by listing all of the Limited Partners executing any agreement, certificate, instrument or document with the single signature of such attorney-in-fact as attorney-in-fact for all of them; and (c) shall survive the delivery of an assignment by a Limited Partner of the whole or a portion of his interest in the Partnership, except that where the purchaser, transferee or assignee thereof is to be admitted as a substituted Limited Partner, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling such attorney-in-fact to sign, execute, certify, acknowledge, and file any such agreement, certificate, instrument, or document necessary to effect such substitution. ARTICLE XVI MEETINGS AND MEANS OF VOTING Meetings of the Partners may be called by the General Partner, or by Limited Partners holding at least 50% of the issued and outstanding Units for any matter specified in Section 9.4. The General Partner shall call a meeting of the Partners to be held not later than 60 days following the receipt by the General Partner of any notice of adjustments of Partnership income or expenses issued by the Internal Revenue Service in connection with an audit of any Partnership Return, such meeting to determine the appropriate action to be taken, including, without limitation, the forum of any litigation contesting the notice. The notice of any meeting called under this Article XVI shall state the nature of the business to be transacted. Notice of any such meeting shall be delivered by the General Partner within ten days of its calling to all Partners in the manner prescribed in Section 17.1, and such meeting shall be held not less than 15 days nor more than 60 days after the date of such notice. Partners may vote in person or by proxy at any such meeting. Any matters presented to the Limited Partners for their vote shall be determined by Limited Partners holding 50% of the issued and outstanding Units or such greater percentage of the issued and outstanding Units as is required under the Act or this Agreement. Each Unit shall be entitled to one vote on all such matters. Whenever the vote or consent of Partners 24 is permitted or required under this Agreement, such vote or consent may be given at a meeting of Partners or may be given in writing in accordance with the procedure for obtaining written votes prescribed in Section 17.1. ARTICLE XVII MISCELLANEOUS 17.1. NOTICE. Except as otherwise specifically provided in this Agreement, any notice, payment, demand or communication required or permitted to be given by any provision of this Agreement shall be duly given if delivered in writing personally to the person to whom it is directed, or if sent by mail or telegraph, as follows: if to the General Partner, at its address set forth in Section 5.1 or to such other address as the General Partner may from time to time specify by written notice to the Limited Partners pursuant to this Section 17.1, and if to a Limited Partner, at such Limited Partner's address set forth in Appendix A hereto, or to such other address as such Limited Partner may from time to time specify by written notice to the General Partner and all other Limited Partners pursuant to this Section 17.1. Any such notice shall be deemed to be given as of the date so delivered, if delivered personally, or as of the date on which the same was deposited in the United States mail, postage prepaid, addressed and sent as aforesaid. 17.2. ADDITIONAL BUSINESSES. The General Partner shall be permitted to manage or OWD additional businesses even though such businesses may compete with the business of the Partnership, including, without limitation, the Project. 17.3. SECTION CAPTIONS. Section and other captions contained in this Agreement are for reference purposes only and are in no way intended to describe, interpret, define or limit the scope, extent, or intent of this Agreement or any provision hereof 17.4. SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. 17.5. AMENDMENTS. Amendments to this Agreement may be proposed by the General Partner. Following such proposal, the General Partner shall submit to the Limited Partners a verbatim statement of any proposed amendment and may include in any such submission its recommendation as to the proposed amendment. The General Partner shall seek the written vote of the Limited Partners on the proposed amendment or shall call a meeting of the Partners pursuant to Article XVI of this Agreement to vote thereon and to transact any other business permitted by the Act to be transacted by the Limited Partners that they may deem appropriate. For purposes of obtaining a written vote, the General Partner may require response within a specified time, but not less than 30 days, and failure to respond in such time shall constitute a vote which is consistent with the General Partner's recommendation with respect to the proposal. A proposed amendment shall be adopted and effective as an amendment to this Agreement if it receives the affirmative vote of 25 Limited Partners holding 50% of the issued and outstanding Units or such greater percentage of the issued and outstanding Units as is required under the Act. 17.6. RIGHT TO RELY UPON THE AUTHORITY OF THE GENERAL PARTNER. No person dealing with the General Partner shall be required to determine its authority to make any commitment or undertaking on behalf of the Partnership, nor to determine any fact or circumstance bearing upon the existence of its authority. In addition, no purchaser of any property of the Partnership shall be required to determine the sole and exclusive authority of the General Partner to sign and deliver on behalf of the Partnership any such installment of transfer, or to see to the application or distribution of revenues or proceeds paid or credited in connection therewith, unless such purchaser shall have received written notice from the Partnership affecting the same. 17.7. GOVERNING LAW. The laws of the State of Delaware shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereto. 17.8. WAIVER OF ACTION FOR PARTITION. Each Partner irrevocably waives during the term of the Partnership, and during the period of its liquidation following any dissolution, any right to maintain any action for partition with respect to any of the assets of the Partnership. 17.9. COUNTERPART EXECUTION. This Agreement may be executed in one or more counterparts all of which together shall constitute one and the same Agreement. 17.10. PARTIES IN INTEREST. Except as provided in Article XI of this Agreement, this Agreement shall be binding upon the parties hereto and their successors, heirs, designees, assigns, legal representatives, executors and administrators. 17.11. CONSTRUCTION OF PRONOUNS. The feminine or neuter of the words "he", "his" and "him" used herein shall be automatically deemed to have been substituted for such words where appropriate to the particular Limited Partner or Organizational Limited Partner executing this Agreement. 17.12. INTEGRATED AGREEMENT. This Agreement constitutes the entire understanding and agreement among the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, restrictions, representations or warranties among the parties other than those set forth herein or herein provided for. 26 IN WITNESS WHEREOF, the undersigned parties have hereto set their hands as of the day and year first above written. GENERAL PARTNER HIT ENTERTAINMENT, INC. By /s/ Brian Shuster ------------------------------ Brian Shuster Its President /s/ J. Brooke Johnston, Jr. --------------------------------- J. Brooke Johnston, Jr. Organizational Limited Partner 27 EX-10.10 12 EXHIBIT 10.10 Exhibit 10.10 THE PARTNERSHIP INTERESTS ISSUED UNDER THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES ACT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION UNLESS, IN THE OPINION OF COUNSEL TO THE GENERAL PARTNER, SUCH REGISTRATION IS NOT REQUIRED. AGREEMENT OF LIMITED PARTNERSHIP OF HEP II, L.P. This AGREEMENT OF LIMITED PARTNERSHIP is made and entered into as of March 4, 1996, by and between Hit Entertainment, Inc., a Delaware corporation (the "General Partner"), and Master Glazier's Karate International, Inc., a Delaware corporation, as the original limited partner (the "Original Limited Partner"), and those other parties who from time to time may become limited partners pursuant to the provisions of this Agreement by execution and delivery of this Agreement or counterparts hereof (hereinafter referred to collectively as the "Limited Partners" and referred to individually as a "Limited Partner"). W I T N E S S E T H: WHEREAS, the General Partner and the Original Limited Partner have created the Partnership, and the parties hereto desire to set forth their respective interests in and all rights, duties and obligations in and to the Partnership, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises, and the mutual covenants and promises hereinafter set forth, the parties to this Agreement of Limited Partnership do hereby agree as follows: ARTICLE I DEFINED TERMS The following defined terms used in this Agreement shall have the meanings specified below: 1.1. "ACCOUNTANTS" means any firm of certified public accountants that may be engaged by the General Partner on behalf of the Partnership for any task. 1.2. "ACT" means the Delaware Revised Uniform Limited Partnership Act (6 Del. C. 6, 17-101, et seq.), and now in effect and as the same may be amended from time to time hereafter. 1.3. "AFFILIATE" means (a) any Person directly or indirectly controlling, controlled by or under common control with, another Person, (b) any Person owning or controlling 10% or more of the outstanding voting securities of such other Person, (c) any officer, director or partner of such Person, or (d) if such other Person is an officer, director or partner, any company for which such Person acts in any such capacity. 