-----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, Mi3zKKJ0zOdpJSvSLHTI3/iXhOTCoqMJ8/DZG1394kauWGRmXH0/YFUiIvpxFBN7 ja3Srk4o9n5SMN/UVberYw== 0000868796-97-000015.txt : 19971015 0000868796-97-000015.hdr.sgml : 19971015 ACCESSION NUMBER: 0000868796-97-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971014 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANCIT MEDIA PRODUCTIONS LTD CENTRAL INDEX KEY: 0000868796 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133019470 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23414 FILM NUMBER: 97695146 BUSINESS ADDRESS: STREET 1: 601 W 50TH ST 6TH FL CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2129779100 MAIL ADDRESS: STREET 1: 601 WEST 50TH ST 6TH FL CITY: NEW YORK STATE: NY ZIP: 10019 10-K 1 ANNUAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 1-10781 LANCIT MEDIA ENTERTAINMENT, LTD. (Exact name of registrant as specified in its charter) New York 13-3019470 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 601 West 50th Street, New York, New York 10019 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 977-9100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting and non-voting common equity held by non-affiliates: $24,050,968 on October 3, 1997. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 6,634,750 shares of Common Stock, par value $.001 per share, outstanding on October 3, 1997. DOCUMENTS INCORPORATED BY REFERENCE None TABLE OF CONTENTS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997 LANCIT MEDIA ENTERTAINMENT, LTD. Part I Item No. Page - ---------------------------------------------------------------- 1 Business I-1 2 Properties I-11 3 Legal Proceedings I-11 4 Submission of Matters to a Vote of Security Holders I-11 Part II 5 Market for Registrant's Common Equity and Related Stockholder Matters II-1 6 Selected Financial Data II-2 7 Management's Discussion and Analysis of Financial Condition and Results of Operations II-3 7A Quantitative and Qualitative Disclosure About Market Risk II-8 8 Financial Statements and Supplementary Data II-8 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-8 Part III 10 Directors and Officers of the Registrant III-1 11 Executive Compensation III-5 12 Security Ownership of Certain Beneficial Owners and Management III-12 13 Certain Relationships and Related Transactions III-13 Part IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1 Signatures S-1 PART I Item 1. Business Introduction Lancit Media Entertainment, Ltd. (the "Company") creates, acquires, develops and produces high-quality children's "edutainment" and family programming, including the 11-time Emmy Award-winning Reading Rainbow(R) (including 1997 and 1996's Emmys for "Outstanding Children's Series"), which is now entering its fifteenth year on the Public Broadcasting Service ("PBS"), and The Puzzle Place(R), the award-winning children's program, produced in cooperation with KCET/Southern California ("KCET"), now in its third year on PBS. The Puzzle Place has received over 20 broadcast awards, plus four Emmy Award nominations, including one for 1997's "Outstanding Children's Preschool Series". The Company seeks to reach consumers for its productions via traditional commercial and public broadcast television, cable television, motion pictures, home video, and interactive media products. The Company was formed in New York on June 11, 1979 and became publicly-traded in June 1991 (NASDAQ: LNCT). The Company includes Lancit Media Entertainment, Ltd. ("Lancit"), which is an entity engaged in the acquisition and development and/or production of properties for television series, motion pictures, home videos and interactive media products for children and family-oriented audiences; Frame Accurate, Inc. ("Frame"), a wholly-owned subsidiary of Lancit, which provides post-production services that include personnel, facilities, graphics, and dubbing, as well as other editing and finishing services; Lancit Copyright Corp. ("LCC"), a wholly-owned subsidiary of Lancit, which holds copyrights and other intellectual property rights; and The Strategy Licensing Company, Inc. ("Strategy"), a wholly- owned subsidiary of Lancit, which is a merchandise licensing and promotions company that performs licensing agent functions and is a 50.1% partner in The Puzzle Place Marketing Company joint venture ("PPMC"). The Company has its principal executive offices at 601 West 50th Street, New York, New York 10019 (212-977-9100). As used in this report, the terms "Company" and "Lancit" refer to Lancit Media Entertainment, Ltd. and its subsidiaries unless the context otherwise indicates. Overview of Business The Company either creates or seeks out and identifies properties that it believes to be suited to become television series or motion pictures, either for television or theatrical release. Properties targeted by the Company for acquisition are sometimes books or characters developed in another medium. Upon identification of such properties, the Company negotiates with the current holder of the property's rights to obtain an option to develop the property as a series or motion picture. Once the concept has been created or rights to the property have been secured, the property enters a development period. Development activities include determining the best medium for exploitation of the property, determining a budget for the project, creating the stories and characters, and, where appropriate, scripting. Once the property has been developed, the Company seeks to negotiate with various distribution venues which would be appropriate for the property (i.e., broadcast television, cable, theatrical release). Based on the outcome of these negotiations, the Company determines whether it will, in fact, go into production of the property and, if so, the type of funding required to complete the production. The Company seeks production funding from several sources, including underwriting grants and corporate funding/sponsorship, broadcast license fees, producer fees, royalties, and licensing and distribution advances. In certain cases, the Company's costs of production exceed the production funding available, requiring the Company to deficit-finance a portion of these production costs, if it elects to go forward with production. After production funding has been obtained and primary production has been completed, the project goes into post-production, which may include editing of the project, the addition of graphics and effects, opening and closing credits and other improvements to the original production materials. Additional revenue opportunities may come from international sales, publishing tie-ins and, in the case of successful series, licensing fees and royalties related to sales of merchandise and other consumer items. Rights in and revenues from these various revenue streams are typically shared, in a significant fashion, with talent, distributors and others. There can be no assurance, once the Company has developed, produced and sold a property, that it will be a success or, if it is a success, that it will generate income for the Company. The Company has a number of properties in development that it believes to be well-suited for the growing children's programming market (see "Business - Development" and "Business - Areas of Proposed Growth", below). However, even if the Company successfully develops, produces and sells these properties, it will be some time, if at all, before they can become income-producing properties. The Company requires substantial additional funding in order to continue its operations and to place these and or other properties into production. The Company is actively exploring a number of alternatives to obtain such funding. The Company is also actively seeking guaranteed distribution arrangements which would reduce the risk of funding such new programming. Strategic Restructuring In the fiscal year ended June 30, 1997, the Company determined to implement a strategic restructuring plan, the initial phase of which included an extensive and systematic review of the Company's operations, cost structure and balance sheet. As part of this process and the Company's continuing analysis, the Company reviewed the anticipated future revenue streams related to its projects and recorded a charge of approximately $5.5 million. This non-cash charge related to film and program costs, of which approximately $2.1 million related to The Puzzle Place and approximately $3.3 million related to Backyard Safari(R). The charge reflected the Company's revision of each of its estimated future royalty streams with respect to The Puzzle Place and its anticipated production funding sources and its estimated future net royalty stream with respect to Backyard Safari. In both cases, the Company accrued for estimated remaining project costs. As part of this restructuring program, management anticipates focusing more of the Company's time and resources on properties that are currently in development which may have more revenue-producing potential to the Company, including a new series currently called Putt Putt 'n Pals, based upon characters developed by Humongous Entertainment, programming for Discovery Communications, Inc. ("DCI") to fill a minimum of one-sixth of the programming on Discovery Kids (see "Business - Development", below), and other commercial broadcasters. Additionally, the Company has, and, where appropriate, will continue to take steps to minimize its operating expenses and continues to seek strategic partners (see "Business Capital Requirements", below). Strategic Programming Alliance With Discovery Communications, Inc. In September 1996, DCI entered into a non-exclusive strategic programming alliance with Lancit and invested $5 million for an initial 6.6% equity stake in the Company. DCI is a large privately-held, diversified media company which owns cable television's The Discovery Channel and The Learning Channel, as well as the national retailing chain, The Nature Company. In May 1997, the Company entered into a two-year production output agreement with DCI, under which the Company will provide one-sixth of the Discovery Channel's Discovery Kids block of programming, which will expand as the programming block expands. Discovery Kids is currently a 3-hour weekly block. Pursuant to the May 1997 agreement, DCI also agreed to fund 13 half-hours of programming for each of the 1997-98 and 1998-99 seasons. No Really is a show which was already produced and aired under the original September 1996 arrangement, as were the "Discovery Kids" promotional spots. In the fiscal year ended June 30, 1997, DCI accounted for 64% of the Company's production and royalty revenues. The Company and DCI have agreed that Outward Bound, scheduled to debut in Fall 1998, will be the first program produced under the new May 1997 arrangement. Capital Requirements Notwithstanding the Company's significant cash position at June 30, 1997, the Company believes that additional funding will be necessary to sustain the Company's operations through the fourth quarter of fiscal 1998. The Company is actively seeking additional funding and has retained an investment banking firm to assist it in this effort. Among the alternatives being considered by the Company are a sale of an