1.4. "AGREEMENT" means this Agreement of Limited Partnership, as amended, modified or supplemented from time to time. 1.5. "AVAILABLE CASH FLOW" means all cash and cash equivalent funds of the Partnership on hand at the end of each Year, less (a) provision for payment of all outstanding and unpaid current cash obligations of the Partnership at the end of such year (including those which are in dispute), including, but not limited to, deferred contingent payments due to principal artists and other talent contributing to the Project, and (b) provisions for reserves for reasonably anticipated cash expenses and contingencies (which include debt service on indebtedness of the Partnership, if any, and amounts payable to the General Partner and Affiliates of the General Partner), not including, but not limited to, provisions for depreciation, amortization and other non-cash expenses; provided, however, that Sale Proceeds shall not be included in Available Cash Flow. 1.6. "CAPITAL ACCOUNT" means, with respect to any Partner, the Capital Account maintained for such Person in accordance with the following provisions: (i) To each Person's Capital Account there shall be credited such Person's Capital Contributions, such Person's distributive share of Net Income and any items in the nature of income or gain that are specially allocated hereunder to such Person, and the amount of any Partnership liabilities assumed by such Person or which are secured by any Partnership property distributed to such Person. (ii) To each Person' s Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Partnership property distributed to such Person pursuant.to any provision of this Agreement, such Person's distributive share of Net Loss and any items in the nature of expenses or losses that are specially 2 allocated hereunder to such Person, and the amount of any liabilities of such Person assumed by the Partnership or which are secured by any property contributed by such Person to the Partnership. (iii) In the event any interest in the Partnership is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (iv) In determining the amount of any liability for purposes of Sections 1.6(i) and (ii) hereof, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities that are secured by contributed or distributed property or that are assumed by the Partnership or the General Partner), are computed in order to comply with such Regulations, the General Partner may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Article XIII hereof upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-l(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events (for example, the acquisition by the Partnership of oil or gas properties) might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). 1.7. "CAPITAL CONTRIBUTION" in respect of any Partner or transferee of such Partner means the amount of money and the initial Gross Asset Value of any property (other than money), tangible or intangible, contributed by such Partner to the capital of the Partnership. 1.8. "CERTIFICATE" means the Certificate of Limited Partnership of the Partnership filed pursuant to the Act, as amended from time to time. 1.9. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 1.10. "DEPRECIATION" means, for each Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Year bears to such 3 beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. 1.11. "FINAL PERCENTAGE" Interest Change Date means the day following the earlier to occur of (i) seven years following the date of this Agreement, or (ii) the date as of which the cumulative amount of Available Cash Flow distributed to the Limited Partners by the Partnership equals 200% of the total Capital Contributions of the Limited Partners. 1.12. "GAIN FROM SALE" means gain or loss, as the case may be, determined m accordance with the rules of determining Federal taxable income, gain or loss, arising from a transaction giving rise to Sale Proceeds. 1.13. "GENERAL PARTNER" means the parties designated as the "General Partner" in the first paragraph of this Agreement, including any successor general partner or general partners substituted pursuant to the provisions of this Agreement. 1.14. "GENERAL PARTNER'S PERCENTAGE INTEREST" means (i) 1% until the Percentage Interest Change Date, (ii) 50% upon and after the Percentage Interest Change Date and (iii) 100% upon and after the Final Percentage Interest Change Date. 1.15. "GENERAL PARTNERSHIP INTEREST" means the entire interest of the General Partner in the Partnership, including the General Partner's Percentage Interest in capital, income, gains, losses, deductions, credits and distributions of the Partnership, the General Partner's right to participate in the management of the Partnership and all other rights and obligations accorded under this Agreement or under the Act. 1.16. "GROSS ASSET VALUE" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the Partnership; (ii) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership (other than pursuant to Section 6.3 hereof) by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property as consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Regulations Section 1.704- 1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner reasonably determines that such 4 adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (iii) The Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and (iv) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this Section 1.15(iv) to the extent the General Partner determines that an adjustment pursuant to Section 1.15(ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.15(iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to Section 1.15(i), Section 1.15(ii), or Section 1.15(iv) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Loss. 1.17. "LIMITED PARTNERS" means the Persons who are, from time to time, admitted to the Partnership as Limited Partners, and whose names, mailing addresses, Limited Partnership Percentage or Capital Contribution, number of Units held by, and social security or taxpayer identification numbers appear in Appendix A to this Agreement, as amended from time to time, including, unless the context otherwise specifically states, the Organizational Limited Partner. Such Persons shall become Limited Partners when a duly executed Subscription Agreement, or such other instrument or document as the General Partner may require, has been accepted by the General Partner, except as otherwise required by law. 1.18. "LIMITED PARTNERS' PERCENTAGE INTEREST" means (i) 99% until the Percentage Interest Change Date, (ii) 50% upon and after the Percentage Interest Change Date and (iii) 0% upon and after the Final Percentage Interest Change Date. 1.19. "LIMITED PARTNERSHIP INTEREST" means the entire interest of a Limited Partner in the Partnership expressed in Units, including such Limited Partner' s interest in the Limited Partners' Percentage Interest in capital, income, gains, losses, deductions, credits and distributions of the Partnership. 1.20. "NET INCOME" and "NET LOSS" means, for each Year, an amount equal to the Partnership' s taxable income or loss for such Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: 5 (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Income and Net Loss pursuant to this Section 1.19 shall be added to such taxable income or loss; (ii) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Income or Net Loss pursuant to this Section 1.19, shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.15(ii) or Section 1.15(iv) hereof, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Loss; (iv) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.10 hereof; and (vi) Notwithstanding any other provision of this Section 1.19, any items which are specially allocated hereunder to any Person shall not be taken into account in computing Net Income or Net Loss. 1.21. "ORIGINAL LIMITED PARTNER" means any party designated as an "Original Limited Partner" in the first paragraph of this Agreement. 1.22. "PARTNERS" means, collectively, the General Partner and the Limited Partners. 1.23. "PARTNERSHIP" means the limited partnership formed pursuant to this Agreement by the filing of the Certificate pursuant to the Act. 1.24. "PARTNERSHIP RETURN" means the United States Partnership Information Return of Income of the Partnership. 1.25. "PERCENTAGE INTEREST CHANGE DATE" means the day following the date as of which the cumulative amount of Net Losses allocated to and Available Cash Flow distributed to the Partners equals 110% of the total Capital Contributions of the Partners. 6 1.26. "PERSON" means (i) a person as that term is defined in Section 7701(a)(1) of the Code, namely, an individual, trust, estate, partnership, association, company or corporation, and (ii) those persons who are related by blood or marriage to a person defined in (i), above. 1.27. "PROJECT" means the development, production, distribution and otherwise effectuating the economic exploitation of artistic properties in the form of one or more motion pictures, including, but not limited to, no fewer than two full length motion pictures, and incorporating themes related to physical fitness, self-defense, action and children. 1.28. "REGULATIONS" means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). 1.29. "SALE PROCEEDS" means all proceeds from any sale, exchange, foreclosure or abandonment of all, or substantially all, of the assets of the Partnership, or any portion of such proceeds, or proceeds from condemnation awards or casualty insurance claims, less applicable expenses and any debt paid or prepaid with the proceeds of, or in connection with, such transaction, which proceeds are not used to acquire Partnership assets or in the operation of the business of the Partnership, exclusive of proceeds accruing in the normal course of business. 1.30. "SECTION" means the designated section of this Agreement if no reference is specified; otherwise the designated section of the specified agreement, statute or regulation or the comparable provision of any successor agreement, statute or regulation. 1.31. "SUBSCRIPTION AGREEMENT" means the agreement between the Partnership and each Limited Partner pursuant to which the Limited Partner agrees to subscribe for one or more Units and the Partnership accepts the subscription. 