interest in the Company, an acquisition of the Company, and/or strategic alliances with industry partners. The Company continues to pursue marketing efforts to generate cash from production and licensing activities and, where appropriate, may explore turning to account certain non-strategic assets. While there can be no assurance that any such transactions will be available to the Company or, if available, that they will be on terms favorable to the Company or its shareholders, the Company is devoting considerable management and other resources to these efforts. The Company also has taken steps to reduce, where appropriate, its operating expenses. These steps include relocating Strategy, its merchandising and licensing agent subsidiary, from Westport, Connecticut to the Company's New York City offices, and certain staff reductions. Productions In addition to Reading Rainbow and The Puzzle Place, the Company's television productions include Outward Bound, an original series that follows a group of young teenagers on Outward Bound wilderness adventure trips, which is scheduled to air on Discovery Kids in Fall 1998, and Backyard Safari, a natural science series for 4-to-8 year olds, featuring Crinkleroot(C), a 3-D animated character featured in Jim Arnosky's popular series of nature books, which is scheduled to air on public television stations commencing in November 1997. Reading Rainbow Lancit is the co-creator of and has produced 130 episodes of Reading Rainbow, the award-winning daily children's series, hosted by LeVar Burton, now entering its fifteenth broadcast season on over 300 PBS stations nationwide. The series was the winner of the 1996 and 1997 Daytime Emmy Award for "Outstanding Children's Series". Each episode centers on a television adaptation of a picture book appropriate for beginning readers. The episodes were produced pursuant to contracts with GPN/NETV Network ("GPN") on behalf of itself and WNED-TV, Buffalo ("WNED"). Reading Rainbow is owned by GPN and WNED, which control all rights to the series, including merchandising and distribution. Lancit and Frame are paid fees for producing, directing and providing post-production services to this series. Revenues related to the series accounted for approximately 30%, 35% and 14% of the Company's production and royalty revenues during the fiscal years ended June 30, 1997, 1996 and 1995, respectively. Funding for Reading Rainbow has been provided by PBS, The Corporation for Public Broadcasting ("CPB"), the National Science Foundation and others. A commitment for a portion of the funding for future episodes has been received, and the Company has recently engaged in discussions with GPN and WNED regarding potential opportunities related to additional funding of the series. There can be no assurance that these discussions will be successful. In August 1997, the Company became the exclusive licensing agent for Reading Rainbow for a term of up to ten years, subject to meeting certain sales goals. The Company will receive a customary license fee based on the percentage of sales of products and merchandise bearing the Reading Rainbow brand (excluding sales of existing products sold to the school and library markets). The Company, as licensing agent for Reading Rainbow, (see "Business - Licensing Agent Activities") will seek to expand the merchandising activities relating to the Reading Rainbow brand, and, as a means to accomplish this goal, is developing plans for brand expansion both domestically and internationally focusing on publishing, merchandising, foreign television, promotions, multi-media, home video and learning systems marketed to parents. The Puzzle Place In November 1991, CPB awarded Lancit and KCET a $4.5 million grant to develop and produce The Puzzle Place, designed to be the first new major daily preschool series created for public television since the premiere of "Sesame Street" in 1969. The series premiered on January 16, 1995 with an initial 40 episodes delivered to PBS. Episodes 41 through 65, produced between March 1995 and December 1995, began airing in February 1996. In June 1997, the Company and KCET entered into an agreement with PBS, pursuant to which PBS would reimburse the Company and KCET up to $1 million in actual costs of securing additional releases of episodes 1 through 65 of the series in return for domestic broadcast rights to the series through December 1998. In addition, if the Company and KCET deliver ten new episodes on or before November 1, 1998 for airing on or before January 1, 1999, PBS will reimburse up to $688,000, plus any unused portion of the previous $1 million in funding, toward securing additional releases of the first 65 episodes in exchange for domestic broadcast rights to the series through June 30, 2000. The Company and KCET share equal ownership in all ancillary rights to the series. CPB is entitled to receive a 19% profit participation in ancillary sales of the project but has committed to invest proceeds which would otherwise be received under this participation, through June 30, 1997, towards the production funding shortfall on the first 65 episodes. As of June 30, 1997, Lancit had received all but approximately $0.1 million of the full amount of the project grants and had recognized substantially all of the revenues related to them over a four year period ending June 30, 1997. As of June 30, 1997, the remaining promotion and outreach efforts required under the CPB grant for the series are still continuing. Production and royalty revenues related to The Puzzle Place accounted for less than 1% of the Company's production and royalty revenues during the fiscal year ended June 30, 1997 and approximately 48% and 83% of the Company's production and royalty revenues during the fiscal years ended June 30, 1996 and 1995, respectively. Lancit and KCET have been actively seeking funding from various sources to support the production of ten new episodes. International Home Foods, Inc./Chef Jr. has agreed to provide funding in the amount of $1.25 million over the next three years and CPB has committed to an additional $1.0 million in funding. The Company and KCET intend to begin the production of the ten new episodes, required to be delivered to PBS by November 1, 1998, in early 1998. The expected budget of $3.2 million for the ten new episodes includes approximately $1.0 million of which approximately $0.5 million from Carnegie Corporation of New York, the Surdna Foundation and the Ford Foundation is already in place, for outreach and promotion activities. The Company is currently in negotiations to acquire the additional financing necessary to fund the production of the ten new episodes. There can be no assurance that the Company will be able to acquire such financing on terms satisfactory to the Company or, if the Company obtains such financing, that the ten new episodes will be completed by November 1, 1998. During the fiscal year ended June 30, 1994, the Company, through Strategy, established PPMC, a joint venture with KCET to manage the exploitation of the various ancillary rights associated with The Puzzle Place. The Company has recognized revenues of $741,420, $1,325,868 and $1,351,007 during the fiscal years ended June 30, 1997, 1996 and 1995, respectively, resulting from its role in the joint venture. PPMC continues to service The Puzzle Place licensee accounts and generates fees from such activities. However, the Company believes that early licensee and retailer expectations for sales of licensed products related to the property were excessively high and that the product introduction, shortly after the show began airing, into an unusually weak overall retail climate led to disappointing retail sales in a number of product categories. The Company, with KCET, has agreed to restructure royalty payment schedules and license terms with certain licensees in order to more closely reflect the anticipated future royalty stream expected to be generated by those particular categories. There can be no assurance that the Company will not effect such a restructuring again in the future. During the fiscal year ended June 30, 1997, the Company determined that the licensing relaunch plan developed by the Company in early 1997 did not appear to have the revenue generating capabilities that the Company previously anticipated, particularly in the short-term. In addition, unexploited licensing categories previously identified by the Company have not met expectations. Further, internationally, the Company is finding it to be a greater challenge than anticipated to distribute the television program, leading to delays in the building of an international licensing campaign. As a result of all of these factors, the Company recorded a non-cash charge in the amount of approximately $2.1 million for the fiscal year ended June 30, 1997, which included an accrual for the estimated remaining program cost. For the fiscal year ended June 30, 1996, the Company recorded a non-cash charge of approximately $2.5 million to reflect its reduced royalty expectations. Based on the history of certain other well established PBS children's series, consumer awareness levels appear to reach their peak several years after a show's debut. Although there can be no assurance that the same will hold true with The Puzzle Place, the Company will seek to work closely with licensees and potential retail partners to heighten the retail popularity of the property. Outward Bound Outward Bound is the first series under Lancit's new output arrangement with DCI (see "Business - Strategic Programming Alliance with Discovery Communications, Inc."). The Company has signed a co-production deal with the wilderness adventure company Outward Bound, Inc. for a series that follows the experiences of a group of young teenagers on Outward Bound adventure trips. A distribution arrangement with DCI is in place, pursuant to which an initial 13 episodes are on order for airing in Fall 1998 (with DCI having options to order additional episodes). With respect to the series, the Company, together with Outward Bound, Inc., will retain copyright and control of all foreign broadcast rights (except those for Latin America) and all other rights, including home video and all other ancillary rights. The Company and Outward Bound, Inc. also retain the copyright and control of the domestic television rights subject to the five year (three years for Latin America) DCI license. Should Outward Bound decide to begin a licensing and merchandising effort, the Company will be the exclusive licensing agent of these rights. No Really Under the September 1996 agreement with DCI, the Company produced No Really for the Discovery Kids programming block. DCI funded the cost of the production of the series, which represented 26% of the Company's total production and royalty revenues for the fiscal year ended June 30, 1997. The series debuted in April 1997, and the six half-hour episodes produced have already aired. Under the terms of the agreement with DCI, the Company is not entitled to any further revenues from the series. "Discovery Kids" Promotional Spots Under the September 1996 agreement with DCI, the Company produced a series of promotional identity spots for the "Discovery Kids" programming block. DCI funded the