1.32. "UNIT" means an interest in the capital of the Partnership contributed by the Limited Partners. The authorized number of Units of the Partnership is 160. 1.33. "YEAR" means the calendar year, except for the initial and final Year of the Partnership which may begin or end on a date other than January 1 and December 31, respectively. ARTICLE II ORGANIZATION 2.1. FORMATION. The parties hereto hereby form a limited partnership under and pursuant to the Act. As required by the Act, the General Partner and the Original Limited Partner shall promptly cause the Certificate to be filed on behalf of the Partnership as required under the Act. 7 2.2. QUALIFICATION. Promptly after the filing of the Certificate pursuant to the Act as set forth in Section 2.1, the General Partner shall take such action as shall be required by law to qualify the Partnership to transact business as a foreign limited partnership in such other places as shall be necessary to protect the status of the Partnership as a limited partnership, and as otherwise required by law. 2.3. NAME. The name of the Partnership is "HEP II, L.P." The business of the Partnership may be conducted under any name chosen by the General Partner, and the General Partner may, in its sole discretion from time to time, change the name of the Partnership. 2.4. PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Partnership shall be located at 1990 Westwood Boulevard, Third Floor, Los Angeles, California 90025, or at such other place as the General Partner may from time to time designate by written notice to the Limited Partners. The General Partner may establish such other places of business of the Partnership in addition to the Partnership's principal place of business when and where required by the Partnership's business and shall give prompt written notice thereof to the Limited Partners. 2.5. REGISTERED AGENT FOR SERVICE OF PROCESS AND REGISTERED OFFICE; PARTNERSHIP RECORDS. The agent for service of process on the Partnership in the State of Delaware shall be CT Corporation System. The address of the registered agent and the address of the registered office of the Partnership in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801. ARTICLE III BUSINESS The business to be conducted by the Partnership shall be the Project and to license ancillary rights to such motion pictures and to carry on any and all activities necessary, proper, convenient or advisable in connection therewith. In conducting its business, the Partnership shall use personnel of the Original Limited Partner in both on-screen and technical advisory roles. In addition, when feasible, the Partnership will incorporate the name, logo, and personnel and/or students of the Original Limited Partner in the Project. ARTICLE IV TERM The term of the Partnership shall be from the date on which the Certificate was originally filed in accordance with the Act, and shall continue until the Final Percentage Interest Change Date, unless sooner terminated by law or as hereafter provided in this Agreement. 8 ARTICLE V NAMES AND ADDRESSES OF PARTNERS 5.1. GENERAL PARTNER. Hit Entertainment, Inc., a Delaware corporation, is the General Partner, and its principal places of business is 1200 AmSouth/Harbert Plaza, Birmingham, Alabama 35203. 5.2. ORIGINAL LIMITED PARTNER AND LIMITED PARTNERS. The name, mailing address, the Limited Partnership Percentage or Capital Contribution of, the number of Units held by, and the social security or taxpayer identification number of, each Original Limited Partner and Limited Partner of the Partnership is set forth in Appendix A attached to this Agreement, as amended from time to time, which is incorporated herein by reference and made a part hereof as though set out in full herein. Such information shall always be kept available to any Partner at the principal place of business of the Partnership. ARTICLE VI CAPITAL CONTRIBUTIONS AND ADDITIONAL WORKING CAPITAL 6.1. CAPITAL CONTRIBUTION OF THE GENERAL PARTNER. The General Partner has contributed to the capital of the Partnership the sum of $1,000, which has an Initial Gross Asset Value of and the General Partner' s capital account will be credited in the amount of $1,000. The General Partner may make additional Capital Contributions from time to time. 6.2. CAPITAL CONTRIBUTION OF THE ORIGINAL LIMITED PARTNER. The Original Limited Partner has contributed $1,500,000 in cash to the capital of the Partnership upon the formation of the Partnership. Such contribution shall be returned to the Original Limited Partner in the event that an additional $1,500,000 in capital is not contributed by additional Limited Partners within SiXtY (60) days after the effective date of this Agreement. 6.3. CAPITAL CONTRIBUTIONS OF THE LIMITED PARTNERS. It is contemplated by the parties to this Agreement that at some indeterminate time in the future, it will be in the best interest of the Partnership and its Partners to admit to the Partnership certain parties as Limited Partners. In such event, all Capital Contributions made by such Limited Partners shall be paid to and received by the Partnership and each Limited Partner, other than the Organizational Limited Partner, shall contribute money to the capital of the Partnership in the amount of $25,000 per Unit subscribed for under a Subscription Agreement. 6.4. WITHDRAWAL OF CAPITAL CONTRIBUTIONS. (a) Limited Partners. Subject to the provisions of Section 11.5, no Limited Partner shall have the right to withdraw or reduce his Capital Contribution without the consent of the General Partner. No Limited Partner shall have the right to demand or 9 receive property other than cash in return for his Capital Contribution, and, except as provided in Section 6.2, no Limited Partner (other than the Original Limited Partner) shall have priority over any other Limited Partner, either as to the return of his Capital Contribution or as to the allocation of income, gains, losses, deductions, credits or as to distributions. (b) General Partner. The General Partner will not withdraw its Capital Contribution prior to the dissolution and liquidation of the Partnership or sooner than the time the Limited Partners have withdrawn their Capital Contributions hereunder, whichever first occurs. 6.5. ASSESSMENTS. Limited Partners will not be subject to assessments for contributions to the capital of the Partnership in excess of the Capital Contribution required by Sections 6.2 and 6.3. 6.6. INTEREST ON CAPITAL. Interest equal to seven percent (7%) shall be paid quarterly on Capital Contributions to the Partnership. 6.7. NO VOLUNTARY CAPITAL CONTRIBUTIONS. No Limited Partner shall have the right to make voluntary Capital Contributions to the Partnership. 6.8. WORKING CAPITAL LOANS. The General Partner shall make or arrange for such loans as are necessary or desirable, in the sole discretion of the General Partner, to meet the working capital needs of the Partnership. Such loans shall be on such terms as the General Partner, in its sole discretion, shall deem reasonable; provided, however, that any loans made by the General Partner shall be on terms no less favorable than those that the Partnership could obtain from an unaffiliated lender. ARTICLE VII EXPENSES OF THE PARTNERSHIP 7.1. NO COMPENSATION TO GENERAL PARTNER AS GENERAL PARTNER. The General Partner shall receive no direct compensation or fees for acting as the general partner of the Partnership. 7.2. REIMBURSEMENT OF EXPENSES INCURRED BY THE GENERAL PARTNER. The General Partner may charge the Partnership for all direct costs and expenses incurred by it in connection with the Partnership's business, including legal and accounting expenses. 7.3. ORGANIZATIONAL AND OFFERING EXPENSES. All expenses incurred in connection with the formation of the Partnership and obtaining the Partnership's capital shall be paid by the Partnership. 10 ARTICLE VIII CAPITAL ACCOUNTS; ALLOCATION OF INCOME AND LOSS; CASH DISTRIBUTIONS 8.1. CAPITAL ACCOUNTS. A Capital Account shall be determined and maintained for each Partner. No interest shall be payable on the Capital Accounts of the Partners. The General Partner shall maintain a minimum balance in its Capital Account equal to one percent of the total positive balance of all Capital Accounts maintained for the Partners. 8.2. ALLOCATION OF NET INCOME OR NET LOSS. With respect to each Year, the General Partner shall be allocated the percentage of Net Income or Net Loss for such Year equal to the applicable General Partner's Percentage Interest, and the Limited Partners shall be allocated the percentage of Net Income or Net Loss for such Year equal to the applicable Limited Partners' Percentage Interest. 8.3. DISTRIBUTION OF AVAILABLE CASH FLOW AND PROPERTY OTHER THAN CASH. (a) The General Partner shall make distributions of Available Cash Flow in cash or assets of the Partnership in kind at such times as the General Partner, in its sole discretion, deems such distributions to be advisable and in the best interest of the Partnership to do so. Notwithstanding any contrary provision contained in this Agreement, to the extent any amount of a distribution of Available Cash Flow would create or increase a deficit in the capital account of any Partner, such amount shall not be distributed to such Partner, but shall be distributed to the other Partners in proportion to the amount of the distributions to such other Partners without regard to this proviso. The General Partner shall have the right to withhold any distribution of Available Cash Flow if it deems it to be in the best interest of the Partnership to do so. (b) With respect to each Year, distributions of Available Cash Flow for such Year shall be made to the General Partner in an amount equal to the General Partner's Percentage Interest of such distribution of Available Cash Flow and to the Limited Partners in an amount equal to the Limited Partners' Percentage Interest of such distribution of Available Cash Flow; provided, however, that such distributions of Available Cash Flow shall be made to the General Partner and Limited Partners taking into account their respective varying percentage interests which occur with respect to each such Year. (c) If assets other than cash are distributed by the Partnership, the capital accounts of the Partners shall be adjusted to reflect how much gain or loss would have been allocated to the respective Partners if the property had been sold at the value or values assigned thereto for purposes of making the distribution. 