project, and the Company received a producer fee. The project accounted for 38% of the Company's total production and royalty revenues for the fiscal year ended June 30, 1997. Under the terms of the agreement with DCI, the Company is not entitled to any further revenues from the series. Backyard Safari The Company has completed production and post-production on the initial season of 13 half-hour episodes of Backyard Safari, a natural science television series for young children that is scheduled to premiere on public television in November 1997. In addition, the Company has entered into an agreement with GPN for distribution of Backyard Safari to the national school and library market. The show combines live action field trips with "3-D" performance animation to explore the wonders of nature. In 1993, Backyard Safari was the recipient of a $1.69 million underwriting grant from the National Science Foundation, the primary grantor of the project, and the project has been developed in cooperation with the American Museum of Natural History. In June 1994, the Company and Manhattan/Transfer Edit entered into an agreement under which the Company utilized the technology of Manhattan/Transfer Edit's digital animation stage to create the motion capture effects for Backyard Safari's animated co-host, Crinkleroot. As part of the agreement, Manhattan/Transfer Edit received a profit participation in the series. The Company continues to work toward securing additional production funding from potential sources of underwriting. Management believes that such efforts may be enhanced when the series begins airing. In the event that the Company were to receive no amounts from sources of outside production funding, the Company estimates that its remaining cash outlay required for this project beyond June 30, 1997 would be less than $0.5 million. Because the program is expected to be aired on a limited basis, at least initially, the Company has reduced its projected production revenues. Furthermore, negotiations with certain venues that were expected to help drive merchandise sales were not successful, which further reduced previously estimated licensing revenues. Also, as the program has only recently been cleared domestically, international exploitation of this property, at least initially, is no longer expected to be significant. As a result of all of these factors, the Company recorded a non-cash charge of approximately $3.3 million during the fiscal year ended June 30, 1997, which included an accrual for estimated remaining project costs. The Company currently owns all rights to the Backyard Safari series and related products as well as the exclusive right to license the Crinkleroot character as part of the series licensing effort. The Company will act as exclusive licensing agent for the series in a wide range of product categories. Development The Company has numerous projects in development. However, as is typical in the television and film industry, only a relatively small number of such projects are ultimately produced. There can be no assurance that the Company's efforts in developing or acquiring potential new programs, including any of the projects in development described below, will lead to production commitments or that any programs that are ultimately produced will be successful. Series in Development The Company has a number of television projects in development, including: Missing Links, a half-hour game show which is being co-produced with the Smithsonian Institution and H. Beale and Company (the late Brandon Tartikoff's production company); Danger Guys, an action-adventure series based on the popular children's books; SEEKERS, an action/adventure series in partnership with The Smithsonian Institution; A.F.R.I.C.A., an animated series about children who can communicate with animals and use their special powers to help solve the problems which arise when the world of humans clashes with the world of nature; Humongous's Putt-Putt(R) & Pals (Freddi Fish & Pajama Sam), an original treatment for an animated series based on Humongous Entertainment's award-winning, best-selling CD-ROMs; Lemmings(R), a game show based on the computer game of the same name; The Zack Files based on the Grosset & Dunlap book series by Dan Greenburg; Pink and Say, based on the book by children's author Patricia Polacco; The Saddle Club, based on the popular sixty-five book series of the same title; and Royal Pain, based on author Ellen Conford's book of the same name. The Company also has television and merchandising rights to many other projects, including Broderbund Software's KID PIX. Feature Films in Development Lancit is currently developing a number of feature film projects, including: The Giver, a best-selling children's fiction book, as a feature with Jeff Bridges' AsIs Productions; The Watsons Go to Birmingham - 1963, with Whoopi Goldberg and her company, One Ho Productions; Fenwick's Suit, based on the Farrar, Straus & Giroux picture book of the same name by David Small, a comedy currently in development with Fox 2000; The Adventures of Taxi Dog, based on the popular Dial Press book series by Sal and Debra Baracca; Groucho Marx Story, a biographical picture; and A Christmas Crime, an original screenplay by Adam Kulakow and Simon Kelton. Should any of these films go into production, the Company would seek to recoup its development costs, receive producer fees and a participation in the film's revenue and would not be required to incur any other future costs in association with these projects. There can be no assurance that any of these films will go into production or that, if any of them do, that they will ultimately be successful. Other The Company is developing several of its properties as television movies and/or direct-to-home videos, including: The 13th Floor, a supernatural time travel adventure story; and Dry Fire, a police story told from the female perspective. The Company also has rights to develop and produce a slate of biographical films, including a motion picture based upon the life of Ingrid Bergman. Other film properties include The Greyhound Project, Sleepless Beauty and Coming of Age with Elephants. Licensing Agent Activities In September 1997, the Company became the exclusive licensing agent for Reading Rainbow for all product categories other than existing products sold to the school and library markets for a term of up to ten years, subject to meeting certain sales goals. The Company, as licensing agent for Reading Rainbow, will seek to expand the merchandising activities relating to the Reading Rainbow brand. Reading Rainbow has established brand recognition with children, parents, teachers, educators, publishers and librarians. The Company is developing extensive plans for brand expansion both domestically and internationally, focusing on publishing, merchandising, foreign television, promotions, multi-media, home video and learning systems marketed to parents. There can be no assurance that any or all of these expansion plans will come to fruition. The Company, through Strategy, a merchandising, licensing, and promotions company, performs licensing agent functions for properties and characters owned by Lancit, as well as for outside clients, including Sega of America, Sony Interactive, Humongous Entertainment and Broderbund Software. Revenues typically are derived from fees based upon the royalties and advances earned by its clients from the sale of licensed consumer products and promotions through the use of a client's copyrights, trademarks and trade names. Strategy acts as merchandising agent for some well known interactive properties, including Putt-Putt, Freddi Fish, and Pajama Sam for Humongous Entertainment; Lemmings for Sony Interactive; KID PIX for Broderbund Software; and Sonic the Hedgehog(TM) for Sega of America. Strategy continues to handle licensing and promotion activities for The Puzzle Place, Backyard Safari, SEEKERS, and Danger Guys. In October 1997, the Company entered into an agreement with Arlene J. Scanlan, pursuant to which the Company acquired the remaining 15% of the outstanding shares of the capital stock of Strategy held by her (see Item 13). Post Production Services Frame provides post-production services that include personnel, facilities, graphics, and dubbing, as well as other editing and finishing services. Frame occupies approximately 20% of the Company's 17,000 square feet of production/office space in New York City, and provides various post-production services for the Company's own productions. Post-production activities include off-line analog and random access editing, creation of special effects, computer-generated 3-D and digitized graphics, and on-line mastering and duplication subsequent to the completion of production of a project. Random access Avid(TM) editing systems, as well as other computer hardware and software, have been purchased over the last few years to enhance Frame's range of services. Frame makes facilities available for post-production services to outside producers, when the facilities are not being used on Company projects. Trademarks, Service Marks and Copyrights LCC was formed to own and administer various copyrights created by the Company and currently administers all of the music publishing interests which the Company retains with respect to the music sound tracks for both The Puzzle Place and Backyard Safari, as well as for other productions created by the Company. The Company owns various United States trademarks, service marks and copyrights, including The Puzzle Place and Backyard Safari. The Company endeavors to take commercially reasonable actions to protect the marks and copyrights created and acquired in its business. Certain of the Company's trademarks, service marks and copyrights may be considered material to the Company's business. The Company's ability to obtain the rights to subject matter appropriate for children's and family programming is a factor that contributes to the Company's ability to develop and market such programming and to efficiently produce and distribute its products. The Company endeavors to obtain rights for merchandising and licensing and home video in order to enhance the value of the properties. Areas of Proposed Growth The Company continues to evaluate potential business opportunities in several markets which it believes present natural tie-ins to its core production and licensing businesses. These markets include specialty and school-related children's products, book publishing, animation, direct-to-consumer sales and providing content to on-line computer service network providers. The Company may consider entering one or more of these business areas in partnership with larger media companies, and intends to explore such opportunities with its current distributors as well as with other potential strategic alliance candidates. The Company will seek to benefit from anticipated increasing demand for children's and educational programming over the next several years, as well as from positive demographic trends. Three principal sources are expected to spur this demand: 1) the pursuit by emerging domestic cable channels of advertising dollars aimed at children; 2) the proliferation of cable and satellite-delivered children's