8.4. ALLOCATION OF GAIN FROM SALE AND DISTRIBUTION OF SALE PROCEEDS. The General Partner shall be allocated an amount of the Gain from Sale equal to the applicable General Partner's Percentage Interest, and the Limited Partners shall be allocated an amount of the Gain from Sale equal to the applicable Limited Partners' Percentage Interest. The General Partner shall make distributions of Sale Proceeds as soon after the receipt thereof by the 11 Partnership as the General Partner deems practicable, such distributions to be made to the Partners in proportion to their respective capital accounts, taking into account the allocations of Gain from Sale set forth in this Section 8.4; provided, however, that to the extent that any amount of a cash distribution to any Partner would create or increase a deficit in the capital account of such Partner, such amount shall not be distributed to such Partner, but shall be distributed to the other Partners in proportion to the amounts distributed to such other Partners without regard to this proviso. 8.5. CONSEQUENCES OF DISTRIBUTIONS. Upon the determination to distribute cash or property other than cash in any manner expressly provided in this Article VIII, made in good faith, the General Partner shall incur no liability on account of such distribution, even though such distribution may have resulted in the Partnership retaining insufficient funds for the operation of its business, which insufficiency resulted in loss to the Partnership or necessitated the borrowing of funds by the Partnership. 8.6. ALLOCATION OF NET INCOME, NET LOSS AND DISTRIBUTIONS IN RESPECT OF UNITS TRANSFERRED OR SOLD BY THE PARTNERSHIP. If one or more Units are transferred during any Year of the Partnership, the Net Income or Net Loss attributable to such Unit or Units for such Year shall be divided and allocated between the transferor and the transferee based on the time each such party was, according to the books and records of the Partnership, the owner of record of the Unit or Units transferred during the Year in which the transfer occurs. Distributions of Partnership assets in respect of Units shall be made only to persons who, according to the books and records of the Partnership, are the owners of such Units on a date selected by the General Partner. The General Partner and the Partnership shall incur no liability for making distributions in accordance with the provisions of the preceding sentence whether or not the General Partner or the Partnership has knowledge or notice of any transfer of ownership of any Unit or Units. For purposes of the foregoing, in the case of a transfer of a Unit, and also in the case of a sale of a Unit by the Partnership (except for the first time any Person or Persons other than the Original Limited Partner is admitted to the Partnership as a Limited Partner or Limited Partners), a Limited Partner who becomes a Limited Partner or who acquires a Unit according to the books and records of the Partnership after the 15th day of a month will be treated as becoming a Limited Partner or acquiring such Unit on the first day of the following month, and a Limited Partner who becomes a Limited Partner or who acquires a Unit according to the books and records of the Partnership during the first 15 days of a month shall be treated as becoming a Limited Partner or acquiring such Units on the first day of such month. In the case of a sale of a Unit by the Partnership (except for the first time any Person or Persons other than the Original Limited Partner is admitted to the Partnership as a Limited Partner or Limited Partners), the General Partner shall have the right to allocate Net Income and Net Loss to the purchaser of such Unit as of the date such purchaser fully executes and delivers a Subscription Agreement. 8.7. TAX ALLOCATIONS: CODE SECTION 704(C). In accordance with Code Section 7W(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted 12 basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value (computed in accordance with Section 1.15). In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.15(ii), subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 8.7 are solely for purposes of federal, state, and local taxes and shall not affect or in any way be taken into account in computing, any Person's Capital Account or share of Net Income or Net Loss, other items, or distributions pursuant to any provisions of this Agreement. ARTICLE IX RIGHTS, POWERS AND OBLIGATIONS OF THE GENERAL PARTNER 9.1. POWERS. The management and control of the Partnership and its business and affairs shall rest exclusively with the General Partner, which shall have all the rights and powers which may be possessed by a general partner pursuant to the Act, and such additional rights and powers as are otherwise conferred by law or are necessary, advisable or convenient to the discharge of its duties under this Agreement. The General Partner shall be the "tax matters partner" within the meaning of the Code. Without limiting the generality of the foregoing, the General Partner may, at the cost, expense and risk of the Partnership: (a) spend the capital and net income of the Partnership in the exercise of any rights or powers possessed by the General Partner hereunder pursuant to a production budget for the Project; (b) purchase, hold, manage, distribute and license the Partnership's property, and enter into agreements containing such terms, provisions and conditions as the General Partner in its discretion shall approve; (c) purchase from or through others contracts of liability, casualty and other insurance and a completion bond, which the General Partner deems advisable for the protection of the Partnership or for any purpose convenient or beneficial to the Partnership; (d) incur indebtedness in the ordinary course of business; 13 (e) pledge, grant security interests in, hypothecate or otherwise encumber, under such terms and conditions as the General Partner deems advisable, the assets of the Partnership; (f) sell, distribute, license or otherwise dispose of, under such terms and conditions as the General Partner deems advisable for the Partnership, or for any purpose convenient or beneficial to the Partnership, any of the assets of the Partnership, including, without limitation, the Project; (g) invest such funds as are temporarily not required for the purposes of the Partnership's operations in such investments as the General Partner, in its sole discretion, shall deem prudent; (h) negotiate employment contracts with principal artists and other talent which may contribute to the Project, including negotiating employment contracts providing for profits participation in the Project for such principal artists and other talent, provided, however, such profits participation shall be subordinated to the Limited Partners' right to the return of their total Capital Contribution pursuant to Section 1.24; (i) delegate all and any of its duties hereunder and, in furtherance of any delegation, appoint, employ, or contract with any person (including Affiliates of the General Partner) for the transaction of the business of the Partnership, which persons may, under the supervision of the General Partner, act as distributors, licensees, consultants, accountants, attorneys, brokers or in any other capacity deemed by the General Partner necessary or desirable, and pay appropriate fees to any of such persons. 9.2. INDEPENDENT ACTIVITIES. The General Partner may engage in whatever activities it chooses, whether or not the same be competitive with the Partnership, without having or incurring any obligation to offer any interest in such activities to the Partnership or any party hereto, and, as a material part of the consideration for the General Partner' s execution hereof, for the admission of such Limited Partner, each Limited Partner hereby waives, relinquishes and renounces any such right or claim of participation. The Partnership shall be considered to be an entity and business wholly separate, for all purposes, from the business and affairs of the General Partner, it being understood that the only obligations undertaken by the General Partner are those expressly provided in this Agreement and those which are inherent to the role of a general partner. 9.3. DUTIES. The General Partner shall manage and control the Partnership, its business and affairs, including, without limitation, the Project, to the best of its ability and shall use its best efforts to carry out the business of the Partnership. The General Partner shall devote itself to the business of the Partnership to the extent that it, in its discretion, deems necessary for the efficient carrying on thereof. The General Partner shall act as a fiduciary with respect to the safekeeping and use of the funds and assets of the Partnership. 14 9.4. CERTAIN LIMITATIONS. Without obtaining the consent of Limited Partners holding greater than 50% of the issued and outstanding Units, or such greater percentage of the issued and outstanding Units as is required under the Act, the General Partner shall not: (i) act in contravention of this Agreement; (ii) except as provided in Article XIII of this Agreement, do any act which would make it impossible to carry on the ordinary business of the Partnership; (iii) confess a judgment against the Partnership; (iv) possess Partnership property, or assign any rights in specific Partnership property, including any assignment for the benefit of Partnership creditors, for other than a Partnership purpose; (v) admit a person as a Limited Partner other than as provided in this Agreement; (vi) amend this Agreement; (vii) dissolve the Partnership; (viii) sell, pledge or exchange all, or substantially all, of the assets of the Partnership; or (ix) remove a general partner of the Partnership. 9.5. NET WORTH OF THE GENERAL PARTNER. The General Partner shall have and maintain at all times during which it is the general partner of the Partnership a net worth which is sufficient to conduct the business of the Partnership in a prudent manner and to comply with any requirements of the Code or the regulations thereunder or interpretations of the Internal Revenue Service thereof necessary to avoid the taxation of the Partnership as an association taxable as a corporation. 9.6. INDEMNIFICATION. Neither the General Partner nor any of its Affiliates, officers, directors, employees or agents shall be liable to the Partnership or any Limited Partners for any action or inaction of the General Partner in connection with the business or affairs of the Partnership, so long as the person against whom liability is asserted acted in good faith on behalf of the Partnership and in a manner reasonably believed by such person to be in the best interests of the Partnership, but only if such course of conduct does not constitute gross negligence or willful misconduct. The General Partner and its Affiliates, officers, directors, employees and agents shall be indemnified and held harmless by the Partnership for any claim, liability, damage, loss, or other expense (including, without limitation, investigating and defending any claims and lawsuits and settlement thereof, and legal and accounting costs in connection therewith) incurred by them solely by virtue of the 15 performance by any of them of the duties of the General Partner acting as general partner in connection with the Partnership's business, so long as such indemnified person acted in good faith on behalf of the Partnership and in a manner reasonably believed by such person to be in the best interests of the Partnership, but only if such course of conduct does not constitute gross negligence or willful misconduct; provided that such indemnification or agreement to hold harmless shall be recoverable only out of assets of the Partnership and not from the Limited Partners. 9.7. GENERAL PARTNER AS LIMITED PARTNER. The General Partner may be a Limited Partner to the extent that it (a) contributes capital under Section 6.3, or (b) purchases or otherwise acquires or becomes the transferee of all or any part of a Limited Partnership Interest. The General Partner's Capital Contribution pursuant to Section 6.1 shall be made solely in its capacity as general partner and shall not entitle the General Partner to any rights as a Limited Partner. 9.8. SUCCESSION AS GENERAL PARTNER. The General Partner may at any time assign its General Partnership Interest to any subsidiary or other Affiliate of the General Partner without the consent of the Limited Partners. Any corporation into which the General Partner may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the General Partner shall be a party, shall be the successor of the General Partner hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In any such event, the General Partner shall amend the Certificate within 90 days thereafter. ARTICLE X STATUS OF LIMITED PARTNERS 10.1. NO PARTICIPATION IN MANAGEMENT. No Limited Partner shall take part in the management of the business of the Partnership, transact any business for the Partnership, have the power to sign for or to bind the Partnership to any agreement or document, or otherwise act as an agent for the Partnership for any purpose. Such powers to manage and transact Partnership business, to bind the Partnership or otherwise to act as the agent of the Partnership are vested solely and exclusively in the General Partner. 10.2. LIMITED LIABILITY. No Limited Partner shall have any personal liability whatsoever, whether to the Partnership, to the Partners or to the creditors of the Partnership, for the debts of the Partnership or any of its losses beyond the amount committed by him to the capital of the Partnership, as set forth in Section 6.2 and 6.3, and his undistributed balance in his Capital Account. Each Unit shall be fully paid and nonassessable, and no Limited Partner shall have any personal liability whatsoever to another Limited Partner on account of his Capital Contribution. 16 ARTICLE XI TRANSFER OF INTERESTS IN THE PARTNERSHIP 11.1. IN GENERAL. Subject to the rights of first refusal granted to the General Partner, the Partnership and the Limited Partners below, a Limited Partner may sell, assign or otherwise transfer any or all of the Units owned by him; provided, however, that: (a) such Limited Partner and his purchaser, assignee or transferee execute, acknowledge and deliver to the General Partner such instruments of transfer and assignment with respect to such transaction as are in form and substance satisfactory to the General Partner; and (b) such Limited Partner pays the Partnership a transfer fee which is sufficient to pay all reasonable expenses of the Partnership in connection with such transaction; provided, further, that such purchaser, assignee, or transferee shall not become a substituted Limited Partner within the meaning of the Act unless the General Partner consents in writing to such person's becoming a substituted Limited Partner, which consent may be given or withheld in the sole discretion of the General Partner. Neither the Partnership nor the General Partner shall recognize or be bound by any sale, assignment or transfer of any Unit unless the General Partner consents to such sale, assignment or transfer in writing. The General Partner will not consent to any sale, assignment or transfer of any Unit or to the admission of any person as a substituted Limited Partner if, in its opinion, such consent and substitution would result in the Partnership being treated for Federal income tax purposes as an association taxable as a corporation, would result in a termination of the Partnership within the meaning of the Code, or would constitute a violation of any applicable Federal or state law pertaining to securities regulation. Notwithstanding the foregoing, each Limited Partner agrees that at least 60 days prior to any sale, assignment or transfer (by operation of law or otherwise) of any Unit by it, such Limited Partner will give written notice thereof to the General Partner and all Limited Partners, including the name of the proposed purchaser, assignee or transferee and all of the terms, conditions and other material details of such proposed sale, assignment or transfer. The General Partner shall have a right of first refusal for its own account for 30 days after receipt by the General Partner of such written notice in which to elect to consummate such sale, transfer or assignment itself pursuant to the same terms, conditions and material details set forth in such notice. If the General Partner does so purchase the Unit, it may resell such Unit, at any time, on whatever terms and conditions it deems appropriate, to any Person without regard to the rights of first refusal set forth herein. If the General Partner fails to consummate the transaction during such 30-day period, the Partnership shall then have 10 days in which to consummate such sale, transfer or assignment pursuant to such terrns, conditions and material details. The right of first refusal in the General Partner provided in this Section 11.1 shall be a right in each party designated as the "General Partner" in the first paragraph of this Agreement, or either of them if the other party designated the "General Partner" fails to exercise its rights thereunder, provided, however, that such disjunctive right in each party designated as the "General Partner" shall not expand the time periods provided for herein with respect to such right of first refusal, and further provided that such right, if jointly exercised by the parties 17 designated the "General Partner", shall be proportionate to the interests in the Partnership of each party designated the "General Partner". If the Partnership does so purchase the Unit, it may resell such Unit, at any time, on whatever terms and conditions it deems appropriate, to any Person without regard to the rights of refusal set forth herein. If the Partnership fails to consummate the transaction during such 10-day period, the General Partner shall give written notice of such failure within two days of the expiration of the above 4-day period to all the Limited Partners. The Limited Partners shall then have 20 days from the end of the above 40-day period in which to consummate such sale, transfer or assignment pursuant to such terms, conditions and material details in proportion to the pro rata Limited Partnership Interests of the Limited Partners participating in such purchase. If any Limited Partner does so purchase a Unit or Units, such Limited Partner may resell such Unit or Units only in accordance with the provisions of this Section 11.1. If none of the General Partner, the Partnership or the other Limited Partners consummate the transaction during such 60-day period, the selling Limited Partner shall then have 30 days from the end of such 60 day period in which to consummate such sale, transfer or assignment pursuant to such terms, conditions and material details and to such named purchaser. If the Limited Partner shall not consummate the sale, transfer or assignment during such 30-day period, such Unit shall again be subject to the rights of first refusal contained herein. 