channels internationally; and 3) the Federal Communications Commission's mandate that each broadcast television station carry three hours of educational children's programming weekly. The Company believes that there are also revenue opportunities in the area of children's characters, which hold long-term commercial potential on a global basis. Characters may be created by the Company or acquired from other sources. Acquired characters typically are derived from properties exploited in publishing or other forms of distribution. Additionally, the Company believes that there is potential in international licensing, including foreign broadcast sales, and publishing, which the Company will seek to exploit. For example, in Latin America, the number of children's channels increased from zero to seven within a twelve-month period and The Puzzle Place can now be seen in Brazil, Mexico, and Panama, in addition to appearing on The Discovery/Learning Channel Latin America which is distributed throughout the Latin American continent. In order to position itself to take advantage of these growing opportunities, the Company intends to focus on increasing its strategic alliances with business partners which can deliver additional distribution outlets, on-air, on-line, and at retail, for the Company's creative assets. This strategy is intended to increase the Company's profitability and allow its properties to be enjoyed by a broader base of viewers, readers, and consumers. There can be no assurance, however, that the Company will be able to take advantage of any of these opportunities or that the Company will achieve any commercial success as a result thereof. Competition Competition in the television production, distribution, and syndication industries is intense, with many companies competing for available literary properties, creative personnel, talent, production personnel, distribution channels and financing, which are essential to create, acquire, develop, produce and distribute product. The Company's competitors include motion picture studios, television networks, and independent television production companies, which have become increasingly active in children's programming, and many of which have substantially greater financial and other resources than the Company. The Company competes for broadcast commitments and production funding for public television projects with Children's Television Workshop, other independent production companies, and projects produced by local public television stations. As the Company attempts to expand into other areas, including commercial television, it will face more intense competition from other, larger entities, which have substantially greater financial and other resources than the Company, such as The Walt Disney Company, Fox, Nickelodeon, Jim Henson Productions, Scholastic Productions, Cinar, and certain television syndicators, production companies, and networks which also seek to attract the children's/family audience segments with their programming. In addition, there is a strong trend toward vertical integration in the business, with more networks owning productions, making it more difficult for smaller, independent companies such as the Company to obtain favorable production financing and distribution terms. In the licensing industry, there is strong competition from other independent licensing agencies and from the in-house licensing divisions of other production companies and motion picture and television studios. With respect to its post-production activities for third parties, if any, Frame faces significant competition from many other independent, and other in-house, post-production facilities. Employees As of October 3, 1997, the Company had 40 full-time employees, 20 of whom are engaged in production and related activities, and 20 of whom are in administration. The Company has an in-house staff of experienced, core production personnel as well as researchers and designers. In order to meet the staffing requirements of a production, the Company will augment its full-time creative staff by contracting with writers, directors, technical and other production personnel known to the Company, generally through paymaster service or loanout companies. The Company is party to collective bargaining agreements with the American Federation of Television and Radio Artists (with respect to The Puzzle Place and Backyard Safari) and the Writer's Guild of America. Some of the Company's current and proposed business activities may be affected by the existence of certain collective bargaining agreements with the Directors Guild of America and the Screen Actors Guild, as many of the performing artists, writers, technical and other production personnel that the Company may call upon are members of such unions and/or guilds. Item 2. Properties The Company's principal production offices and its post-production service facility, as well as its executive offices, are located at 601 West 50th Street, New York, New York 10019 pursuant to two leases with the same unrelated party. The combined leases cover approximately 17,000 square feet and both expire in September 1998. The aggregate annual base rent is approximately $217,660 through September 1998. The Company maintains development offices at 9454 Wilshire Boulevard, Beverly Hills, California 90212, pursuant to a lease, expiring in April 1998, with an unrelated party, for approximately 930 square feet at an aggregate annual rental of approximately $24,000. Strategy's licensing activities, previously based in Westport, Connecticut have been moved into the Company's New York City offices. The Company is seeking to sublet the Westport offices or to terminate its obligations under this lease on terms mutually agreeable to the Company and the landlord. These premises are currently subject to a lease, expiring in March 1999, with an unrelated party for approximately 3,500 square feet at an aggregate annual base rental of approximately $68,000 plus certain escalation clauses. There can be no assurance that the Company will be able to sublet these offices or to terminate the lease. The Company believes that the facilities mentioned above will be adequate for its needs for the foreseeable future. Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock, par value $0.001 per share (the "Common Stock"), is traded in the over-the-counter market and quoted on the National Association of Securities Dealers, Inc. Automated Quotation System National Market ("NASDAQ") and listed under the symbol "LNCT". The table set forth below shows, for the period indicated, the high and low bid quotations on NASDAQ for the Company's Common Stock. These amounts represent inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Bid Quarter Ended Type of Security High Low September 30, 1995 Common Stock $16.75 $12.50 December 31, 1995 Common Stock $13.38 $10.63 March 31, 1996 Common Stock $13.00 $8.88 June 30, 1996 Common Stock $14.00 $9.50 September 30, 1996 Common Stock $12.88 $9.25 December 31, 1996 Common Stock $10.50 $4.25 March 31, 1997 Common Stock $7.13 $4.63 June 30, 1997 Common Stock $5.13 $2.69 The Company has not paid any dividends in the two most recent fiscal years and has no present intention to declare or pay dividends. The Company estimates that, as of September 24, 1997, there were approximately 201 holders of record of its Common Stock. As of April 29, 1997, as amended June 20, 1997, the Company entered into an agreement with Robinson Lerer Montgomery, LLC ("RLM") pursuant to which RLM agreed to perform certain public relations and shareholder communication services to the Company for a term of one year in consideration of a monthly retainer and warrants to purchase up to 122,093 shares of the Company's Common Stock at an exercise price of $3.625 per share, which warrants are exercisable for a period of four years. As of September 10, 1997, the Company issued to Allen & Company Incorporated ("Allen") warrants to purchase up to 100,000 shares of Common Stock at an exercise price of $3.00 per share, which warrants are exercisable for a period of five years. Such warrants were issued in partial payment for Allen's fee for investment banking services in connection with the September 1996 investment by DCI in the Company. The Company relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, in effecting these transactions. Item 6. Selected Financial Data The selected consolidated financial data with respect to each of the Company's fiscal years ended June 30, 1997, 1996, 1995, 1994 and 1993 is derived from the Company's audited consolidated financial statements. The information below should be read in conjunction with the consolidated financial statements and related notes thereto, set forth in Item 14 of this Report. Fiscal Year Ended June 30, ----------------------------------------------------------- 1997 1996 1995 1994 1993 Statement of Operations Data: Revenues $ 3,152,057 $ 9,061,213 $ 17,882,479 $ 8,914,698 $3,670,990 Income (loss) from continuing $(10,078,908) $(3,700,713) $ 1,247,499 $ 34,874 $ (996,823) operations (1) Income (loss) from continuing operations per common share $ (1.54) $ (.60) $ .20 $ .01 $ (.25) (1) Weighted average shares used in 6,538,851 6,177,051 6,365,741 6,154,223 3,944,010 computation Balance Sheet Data: Total assets $ 9,199,313 $14,388,166 $ 22,395,858 $16,926,998 $5,494,714 (1) Loss from continuing operations for fiscal 1997 includes a charge of $5,456,180, or $0.83 per share, for a non-cash write-down related to projects and, for fiscal 1996, includes a charge of $2,650,000, or $0.43 per share, for a non-cash write-down related to a project and a restructuring charge. See the consolidated financial statements and related notes thereto. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 1997 as compared to Fiscal 1996 Production and royalty revenues for the fiscal year ended June 30, 1997 decreased to $1,943,807 from $6,812,975 for the fiscal year ended June 30, 1996. This decrease is primarily the result of significantly reduced production activity on The Puzzle Place, Backyard Safari and Reading Rainbow, all of which was partially offset by production activity beginning in the third quarter of fiscal 1997 on No Really and a series of promotional spots for the Discovery Kids programming block. Licensing agent fee revenues for the fiscal year ended June 30, 1997 decreased to $1,208,250 from $2,248,238 in the fiscal year ended June 30, 1996. This decrease is primarily the result of reduced revenue recognition resulting from the adjustment of the licensing terms for several licensees on The Puzzle Place and reduced royalties on Sonic The Hedgehog. Production and royalty expenses for the fiscal year ended June 30, 1997 decreased to $3,026,577 from $6,580,666 in the fiscal year ended June 30, 1996 reflecting primarily decreased production and royalty activity on The Puzzle Place and reduced production activity on Reading Rainbow and Backyard Safari, all of which was partially offset by production activity beginning in the third quarter of fiscal 1997 on No Really and a series of promotional spots for the Discovery Kids programming block as well as additional development expenses. Direct costs of licensing agent activities for the fiscal year ended June 30, 1997 decreased to $809,823 from $1,175,699 in the fiscal year ended June 30, 1996 primarily as a result of reduced personnel, professional fees, travel and marketing costs. General and administrative expenses for the fiscal year ended June 30, 1997 increased to $4,073,089 from $2,438,471 in the fiscal year ended June 30, 1996. This increase is principally due to personnel costs (approximately $451,000), a severance charge (approximately $126,000) and professional fee costs (approximately $422,000) as well as a reduction in project activities resulting in costs (approximately $398,000) being reflected as overhead expenses rather than being absorbed as part of project activities. Of the overall increase, approximately $768,000 represents what the Company expects to be non-recurring items, and as previously mentioned above, an additional amount of approximately $398,000 represents costs typically absorbed by projects. A non-cash write-down related to film and program costs was taken during the fiscal year ended June 30, 1997 amounting to approximately $5.5 million. This non-cash charge, of which approximately $2.1 million relates to The Puzzle Place and approximately $3.3 million relates to Backyard Safari, reflects the Company's revision of its estimated future net royalty stream with respect to The Puzzle Place and the Company's revision of its anticipated production funding sources and its estimated future net royalty stream with respect to Backyard Safari. In both cases, the Company accrued for estimated remaining project costs. With respect to The Puzzle Place, the Company determined that the licensing relaunch plan developed by the Company in early 1997 did not appear to have the revenue generating capabilities that the Company previously anticipated, particularly in the short-term. In addition, unexploited licensing categories previously identified by the Company with respect to The Puzzle Place have not met expectations. Further, internationally, the Company is finding it to be a greater challenge than anticipated to distribute the television program, leading to delays in the building of a licensing campaign. With respect to Backyard Safari, the Company has an airing commitment for Fall 1997 which does not include an initial license fee. Because the program is expected to be aired on a limited basis, at least initially, the Company has reduced its expected production revenues. Furthermore, negotiations with certain venues that were expected to help drive merchandise sales were not successfully completed which further reduced previously estimated licensing revenues. Because the program has only recently been cleared domestically, international exploitation of this property, at least initially, is no longer expected to be significant. A write-down related to a project and a restructuring charge during the fiscal year ended June 30, 1996 amounted to $2,650,000. A project-related charge in the amount of $2,500,000 primarily reflected revisions in the Company's future anticipated net royalty stream on The Puzzle Place project and an effort to adjust the amortization of film and program costs to those anticipated revenue streams. Additionally, a downsizing of staff involved with certain projects resulted in a restructuring charge of $150,000 including severance and other benefits paid to terminated employees. Management anticipates focusing more of the Company's time and resources on properties which are currently on the development slate which may have more financial benefit to the Company. These include Humongous and programming for DCI to fill a minimum of one-sixth of the programming on Discovery Kids. Interest income, net for the fiscal year ended June 30, 1997 decreased to $255,508 from $276,570 in the fiscal year ended June 30, 1996. This decrease is primarily due to a reduced level of cash invested during the current fiscal year, resulting from the Company's utilization of cash for production, development and corporate needs. Provision for income tax was $19,500 for state and local taxes for the fiscal year ended June 30, 1997 compared to $87,900 for state and local taxes in the fiscal year ended June 30, 1996. Minority interest in the Company's licensing activities for the fiscal year ended June 30, 1997 was $101,304 compared to $105,760 in the fiscal year ended June 30, 1996. Net loss for the fiscal year ended June 30, 1997 was $10,078,908 ($1.54 per share) compared to net loss of $3,700,713 ($.60 per share) in the fiscal year ended June 30, 1996 primarily as a result of the combination of all factors discussed above. Weighted average shares outstanding for the fiscal year ended June 30, 1997 increased to 6,538,851 from 6,177,051 in the fiscal year ended June 30, 1996 primarily as a result of the issuance of shares related to DCI's purchase of its 6.6% equity stake in the Company. Net loss for the fiscal year ended June 30, 1997 included a charge of $5,456,180, or $0.83 per share, for a non-cash write-down related to projects and, for the fiscal year ended June 30, 1996, included a charge of $2,650,000, or $0.43 per share, for a non-cash write-down related to a project and a restructuring charge. Fiscal 1996 as compared to Fiscal 1995 Production and royalty related revenue for the fiscal year ended June 30, 1996 decreased to $6,812,975 from $15,532,607 in the fiscal year ended June 30, 1995 primarily as a result of reduced royalty revenue, and to a lesser extent, lower levels of production activity related to The Puzzle Place project during fiscal 1996. In fiscal 1995, revenues included over $7 million of initial copyright holder royalties from licensees of this project. As of June 30, 1996, substantially all of these licensees were still in the process of recouping initial royalty commitments from product sales. The Company is not able to record additional revenues, as copyright holder, until individual licensees have recouped the royalties previously recognized by the Company. Licensing agent fees for the fiscal year ended June 30, 1996 remained relatively constant at $2,248,238 compared to $2,349,872 in the fiscal year ended June 30, 1995. Production and royalty related expenses for the fiscal year ended June 30, 1996 decreased to $6,580,666 from $13,550,150 in the fiscal year ended June 30, 1995 primarily related to the decreased level of royalty and production activity for The Puzzle Place series. However, such expenses represented an unusually high percentage of related revenues in fiscal 1996 primarily due to copyright holder expenses on The Puzzle Place project remaining relatively high during the fiscal 1996 period of licensee recoupment on the project. Direct costs of licensing activities for the fiscal year ended June 30, 1996 remained relatively constant at $1,175,699 compared to $1,184,345 in the fiscal year ended June 30, 1995. During fiscal 1996, increased personnel costs were offset by reduced travel costs. General and administrative expenses for the fiscal year ended June 30, 1996 increased to $2,438,471 from $2,168,827 in the fiscal year ended June 30, 1995. This increase is primarily the result of the hiring of more personnel, as well as higher facilities and insurance costs in addition to increased depreciation and amortization expense. A write-down related to a project and a restructuring charge during the fiscal year ended June 30, 1996 amounted to $2,650,000. The Company's decision to record a non-cash project-related charge in the amount of $2,500,000 primarily reflects revisions in the Company's future anticipated net royalty stream on The Puzzle Place project and an effort to adjust the amortization of film and program costs to those anticipated revenue streams. Additionally, an overall decrease in production activity during the fiscal year ended June 30, 1996 resulted in a downsizing of staff involved with certain projects and a resulting restructuring charge of $150,000 including severance and other benefits paid to terminated employees. Interest income for the fiscal year ended June 30, 1996 decreased to $276,570 from $506,316 in the fiscal year ended June 30, 1995. This decrease is primarily the result of cash being used during the year which reduced the cash available for investment during the year. Provision for income taxes - current for the fiscal year ended June 30, 1996 increased to $87,900 from $38,000 in the fiscal year ended June 30, 1995. This increase is primarily due to state and local income tax liabilities associated with the Company's licensing subsidiary. Minority interest in the Company's licensing activities decreased to $105,760 for the fiscal year ended June 30, 1996 from $199,974 for the fiscal year ended June 30, 1995. This change is the direct result of the change in the profitability of the licensing activities from year to year. Net loss for the fiscal year ended June 30, 1996 was $3,700,713, or $0.60 per share (which includes the above-mentioned write-down related to a project and restructuring charge amounting to $2,650,000, or $.43 per share) compared to net income of $1,247,499, or $0.20 per share, in the fiscal year ended June 30, 1995 as a result of the combination of the factors described above. Weighted average shares outstanding for the fiscal year ended June 30, 1996 decreased to 6,177,051 from 6,365,741 in the fiscal year ended June 30, 1995 primarily reflecting the exclusion of outstanding anti-dilutive stock options during the fiscal 1996 loss period. Liquidity and Capital Resources The Company had cash and cash equivalents as of June 30, 1997 of approximately $4.5 million, and no long-term debt. Notwithstanding the Company's cash position at June 30, 1997 the Company believes that additional funding will be necessary to sustain the Company's operations through the fourth quarter of fiscal 1998. The Company is actively seeking additional funding and has retained an investment banking firm to assist it in this effort. Among the alternatives being considered by the Company are a sale of an interest in the Company, an acquisition of the Company, and/or strategic alliances with industry partners. The Company continues to pursue marketing efforts to generate cash from production and other licensing activities and, where appropriate, may explore turning to account certain non-strategic assets. While there can be no assurance that any such transactions will be available to the Company or, if available, that they will be on terms favorable to the Company or its shareholders, the Company is devoting considerable management and other resources to these efforts. The Company also has taken steps to reduce, where appropriate, its operating expenses. These steps include relocating Strategy, its merchandising and licensing agent subsidiary, from Westport, Connecticut to the Company's New York City offices, and certain staff reductions. Cash used in operating activities was approximately $3.6 million for the fiscal year ended June 30, 1997, compared to approximately $3.9 million for the fiscal year ended June 30, 1996. A net loss of approximately $10.1 million for the fiscal year ended June 30, 1997, including a non-cash write down on projects of approximately $5.5 million and depreciation and other amortization of approximately $0.4 million, net additions