11.2. SUBSTITUTED LIMITED PARTNERS. If none of the General Partner, the Partnership or the Limited Partners exercise their rights of first refusal provided in Section 11.1 and the General Partner consents to the admission of a Person as a substituted Limited Partner within the meaning of the Act, and such Person: (a) elects to become a substituted Limited Partner by delivering a written notice of such election to the General Partner; (b) executes and acknowledges such other instruments as the General Partner may deem necessary or advisable to effect the admission of such Person as a substituted Limited Partner, including, without limitation, the written acceptance and adoption by such Person of the provisions of this Agreement; and (c) pays the Partnership a transfer fee which is sufficient to pay all reasonable expenses of the Partnership in connection with the admission of such Person as a substituted Limited Partner within the meaning of the Act, including, without limitation, the cost of preparing, printing and filing for record an amendment to the Certificate in accordance with the Act; then the General Partner shall take all steps which, in the opinion of the General Partner, are reasonably necessary to admit such Person as a substituted Limited Partner under the Act. Such Person shall thereupon become a substituted Limited Partner within the meaning of the Act. 11.3. PURCHASE OF UNITS BY THE GENERAL PARTNER. The General Partner may acquire one or more Units owned by, or reserved for, Limited Partners, and, if with respect to such 18 additional Unit or Units the General Partner becomes a Limited Partner within the meaning of the Act, the General Partner shall, with respect to such Unit or Units, enjoy all the rights and be subject to all the obligations and duties of a Limited Partner. Any Limited Partnership Interest owned by the General Partner may be sold, in whole or in part, by the General Partner, on whatever terms and conditions it deems appropriate, to any Person without regard to the rights of first refusal set forth in Section 11.1. 11.4. INVOLUNTARY TRANSFER OF PARTNER'S INTEREST. (a) If any Limited Partner, or more than 50% of the members, partners or shareholders of a Limited Partner which is not an individual, shall be adjudicated a bankrupt or make a general assignment for the benefit of creditors or take the benefit of any insolvency act, or if a permanent receiver or trustee in bankruptcy be appointed for any such Limited Partner's property, or if a temporary receiver be appointed for any Limited Partner and such appointment is not vacated or set aside within 60 days from the date of such appointment, or in the case of a Limited Partner which is not an individual, such Limited Partner shall be adjudicated a bankrupt or make a general assignment for the benefit of creditors or take the benefit of any insolvency act, or if a permanent receiver or trustee in bankruptcy be appointed for any such Limited Partner' s property, or if a temporary receiver be appointed for any such Limited Partner and such appointment is not vacated or set aside within 60 days from the date of such appointment, or in the event of any attempted transfer or other devolution of the interest of any Limited Partner in the Partnership except as specifically provided herein, then such Limited Partner shall become a "defaulting Partner" (which term as used herein shall include any successor to or assignee of the defaulting Partner). (b) If any Limited Partner, or more than 50% of the members, partners or shareholders of a Limited Partner which is not an individual, shall die, or in the case of a Limited Partner which is not an individual, such Limited Partner shall dissolve, then such Limited Partner shall become an "involuntary defaulting Partner" (which term as used herein shall include any successor to or assignee of the involuntary defaulting Partner). (c) The General Partner, at its election, may cause the Partnership to purchase and, if so elected, the defaulting Partner or the involuntary defaulting Partner, as the case may be, shall sell the Limited Partnership Interest of the defaulting Partner or the involuntary defaulting Partner, as the case may be, in the Partnership at the prices and upon the terrns specified in Section 11.5 at a closing which shall be held at the principal office of the Partnership within 120 days following the giving of written notice to the defaulting Partner or involuntary defaulting Partner of the election to purchase such Partner's Limited Partnership Interest after receiving appropriate releases and satisfactions. 11.5. PURCHASE PRICE OF DEFAULTING PARTNER'S INTEREST. If the General Partner shall elect to cause the Partnership to purchase the Limited Partnership Interest of a defaulting Partner or an involuntary defaulting Partner pursuant to Section 11.4, the purchase price shall equal the balance of the Capital Account related to said Limited Partnership Interest reduced by the amount of any obligation then due the Partnership by the defaulting Partner 19 or involuntary defaulting Partner (all obligations of the defaulting Partner or involuntary defaulting Partner shall become immediately due and payable immediately preceding liquidation of the defaulting Partner' s or the involuntary defaulting Partner's interest), and the excess (if any) of such obligations over the value of such Partner' s interest shall be immediately due and payable to the Partnership by such Partner. (a) At the closing of the transfer of the Limited Partnership Interest, the Partnership shall pay in cash to the defaulting Partner or the involuntary defaulting Partner 20% of the purchase price (net after reduction for any obligations owed by the Partner to the Partnership as above provided), and the balance of the purchase price shall be evidenced by the Partnership's nonnegotiable promissory note payable in eight approximately equal quarterly installments of principal, the first of which installments shall be due and payable three months after the closing, with the remainder being due and payable serially each three months thereafter. The unpaid balance shall bear interest at a rate equal to the lower of (x) the prime rate of Citibank, N.A., New York, New York on the date of closing, or (y) 9% per annum, payable quarterly with each installment of principal. The note shall contain provisions for (i) the acceleration of the entire unpaid balance of principal and accrued interest at the option of the holder in the event of default in payment of any principal or interest when due, (ii) the payment of reasonable attorneys' fees in the event of default, (iii) the prepayment of all or part of the unpaid principal (any prepayment being first applied to then accrued interest), and (iv) no prepayment during the taxable year in which the liquidation of the Limited Partnership Interest occurs. (b) All determinations and allocations required under this Section 11.5 shall be made by the Partnership's Accountants, and any such determination or allocation so made shall be binding on all parties. For the purpose of the computations required in determining the defaulting or involuntary defaulting Partner's Limited Partnership Interest, the books of the Partnership and its Affiliates shall be accepted as correct. (c) No payment other than those specifically provided for herein shall be due or payable with respect to the interest of the defaulting or involuntary defaulting Partner. Any debt due by the Partnership to the defaulting Partner or involuntary defaulting Partner, as the case may be, shall be payable according to it.c terms ARTICLE XII RESIGNATION OF THE GENERAL PARTNER 12.1. NO RESIGNATION OF THE GENERAL PARTNER. The General Partner may not resign as general partner of the Partnership. 12.2. LIABILITY OF THE GENERAL PARTNER AFTER RESIGNATION. If, notwithstanding the provisions of Section 12.1, the General Partner resigns as such, its liability as a general 20 partner shall cease upon the appointment of a successor General Partner pursuant to Section 12.3, and the Partnership shall promptly take all steps reasonably necessary under the Act to cause such cessation of liability; provided, however, that, if no successor General Partner is appointed pursuant to Section 12.3, the General Partner shall remain the General Partner of the Partnership for purposes of the winding up of the Partnership pursuant to Section 13.2. Upon its resignation, the General Partner shall not receive its Capital Contribution, nor the repayment of any indebtedness of the Partnership owed it, nor any undistributed balance in its capital account nor its share of any Sale Proceeds as otherwise provided for in Article VIII hereof. 12.3. APPOINTMENT OF SUCCESSOR GENERAL PARTNER. Subject to Section 13.1(i), at any time during the 90 day period after any notice of resignation given by the General Partner, the Limited Partners may, by the affirmative vote of Limited Partners holding 51% of the issued and outstanding Units, voting at a meeting called in accordance with Article XVI hereof, elect a successor General Partner to serve beginning immediately upon the effectiveness of the resignation of the General Partner. ARTICLE XIII DISSOLUTION AND WINDING UP OF THE PARTNERSHIP 13.1. DISSOLUTION OF THE PARTNERSHIP. The resignation of either party designated as the General Partner in the first paragraph of this Agreement shall cause a dissolution of the Partnership unless (i) the other party designated as the General Partner in the first paragraph of this Agreement elects to serve as the sole General Partner and continue the Partnership, or (ii) a successor General Partner is appointed pursuant to Section 12.3. The Partnership shall also be dissolved upon (a) the final judgment by a court having jurisdiction over the General Partner adjudicating either party designated as the General Partner in the first paragraph of this Agreement to be bankrupt, or (b) the expiration of the term of the Partnership. In no event shall the death of any Limited Partner result in dissolution of the Partnership. 13.2. WINDING UP OF THE PARTNERSHIP. Upon the dissolution of the Partnership, the General Partner shall take full account of the Partnership's assets and liabilities and the assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof. The proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed as provided in the Act; provided, however, that after payment of all Partnership debts, obligations and liabilities, there shall be distributed to each Partner the balance in his capital account, and the remaining assets of the Partnership, if any, shall be distributed according to the Partners' percentage interest in the Partnership. 