to film and program costs of approximately $1.6 million, a decrease in deferred revenues of approximately $1.2 million and a decrease in participations payable of approximately $0.4 million, which were partially offset by a decrease in accounts receivable of approximately $2.2 million, an increase in accounts payable and accrued expenses of approximately $1.4 million comprises the majority of the cash used in operating activities. Cash used in investing activities was approximately $55,000 for the fiscal year ended June 30, 1997, compared to approximately $163,000 for the fiscal year ended June 30, 1996. The Company made improvements to its office space and purchased computer equipment in the fourth quarter of fiscal 1997. Cash provided from financing activities was approximately $4.7 million for the fiscal year ended June 30, 1997 compared to $13,126 for the fiscal year ended June 30, 1996. In September 1996, DCI invested $5 million, which was partially offset by costs relating to the transaction, in return for a 6.6% equity stake in the Company, and the right to purchase what currently represents an additional 6.2% equity stake in the Company through the exercise of warrants at $13 per share. As of June 30, 1997, the Company is continuing with the outreach, publicity and television rights renewals for the first 65 episodes of The Puzzle Place. All the remaining outreach and publicity costs and television rights renewal costs through June 30, 1997 were accrued and included in the calculation of the film and program cost write-down related to the property. The Company estimates that, after it receives the balance of the monies due from CPB and KCET, the Company's remaining funding requirement will be no more than approximately $0.1 million. With respect to The Puzzle Place licensing effort, the Company and KCET have agreed to, and may in the future, adjust the licensing terms for certain licensees. The Company has completed post-production on the initial season of 13 episodes of Backyard Safari which was partially funded through a major grant from the National Science Foundation. The Company estimates that its remaining funding requirement for this project is approximately $0.5 million to cover primarily outreach and promotion activities. All of these remaining costs were accrued for and included in the calculation of the film and program cost write-down related to the property. Management does not expect inflation to have a significant impact on the Company's business. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and advises readers that this report includes forward-looking statements that involve known and unknown risks and uncertainties which may cause the Company's development and financial performance in future periods to differ materially from anticipated developments and performance expressed in any forward-looking statements made by, or on behalf of, the Company. These risk factors include, among others: The ability of the Company to secure timely production funding and additional capital financing; Risks generally associated with the production of a television series and other entertainment products, including, without limitation, (a) the availability of appropriate time slots for children's and family entertainment programming; (b) a serious strike threat that could delay production schedules; (c) availability of a star or other key individual(s) associated with production of a series, movie or other project; Network and studio acceptance of television and motion picture projects; pricing, purchasing, financing, operational, advertising and promotional decisions by intermediaries in the distribution channel; and the effects of vertical integration of companies in the media and entertainment industry, the effects of which could be to reduce the opportunities for the Company and independent producers, suppliers and distributors as a whole; The ability of the Company to successfully negotiate and enter into agreements to acquire rights, develop, produce, market and distribute entertainment and licensing projects; Difficulties or delays in the development, production and marketing of entertainment projects and/or licensed products, including, but not limited to, a failure to complete production of new projects when anticipated and failures related to another party's inability to perform, which could, for example, affect the licensees' ability to manufacture, or consumer demand for, licensed products; Less than anticipated consumer acceptance of entertainment projects or licensed products, which could negatively affect the life cycle of entertainment projects and licensed products; The effects of, and changes in, consumer tastes, economic and tax policies, social and economic conditions, and laws and regulations, including governmental action or legal proceedings relating to intellectual property rights and intellectual property licenses and the adoption of new, or changes in, accounting policies Non-renewal of annual contracts with production-related customers; and Underutilization of the Company's post-production facilities resulting from, among other things, production slowdowns or inefficiencies. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable Item 8. Financial Statements and Supplementary Data See the consolidated financial statements and related notes thereto set forth in Item 14 of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure See Current Report on Form 8-K, filed May 8, 1997 (reporting the change in the Company's certifying accountants). PART III Item 10. Directors and Executive Officers of the Registrant The following table sets forth information with respect to the directors and executive officers of Lancit as of September 26, 1997: Name Age Position Susan L. Solomon 46 Chairman of the Board of Directors, Chief Executive Officer Cecily Truett 48 Co-President and Director Laurence A. Lancit 49 Co-President and Director Orly Wiseman 39 Senior Vice President - Production Gary Appelbaum 39 Senior Vice President, Chief Financial Officer and Treasurer Jane M. Abernethy 40 Senior Vice President - Legal and Business Affairs Noel Resnick 46 Senior Vice President - Development David Michaels 34 Senior Vice President - Motion Pictures Irene V. Minett 50 Senior Vice President - Marketing Marc L. Bailin 45 Secretary and Director Joseph Kling 66 Director John R. Costantino 51 Director Roger C. Faxon 49 Director A. Robert Towbin 62 Director Each of the directors serves from the date of election until the next annual meeting of shareholders and until a successor is elected and qualified. Each of the officers serves at the discretion of the Board of Directors from the date of election until the next annual meeting of shareholders and until a successor is elected and qualified. SUSAN L. SOLOMON, Chairman and Chief Executive Officer, joined the Company in April 1997. In August 1996, Ms. Solomon was named a Senior Vice President for Corporate Development of Sony Corporation of America. Ms. Solomon joined Sony in January 1994 to oversee that company's investments in satellite and cable radio and to assist in the development of worldwide music video channels. Ms. Solomon served as Chief Executive Officer, President and founder of Sony Worldwide Networks, from its inception in March 1994. From October 1992 to January 1994, she served as Executive Vice President of McAndrews and Forbes' media holding subsidiary The Andrews Group. Prior to that, Ms. Solomon held a number of senior executive positions in the media and entertainment industry, including being affiliated with MMG Patricof & Co. as a senior investment banker specializing in entertainment and media. Ms. Solomon received a B.A. from New York University in 1975, and a J.D. degree from Rutgers Law School in 1978, where she was an editor for the Law Review. She is a member of the New York Bar, and serves on the Board of the New York Chapter of the Juvenile Diabetes Foundation. CECILY TRUETT is co-founder of the Company and has served as Co-President of the Company since April 1997. From March 1989 through March 1997, she served as Chairman of the Board of Directors and Chief Executive Officer of the Company. From the Company's inception in 1979 through March 1989, Ms. Truett served as Executive Vice President of the Company. From 1978 to 1979, Ms. Truett was Project Director of Books and Broadcasting For Children, an international symposium in children's media. Between 1974 and 1978, she was an associate producer/producer for South Carolina Educational Television Network ("SCETV"). Ms. Truett has served as a Blue Ribbon panelist for the Emmy Awards and as a judge at the Prix Jeunesse International Awards for children's programs. Ms. Truett has also written an Emmy Award-winning episode of Reading Rainbow. Ms. Truett is the wife of Laurence A. Lancit. LAURENCE A. LANCIT is co-founder of the Company and has served as Co-President of the Company since April 1997 and as a Director since the Company's inception. He served as President and Chief Operating Officer of the Company from its inception in 1979 through March 1997, as well as Treasurer through June 1995. From 1977 to 1979, he was a producer/director for the Network for Continuing Medical Education, a major distributor of medical information productions to hospitals nationwide. From 1971 to 1977, Mr. Lancit was a producer/director for SCETV, a PBS affiliate. During this period, his credits included Director of "Lowell Thomas Remembers", a series of 44 half hours, and "10 Years of Firing Line" with William F. Buckley Jr. In June 1992, Mr. Lancit received a 1992 Daytime Emmy Award as Best Director In A Children's Series for his efforts on Reading Rainbow. Mr. Lancit is the husband of Cecily Truett. ORLY WISEMAN has been supervising producer of Reading Rainbow since 1982 and in April 1993 was promoted to Senior Vice President Production from Vice President - Production. During her tenure, the series has been the recipient of every major award in children's programming, including nine Emmys, the Prix Jeunesse International and the Peabody. Prior to joining the Company, Ms. Wiseman served as a producer for Hearst/ABC Cable and a variety of commercial television projects. GARY APPELBAUM, who joined the Company as Vice President and Controller in October 1992, became a Senior Vice President and the Chief Financial Officer in October 1993. In June 1995, he became the Treasurer as well. Mr. Appelbaum worked for Madison Square Garden Corporation from 1989 to 1992, first as Assistant Controller and then as Vice President and Controller. Prior to that, Mr. Appelbaum worked for Four M Manufacturing as Corporate Controller from 1988 to 1989. Mr. Appelbaum is a CPA and received a Masters in Business Administration from New York University in 1987. JANE M. ABERNETHY joined the Company as Vice President - Legal & Business Affairs in October 1995 and became Senior Vice President - - Legal & Business Affairs in August 1997. Ms. Abernethy was an associate with the entertainment law firm of Frankfurt, Garbus, Klein & Selz, P.C. from April 1991 through September 1995. From September 1986 through March 1991, Ms. Abernethy was a corporate associate with the firm of Kramer, Levin, Naftalis & Frankel. Ms. Abernethy is a graduate of New York University School of Law (J.D.) and Princeton University (A.B.). She serves on the Board of Directors of Cause Effective, Inc., a non-profit technical assistance provider to other non-profit corporations. NOEL RESNICK joined the Company in February 1996 as Senior Vice President - - Development. Ms. Resnick has been an award winning independent producer of children's and family entertainment since 1986. In addition to developing and producing both live action and animation programs for network and cable television, she produced the critically acclaimed film The Little Kidnappers (1990 - recipient of the Banff Television Festival "Rockie" Award for Best Children's Program of 1991) as well as the highly rated trilogy of Not Quite Human movies (1987, 1989, 1992) for Disney. Ms. Resnick's other executive producing credits include the animated ABC Weekend Special The Magic Flute (1994), ABC Afterschool Special Magical Makeover (1994), CBS Storybreak wraparounds (1993) and the CBS Schoolbreak Special But He Loves Me (1991). Her production of the 100th ABC Afterschool Special The Gift of Amazing Grace was awarded the 1987 NAACP Image Award for Best Children's Special. From 1976 to 1986, she served in several executive positions at ABC Television in the children's and family programming arena where she was responsible for the development and production of ABC's Afterschool Specials, Weekend Specials, primetime family specials and Saturday morning series. DAVID MICHAELS, who joined the Company in March 1996 as Vice President - Motion Pictures, became Senior Vice President - Motion Pictures in March 1997. From 1994 through February 1996, Mr. Michaels developed motion picture projects for Le Bad, Incorporated, the production company for director Russell Mulcahy (Highlander, Ricochet, The Shadow). Concurrently, as an independent producer through his own company, Good Medicine Films, Inc., Mr. Michaels produced or executive produced a number of projects including Ringside, Not Even Trees and The Reunion. From 1992 through 1994, Mr. Michaels worked as a writer/producer with Media, Incorporated, a television and commercial production company. In addition, during 1991 to 1995, Mr. Michaels worked as a freelance editor for the New York Times creating advertorial sections for the paper. Prior to that, Mr. Michaels was a story editor for several series produced by Lorimar-Telepictures. IRENE V. MINETT, who joined the Company in April 1997 as Vice President - Marketing, became Senior Vice President - Marketing in August 1997. From 1994 to April 1997, Ms. Minett was Vice President Entertainment Programming and Marketing, for Sony Worldwide Networks, the radio division of Sony Corp. of America, where she produced and marketed a series of live concert simulcasts with the Arts & Entertainment cable television network and successfully developed, executed and managed the Entertainment & Music News Network programming. From 1987 to 1994, Ms. Minett was Director of Entertainment Programming and Marketing at ABC Radio Networks where she created and executed marketing and promotional campaigns as well as image enhancing programming. She negotiated, produced and marketed a variety of concert broadcast and promotional events including the Rolling Stones' 1989 Steel Wheels Tour, the American Top 40 Concert Tour and the series ABC In Concert. MARC L. BAILIN has served as Secretary and as a Director of the Company since the Company's inception in 1979. He is a senior partner of Rubin, Bailin, Ortoli, Mayer, Baker & Fry LLP and has been engaged in the practice of entertainment and corporate law in New York and California for nineteen years. Mr. Bailin has served as the line production attorney for the Reading Rainbow series since its creation and has served as Executive Producer of nine feature length action motion pictures. Mr. Bailin is also a Director and founder of Virtu Management Group, Ltd., a business management and financial affairs firm for a variety of leading motion picture, prime-time television and daytime television personalities. Mr. Bailin attended The New York University and Boston University Schools of Law (J.D.) as well as Columbia University Graduate School of Business (M.B.A.) and Yale College (B.A.). JOSEPH KLING has served as a Director of the Company since 1993. From 1985 to 1989, Mr. Kling was Vice Chairman and President of View Master Ideal Group. From 1989 to 1991, he was President of Sharon Industries, Inc., a manufacturer and distributor of toy products. Since 1991, he has been President of PAMSCO Inc., a consulting company. Mr. Kling is on the Board of Directors of Russ Berrie & Co., a New York Stock Exchange-listed designer and marketer of gift products worldwide. JOHN R. COSTANTINO has served as a Director of the Company since May 1995. From 1978 to 1984, Mr. Costantino was a Senior Tax Partner at Touche Ross & Co. where he served as Managing Tax Partner of the firm's New York practice. From 1984 to 1985, he was President and Managing Director of Integrated Acquisition Corporation. From 1985 to 1987, he was Senior Executive Vice President and Chief Operating Officer of Conair Corporation. Since 1987 he has been a private investor and is presently a principal of Walden Partners Ltd., an investment partnership. Mr. Costantino is a member of the Board of Directors of Brooklyn Bancorp Inc. (the holding company for Crossland Federal Savings Bank), a Trustee of the General Electric Company's family of funds and is also a director of a number of domestic and international companies. He is an attorney and certified public accountant admitted to practice in New York State. ROGER C. FAXON has served as a Director of the Company since January 1997. Mr. Faxon was named Senior Vice President - Business Development and Strategy of EMI Music in April 1994 and is responsible for EMI's world-wide planning process and development of market strategies for over seventy countries. In June 1990, Mr. Faxon was appointed Executive Vice President of Sotheby's in North and South America and in September 1991 was named Managing Director of Sotheby's Europe. Mr. Faxon has a B.A. degree from the Johns Hopkins University of Baltimore, Maryland. A. ROBERT TOWBIN has served as a Director of the Company since May 1997. Mr. Towbin was named Managing Director of Unterberg Harris in September 1995. In January 1987, Mr. Towbin joined Shearson Lehman Hutton, Inc., now Lehman Brothers, as a Managing Director. In January 1994, Mr. Towbin was appointed President and Chief Executive Officer of the Russian-American Enterprise Fund. Mr. Towbin serves as a Corporate Director of Bradley Real Estate, Inc., Gerber Scientific, Inc., Columbus New Millennium Fund (London), K&F Industries, Inc. and Globalstar Telecommunications. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and persons who own beneficially more than ten percent of the Company's outstanding Common Stock to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of Common Stock and other securities of the Company on Forms 3, 4 and 5, and to furnish the Company with copies of all such forms they file. Based on a review of copies of such reports furnished to it, the Company believes that all of the Company's directors and officers timely filed all reports required during the fiscal year ended June 30, 1997, except that the Forms 3 for each of Mr. Faxon, Ms. Minett and Mr. Towbin were filed more than 10 days after the occurrence of the events that required their filing; Mr. Appelbaum filed a late Form 4 reporting the exercise of an employee stock option; and the Forms 5 for each of Mr. Towbin and Ms. Scanlan, reporting only exempt transactions, were filed late. Item 11. Executive Compensation The following table sets forth the aggregate compensation earned for services rendered during the three fiscal years ended June 30, 1997, 1996 and 1995 to the Company's chief executive officer and the four other most highly compensated executive officers other than the chief executive officer to whom aggregate annual compensation (salary and bonus) exceeded $100,000 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE Annual Compensation Other Securities All Annual Underlying Other Name and Year Salary Bonus Compensation Options/SARs(1) Compensation Principal Ended ($) ($) ($) (#) ($) Position June 30, Susan L. 1997 $108,814 $150,000(2) $49,755(3) 750,000(4)/ $5,625(12) Solomon 255,000(5) Chief 1996 - - - - - Executive 1995 - - - - - Officer and Chairman of the Board of Directors* Cecily 1997 $150,000 - $ 9,661(7) 45,000/0(8) $10,159(13) Truett 1996 $146,600 $ 2,000(6) $19,803(7) - $ 6,247(13) Co-President**1995 $133,300 $10,665(6) $34,829(7) - $ 8,528(13) Laurence 1997 $150,000 - $16,870(9) 45,000/0(8) $12,785(14) A. Lancit 1996 $146,600 $ 2,000(6) $28,587(9) - $ 7,988(14) Co-President***1995$133,300 $10,665(6) $11,750(9) - $11,994(14) Arlene J. 1997 $125,000 $ 1,000(6) - 15,000/0(11) $ 3,780(15) Scanlan 1996 $125,000 $ 2,000(6) - - $ 4,070(15) President 1995 $125,000 $10,665(6) - 5,000/0(11) $ 3,810(15) of Strategy**** Noel 1997 $127,083 750(6) $ 7,200(10) - $ 2,898(16) Resnick 1996 $ 46,875 - $ 2,700(10) 33,000/0(11) - Senior 1995 - - - - - Vice President Development * Became Chief Executive Officer and Chairman of the Board commencing April 1, 1997. ** Was Chief Executive Officer and Chairman of the Board until March 31, 1997. *** Was President and Chief Operating Officer until March 31, 1997. **** Terminated, effective September 23, 1997 (1) All options listed were granted pursuant to either the 1990 Stock Option Plan (as amended, the "1990 Plan") or the 1997 Stock Incentive Plan (as amended, the "1997 Plan"), as indicated. Stock appreciation rights ("SARs") were granted under the Company's 1997 Value Incentive Bonus Program. Option exercise prices and SAR measuring values are at or above the fair market value of the Company's Common Stock as reported on NASDAQ on the date of grant (see "Executive Compensation - Option/SAR Grants In Last Fiscal Year", below). (2) Ms. Solomon earned a signing bonus of $150,000 upon her hiring. (3) Ms. Solomon received other annual compensation in the form of paid advisory services along with a tax equalization for negotiation of her employment contract totaling $49,755. (4) Consists of (i) options to purchase 255,000 shares of the Company's Common Stock granted pursuant to the 1997 Plan (the "1997 Plan Option"), subject to approval of such plan or such options by the Company's shareholders; and (ii) options to purchase 495,000 shares of the Company's Common Stock granted pursuant to the 1990 Plan. (5) SARs are subject to cancellation upon approval by the Company's shareholders of either the 1997 Plan or the 1997 Plan Option. Does not include 700,000 SARs which were granted on March 31, 1997 and canceled on June 20, 1997. (6) Officers, as a group, under an incentive bonus plan (the "Bonus Plan"), receive a bonus of 5% of pre-tax income (before bonus), for a fiscal year, provided that (i) pretax income (before bonus) for such fiscal year is at least $250,000, (ii) net income for such fiscal year exceeds net income for the prior fiscal year, and (iii) net income is at least $.05 per share (adjusted for stock splits and stock dividends), on a fully diluted basis. No amounts