13.3. COMPLIANCE WITH CERTAIN REQUIREMENTS OF REGULATIONS. In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-l(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article XIII to the Partners who have positive Capital Accounts in compliance with Regulations Section 1.704 1(b)(2)(ii)(b)(2), 21 and (b) if any Partner' s Capital Account has a deficit balance (after giving effect to all contributions, distributions, and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-l(b)(2)(ii)(b)(3). In the discretion of the General Partner, a pro rata portion of the distributions that would otherwise be made to the Partners pursuant to Section 13.2 may be: (a) distributed to a trust established for the benefit of the Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the Partners from time to time, in the reasonable discretion of the General Partner, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the Partners pursuant to this Agreement; or (b) withheld to provide a reasonable reserve of Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld amounts shall be distributed to the Partners as soon as practicable. ARTICLE XIV BOOKS OF ACCOUNT, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX ELECTION 14.1. BOOKS OF ACCOUNT. The Partnership's books and records (including a current list of the names and addresses of all Limited Partners) and an executed COW of this Agreement, as currently in effect, shall be maintained at the principal office of the Partnership at 1990 Westwood Boulevard, Third Floor, Los Angeles, California 90025, and each Partner shall have access thereto at all reasonable times. The books and records of the Partnership shall be kept by the General Partner using the income tax basis method of accounting consistently applied, which shall be the cash method of accounting, if allowed under the Code, and shall reflect all Partnership transactions and be appropriate and adequate for the Partnership's business. The General Partner shall also keep adequate federal income tax records using an appropriate method of tax accounting, which shall be the cash method of accounting, if allowed under the Code, on a basis consistently applied. Each Limited Partner hereby agrees to submit to the General Partner the name, address and social security or taxpayer identification number of a transferee of the Limited Partner and the date of transfer of the Unit or Units so transferred. 14.2. FINANCIAL REPORTS. The Partnership will send the following reports to each Person who was a Partner during the period covered by such report: 22 (a) A report within 90 days after the end of each Year of the Partnership containing all information necessary for the preparation of the Partner's Federal and state income tax returns; (b) An annual report within 120 days after the end of each Year of the Partnership containing: (i) a balance sheet as of the end of the fiscal year, a statement of income and a cash flow statement for the year then ended, all of which, except for the cash flow statement, shall be prepared in accordance with federal income tax principles, and (ii) a report of the activities of the Partnership during the period covered by the report. Such report will set forth distributions to the Limited Partners for the period covered thereby, and shall separately identify distributions of Available Cash Flow, whether such be in cash or non-cash assets during the period, amounts which had been held as reserves, and proceeds from disposition or sublease of assets, if any. The report shall also include a detailed statement of any transaction with the General Partner of the Partnership or its Affiliates and of commissions, compensation and other benefits paid, or accrued to such General Partner or its Affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed; and (c) Semi-annual progress reports on the operations of the Partnership. 14.3. FISCAL YEAR. The fiscal year of the Partnership shall be the Year, as defined in Section 1.32. 14.4. BANKING. All funds of the partnership shall be initially deposited in a separate bank account or accounts or in an account or accounts of a savings and loan association as shall be determined by the General Partner, but such funds may be invested as provided in Section 9.1(g). 14.5. TAX ELECTION. Upon the transfer of an interest in the Partnership or in the event of a distribution of the Partnership's property, the Partnership may elect, but is not required to elect, pursuant to Section 754 of the Code to adjust the basis of the Partnership's property as allowed by Sections 734(b) and 743(b) thereof. The General Partner shall have the sole authority and discretion to make such an election. There shall be no requirement that the General Partner make such an election. 14.6. TAX RETURNS. The General Partner shall, for each fiscal year, file on behalf of the Partnership with the Internal Revenue Service a Partnership Return within the time prescribed by law (including any extensions) for such filing. The General Partner shall also file on behalf of the Partnership such state and/or local tax returns as may be required by law. 23 ARTICLE XV POWER OF ATTORNEY 15.1. APPOINTMENT OF ATTORNEY-IN-FACT. Each Limited Partner hereby makes, constitutes and appoints the General Partner and any officer thereof, with full power of substitution and resubstitution, his agent and attorney-in-fact to file for record the Certificate as required by the Act, and to sign, execute, certify, acknowledge, and file for record any other instruments which may be required of the Partnership or of the Limited Partners by law, including, but not limited to, amendments to or cancellations of the Certificate and specifically including the amendments to the Agreement admitting Limited Partners to the Partnership as Limited Partners. Each Limited Partner authorizes such attorney-in-fact to take any further action which such attorney-in-fact shall consider necessary or advisable in connection with the foregoing, hereby giving such attorney-in-fact full power and authority to act to the same extent as if such Limited Partner were himself personally present and hereby ratifying and confirming all that such attorney-in-fact shall lawfully do or cause to be done by virtue hereof. 15.2. EFFECT OF POWER. The power of attorney pursuant to Section 15.1: (a) is a special power of attorney, coupled with an interest, is irrevocable, and shall survive the death, insanity, or incapacity of the granting Limited Partner: (b) may be exercised by such attorney-in-fact for each Limited Partner by listing all of the Limited Partners executing any agreement, certificate, instrument or document with the single signature of such attorney-in-fact as attorney-in-fact for all of them; and (c) shall survive the delivery of an assignment by a Limited Partner of the whole or a portion of his interest in the Partnership, except that where the purchaser, transferee or assignee thereof is to be admitted as a substituted Limited Partner, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling such attorney-in-fact to sign, execute, certify, acknowledge, and file any such agreement, certificate, instrument, or document necessary to effect such substitution. ARTICLE XVI MEETINGS AND MEANS OF VOTING Meetings of the Partners may be called by the General Partner, or by Limited Partners holding at least 50% of the issued and outstanding Units for any matter specified in Section 9.4. The General Partner shall call a meeting of the Partners to be held not later than 60 days following the receipt by the General Partner of any notice of adjustments of Partnership income or expenses issued by the Internal Revenue Service in connection with an audit of any Partnership Return, such meeting to determine the appropriate action to be taken, including, without limitation, the forum of any litigation contesting the notice. 24 The notice of any meeting called under this Article XVI shall state the nature of the business to be transacted. Notice of any such meeting shall be delivered by the General Partner within ten days of its calling to all Partners in the manner prescribed in Section 17.1, and such meeting shall be held not less than 15 days nor more than 60 days after the date of such notice. Partners may vote in person or by proxy at any such meeting. Any matters presented to the Limited Partners for their vote shall be determined by Limited Partners holding 50% of the issued and outstanding Units or such greater percentage of the issued and outstanding Units as is required under the Act or this Agreement. Each Unit shall be entitled to one vote on all such matters. Whenever the vote or consent of Partners is permitted or required under this Agreement, such vote or consent may be given at a meeting of Partners or may be given in writing in accordance with the procedure for obtaining written votes prescribed in Section 17.1. ARTICLE XVII MISCELLANEOUS 17.1. NOTICE. Except as otherwise specifically provided in this Agreement, any notice, payment, demand or communication required or permitted to be given by any provision of this Agreement shall be duly given if delivered in writing personally to the person to whom it is directed, or if sent by mail or telegraph, as follows: if to the General Partner, at its address set forth in Section 5.1 or to such other address as the General Partner may from time to time specify by written notice to the Limited Partners pursuant to this Section 17.1, and if to a Limited Partner, at such Limited Partner' s address set forth in Appendix A hereto, or to such other address as such Limited Partner may from time to time specify by written notice to the General Partner and all other Limited Partners pursuant to this Section 17.1. Any such notice shall be deemed to be given as of the date so delivered, if delivered personally, or as of the date on which the same was deposited in the United States mail, postage prepaid, addressed and sent as aforesaid. 17.2. ADDITIONAL BUSINESSES. The General Partner shall be permitted to manage or own additional businesses even though such businesses may compete with the business of the Partnership, including, without limitation, the Project. 17.3. SECTION CAPTIONS. Section and other captions contained in this Agreement are for reference purposes only and are in no way intended to describe, interpret, define or limit the scope, extent, or intent of this Agreement or any provision hereof. 17.4. SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. 17.5. AMENDMENTS. Amendments to this Agreement may be proposed by the General Partner. Following such proposal, the General Partner shall submit to the Limited Partners a verbatim statement of any proposed amendment and may include in any such submission its recommendation as to the proposed amendment. The General Partner shall 25 seek the written vote of the Limited Partners on the proposed amendment or shall call a meeting of the Partners pursuant to Article XVI of this Agreement to vote thereon and to transact any other business permitted by the Act to be transacted by the Limited Partners that they may deem appropriate. For purposes of obtaining a written vote, the General Partner may require response within a specified time, but not less than 30 days, and failure to respond in such time shall constitute a vote which is consistent with the General Partner' s recommendation with respect to the proposal. A proposed amendment shall be adopted and effective as an amendment to this Agreement if it receives the affirmative vote of Limited Partners holding 50% of the issued and outstanding Units or such greater percentage of the issued and outstanding Units as is required under the Act. 17.6. RIGHT TO RELY UPON THE AUTHORITY OF THE GENERAL PARTNER. No person dealing with the General Partner shall be required to determine its authority to make any commitment or undertaking on behalf of the Partnership, nor to determine any fact or circumstance bearing upon the existence of its authority. In addition, no purchaser of any property of the Partnership shall be required to determine the sole and exclusive authority of the General Partner to sign and deliver on behalf of the Partnership any such instrument of transfer, or to see to the application or distribution of revenues or proceeds paid or credited in connection therewith, unless such purchaser shall have received written notice from the Partnership affecting the same. 17.7. GOVERNING LAW. The laws of the State of Delaware shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereto. 17.8. WAIVER OF ACTION FOR PARTITION. Each Partner irrevocably waives during the term of the Partnership, and during the period of its liquidation following any dissolution, any right to maintain any action for partition with respect to any of the assets of the Partnership. 17.9. COUNTERPART EXECUTION. This Agreement may be executed in one or more counterparts all of which together shall constitute one and the same Agreement. 17.10. PARTIES IN INTEREST. Except as provided in Article XI of this Agreement, this Agreement shall be binding upon the parties hereto and their successors, heirs, devisees, assigns, legal representatives, executors and administrators. 17.11. CONSTRUCTION OF PRONOUNS. The feminine or neuter of the words "he", "his" and "him" used herein shall be automatically deemed to have been substituted for such words where appropriate to the particular Limited Partner executing this Agreement. 17.12. INTEGRATED AGREEMENT. This Agreement constitutes the entire understanding and agreement among the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, restrictions, representations or warranties among the parties other than those set forth herein or herein provided for. 26 IN WITNESS WHEREOF, the undersigned parties have hereunto set their hands as of the day and year first above written. GENERAL PARTNER HIT ENTERTAINMENT, INC. By /s/ Brian Shuster ------------------------------- Brian Shuster Its President ORIGINAL LIMITED PARTNER MASTER GLAZIER'S KARATE INTERNATIONAL, INC. By /s/ Mark Glazier ------------------------------- Mark Glazier Its President 27 APPENDIX A TO THE AGREEMENT OF LIMITED PARTNERSHIP OF HEP II, L.P. GENERAL PARTNER Name Mailing Address ------------------------- ---------------------------- Hit Entertainment, Inc. 1200 AmSouth/Harbert Plaza Birmingham, Alabama 35203 LIMITED PARTNERS
Social Security or Number Taxpayer Mailing Capital of Identification Name Addresss Contribution Units Number - ------------------------ ---------------------------- --------------- -------- ---------------- Master Glazier's Karate 570 Broad Street $1,500,000 60 22-3234110 International, Inc. Suite 12 Elizabeth, New Jersey 07202
A-1 EX-10.11 13 EXHIBIT 10.11 Exhibit 10.11 THE PARTNERSHIP INTERESTS ISSUED UNDER THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES ACT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION UNLESS, IN THE OPINION OF COUNSEL TO THE GENERAL PARTNER, SUCH REGISTRATION IS NOT REQUIRED. AMENDMENT NO. 1 TO AGREEMENT OF LIMITED PARTNERSHIP OF HEP II, L.P. This AMENDMENT NO 1 TO AGREEMENT OF LIMITED PARTNERSHIP is made and entered into as of April 23, 1996, by and among Hit Entertainment, Inc., a Delaware corporation (the "General Partner"), Master Glazier's Karate International, Inc., a Delaware corporation, as the original limited partner (the "Original Limited Partner") and United Leisure Corporation, a Delaware corporation ("ULC"), and those other parties who from time to time may become limited partners pursuant to the provisions of this Agreement by execution and delivery of this Agreement or counterparts hereof (hereinafter referred to collectively as the "Limited Partners" and referred to individually as a "Limited Partner") W I T N E S S E T H: WHEREAS, the General Partner and the Original Limited Partner have created the Partnership, and the parties hereto desire to set forth their respective interests in and all rights, duties and obligations in and to the Partnership, all upon the terms and conditions hereinafter set forth; and WHEREAS, ULC desires to become a limited partner of the Partnership by the execution and delivery hereof. NOW, THEREFORE, in consideration of the premises, and the mutual covenants and promises hereinafter set forth, the parties to this Agreement of Limited Partnership do hereby agree as follows: 1. Admission of ULC as Limited Partner; Capital Contribution. By its execution and delivery of this Agreement, ULC shall become a Limited Partner of the Partnership and hereby makes a capital contribution to the Partnership in the total amount of $1,500,000, thereby becoming the owner of 60 Units 2. Section 8.1 of the Agreement of Limited Partnership of the Partnership is hereby amended to read in its entirety as follows "8.1 CAPITAL ACCOUNTS. A Capital Account shall be determined and maintained for each Partner. Interest equal to seven percent (7%) per annum shall be payable on a quarterly basis on the Capital Accounts of the Partners The General Partner shall maintain a minimum balance in its Capital Account equal to one percent of the total positive balance of all Capital Accounts maintained for the Partners." 2 IN WITNESS WHEREOF, the undersigned parties have hereunto set their hands as of the day and year first above written. GENERAL PARTNER HIT ENTERTAINMENT, INC. By /s/ Brian Shuster ----------------------------- Brian Shuster Its President LIMITED PARTNERS UNITED LEISURE CORPORATION By /s/ Harry Shuster --------------------------------- Harry Shuster Chairman of the Board, President and Chief Executive Officer ORIGINAL LIMITED PARTNER MASTER GLAZIER'S KARATE INTERNATIONAL, INC. By /s/ Mark Glazier -------------------------------- Mark Glazier Its President 3 APPENDIX A TO THE AMENDMENT NO. 1 OF AGREEMENT OF LIMITED PARTNERSHIP OF HEP II, L.P. GENERAL PARTNER Name Mailing Address - ----------------------------- ------------------------------- Hit Entertainment, Inc. 1200 AmSouth/Harbert Plaza Birmingham, Alabama 35203 LIMITED PARTNERS
Social Security or Number Taxpayer Mailing Capital of Identification Name Addresss Contribution Units Number - ------------------------ ---------------------------- --------------- -------- ---------------- Master Glazier's Karate 570 Broad Street $1,500,000 60 22-3234110 International, Inc. Suite 12 Elizabeth, New Jersey 07202 United Leisure 8800 Irvine Center Drive $1,500,000 60 13-2652243 Corporation Irvine, California 92718
A-1 EX-21.1 14 EXHIBIT 21.1 Exhibit 21.1 LIST OF SUBSIDIARIES The Company has the following wholly owns subsidiaries: Name of Corporation Jurisdiction of Incorporation Hit Productions, Inc. California United Film Distributors-- California, Inc. California Skeleton Productions, Inc. California Retribution Productions, Inc. California Production of the Night, Inc. California Markus 4, Inc. California J.F.W. Productions, Inc. California Bad Blood Productions, Inc. California Secret Agent Productions, Inc. California Santa Productions, Inc. California Elevator Productions, Inc. California Dead End Productions, Inc. California Avatar Filmworks, Inc. California EX-23.1 15 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of United Film Distributors, Inc. Los Angeles, California We hereby consent to the use in the Prospectus constituting a part of this Registration Statement on Form SB-2 of our report dated November 15, 1996, relating to the consolidated financial statements of United Film Distributors, Inc. which is contained in the Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. MOORE STEPHENS, P.C. Certified Public Accountants. Cranford, New Jersey June 12, 1997 EX-27 16 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS ENCLOSED AS ITEM 22 IN THIS REGISTRATION STATEMENT. 1 U.S. Dollars 6-MOS JUL-31-1997 AUG-01-1996 JAN-31-1997 1 295,774 0 0 0 0 7,373,634 79,179 18,981 7,433,832 2,265,707 0 30,000 0 0 2,005,932 7,433,832 4,029,908 0 0 3,621,637 0 0 76,629 (97,756) 26,658 (71,098) 0 0 0 (71,098) (0.02) (0.02)
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