were accrued under the Bonus Plan for fiscal 1997 or fiscal 1996. $77,987 was accrued under the Bonus Plan for fiscal 1995 and each eligible individual received $8,665 which was paid in fiscal 1996. Other bonus amounts shown are holiday bonuses for which all employees are eligible. The amounts of these bonuses are determined at the discretion of management. (7) Ms. Truett received other annual compensation in the form of royalty payments as one of the creators of The Puzzle Place of $9,661, $19,803 and $34,830 in fiscal 1997, 1996 and 1995, respectively. (8) Granted pursuant to the 1997 Plan. Stock options granted under the 1997 Plan are generally exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value of the Company's Common Stock on the date of grant. Stock options granted under the 1997 Plan generally vest on or before the first anniversary of the date of grant. The 1997 Plan is subject to approval by the Company's shareholders. (9) Mr. Lancit received other annual compensation as follows: auto expense allowance of $16,871, $15,280 and $11,750 in fiscal 1997, 1996 and 1995, respectively; and fees for his services as a director of Reading Rainbow in the amount of $13,307 in fiscal 1996. (10) Ms. Resnick received other annual compensation as follows: auto expense allowance of $7,200 and $2,700 in fiscal 1997 and 1996, respectively. (11) Granted pursuant to the 1990 Plan. Stock options granted under the 1990 Plan are generally exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the 1990 Plan to a shareholder owning more than 10% of the outstanding Common Stock may not exceed five years and its exercise price may not be less than 110% of the fair market value of the Common Stock on the date of the grant. Stock options granted under the 1990 Plan generally vest on or before the first anniversary of the date of grant. (12) Ms. Solomon received other compensation as follows: an automobile allowance of $5,625. (13) Ms. Truett received other annual compensation as follows: employer paid life insurance of $5,660, $1,590, and $4,339 in fiscal 1997, 1996 and 1995, respectively; employer 401(k) contributions of $4,500, $4,658 and $4,189 in fiscal 1997, 1996 and 1995, respectively. (14) Mr. Lancit received other compensation as follows: employer paid life insurance of $8,285, $3,330 and $7,362 in fiscal 1997, 1996 and 1995, respectively; employer 401(k) contributions of $4,500, $4,657 and $4,632 in fiscal 1997, 1996 and 1995, respectively. (15) Ms. Scanlan received other compensation as follows: employer 401(k) contributions of $3,780, $4,070 and $3,810 in fiscal 1997, 1996 and 1995, respectively. (16) Ms. Resnick received other compensation as follows: employer 401(k) contributions of $2,898 in fiscal 1997. Employment Contracts On April 1, 1997, the Company entered into an employment agreement with Susan L. Solomon in connection with her appointment as Chairman of the Board and Chief Executive Officer, which employment agreement was amended on June 20, 1997. The agreement has a three-year term and is subject to renewal such that, unless and until terminated by either party, the remaining term thereof is never less than two years. Annual base salary thereunder is $350,000, subject to increase from year to year by a minimum amount based on the annual increase in the consumer price index, with the actual amount of the increase being determined by the Board of Directors. In addition, the agreement calls for Ms. Solomon to receive, on an annual basis, a performance bonus equal to a set percentage of certain established, annually increasing levels of the Company's pretax income, and additional bonus payments in the event of certain third-party investments in the Company. Ms. Solomon is also entitled to participate in the Bonus Plan. If her employment agreement were terminated by either party following a change in control, as defined in the employment agreement, Ms. Solomon would be entitled to her base salary and bonus payable throughout the remaining term of the agreement. Pursuant to her employment agreement, Ms. Solomon also received certain stock options and stock appreciation rights (see "Executive Compensation - Option/SAR Grants in Last Fiscal Year" below). In October 1995, the Company entered into employment agreements, covering the term from October 1, 1995 to October 1, 1998, with each of Cecily Truett and Laurence A. Lancit. Each agreement provides for a base annual salary starting at $150,000 for the first year, subject to increases in each of the remaining two years in a minimum amount based on the annual increase in the consumer price index, with the actual amount of the increase being determined by the Board of Directors. Each of Ms. Truett and Mr. Lancit is eligible to participate in the Bonus Plan. Following a change in control of the Company, as defined in each such agreement, each of Ms. Truett and Mr. Lancit could terminate her or his employment with the Company for any reason within one year after the change in control and certain provisions of the employment agreement relating to future employment would not apply. Additionally, in the event that the Company terminates the employment of either of Ms. Truett or Mr. Lancit, other than for cause, within one year following a change in control, Ms. Truett and/or Mr. Lancit, as the case may be, would receive payment in the amount of the greater of (i) her or his then existing annual base salary or (ii) the balance of her or his base salary due for the remaining term of the employment agreement. In September 1997, the Company and Noel Resnick executed an employment agreement, covering the term from February 16, 1996 to February 16, 1998. The agreement provides for an annual base salary of $125,000 in the first year and at least $130,000 in the second year. Ms. Resnick is eligible to participate in the Bonus Plan. The following table sets forth all grants of stock options and stock appreciation rights during the fiscal year ended June 30, 1997 to the Named Executive Officers. OPTION/SAR GRANTS IN LAST FISCAL YEAR (Individual Grants) Potential Realizable Value at Individual Grants Assumed Annual Rates of Stock Price Appreciation for Option Term(5) Number of % of Securities Total Underlying Options/ Options/ SARs Exercise SARs Granted or Expiration Name Granted to Base Date 0%($) 5%($) 10%($) (#)(1) Employees Price in ($/Sh)(1) Fiscal Year(4) Susan L. 495,000(2),(9) 41.8% 3.15625 03-31-07 - 1,296,745 5,921,282 Solomon, 255,000(8),(10) 21.6% 3.15625 03-31-07(6) - 668,020 3,050,358 Chief 255,000(3),(11) 21.6% 3.15625 03-31-07(7) - 668,020 3,050,358 Executive Officer and Chairman of the Board* Cecily Truett, 45,000(3),(12) 3.8% 3.15625 06-20-07 - 117,886 538,298 Co-President** Laurence A. Lancit, 45,000(3),(12) 3.8% 3.15625 06-20-07 - 117,886 538,298 Co-President*** Arlene J. Scanlan, 15,000(2),(13) 1.3% 3.15625 12-23-97(13)- 39,295 179,432 President, The Strategy Licensing Company, Inc.**** Noel Resnick, 33,000(2),(14) 2.8% 3.15625 06-20-07 - 86,450 394,752 Senior Vice President-Development * Became Chief Executive Officer and Chairman of the Board commencing April 1, 1997. ** Was Chief Executive Officer and Chairman of the Board until March 31, 1997. *** Was President and Chief Operating Officer until March 31, 1997. **** Terminated, effective September 23, 1997 (1) All options listed were granted pursuant to either the 1990 Plan or the 1997 Plan, as indicated. Stock appreciation rights ("SARs") were granted under the Company's 1997 Value Incentive Bonus Program. Option exercise prices and SAR measuring values are at the average of the last bid and the last ask prices of the Company's Common Stock as reported on NASDAQ on the date of grant. (2) Granted pursuant to the 1990 Plan. Stock options granted under the 1990 Plan are generally exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the 1990 Plan to a shareholder owning more than 10% of the outstanding Common Stock of the Company may not exceed five years and its exercise price may not be less than 110% of the fair market value of the Common Stock on the date of the grant. Stock options granted under the 1990 Plan generally vest on or before the first anniversary of the date of grant. The 1990 Plan provides for accelerated vesting upon the occurrence of certain transactions which would otherwise cause such options to be extinguished. (3) Granted pursuant to the 1997 Plan. Stock options granted under the 1997 Plan are generally exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value of the Company's Common Stock on the date of grant. Stock options granted under the 1997 Plan generally vest on or before the first anniversary of the date of grant. Options granted under the 1997 Plan provide for accelerated vesting upon the occurrence of certain transactions which would otherwise extinguish such options. The 1997 Plan is subject to approval by the Company's shareholders. (4) Based on the total number of stock options and SARs granted to all employees and directors of the Company under the Company's various stock incentive plans during the fiscal year ended June 30, 1997, or a total of 1,182,350 rights. Excludes (i) 255,000 rights granted to Ms. Solomon, as either the 255,000 SARs or the 1997 Plan Option will be canceled on or prior to December 31, 1997 (see Notes 6 and 7 below) and (ii) 700,000 SARs which were granted to Ms. Solomon on March 31, 1997 and were canceled on June 20, 1997. (5) The dollar amounts shown under these columns are the results of calculations at 0% and at the 5% and 10% rates set by the SEC for the maximum option term and are not intended to, and may not accurately, forecast possible future appreciation, if any, in the price of the Company's Common Stock. (6) Subject to cancellation if either the 1997 Plan Option or the 1997 Plan is approved by the shareholders of the Company on or prior to December 31, 1997. (7) Subject to cancellation if the 1997 Plan Option or the 1997 Plan is not approved by the shareholders of the Company on or prior to December 31, 1997. (8) SARs granted pursuant to the Company's 1997 Value Incentive Bonus Program (as amended, the "Program"). SARs granted under the Program are generally convertible for a period of up to 10 years from the date of grant at a measuring price equal to the fair market value of the Company's Common Stock on the date of grant. (9)Options become exercisable on the earlier to occur of (i) October 1, 1997, or (ii) a change in control of the Company. Options granted in partial replacement of the cancellation of 700,000 SARs (see Note 10 below). (10)SARs become payable upon conversion in cash or common stock, at the option of the Company, upon the earliest to occur of (i) a meeting, which is required to be held no later than December 31, 1997, at which the Company's shareholders decline to approve or ratify the 1997 Plan or the 1997 Plan Option, (ii) December 31, 1997, or (iii) a change in control of the Company. Upon approval or ratification by the shareholders on or before December 31, 1997 of either the 1997 Plan or the 1997 Plan Option, the SARs granted pursuant to the Program will be canceled. SARs remain convertible until March 31, 2007, unless earlier canceled in accordance with their terms. Does not include 700,000 SARs which were granted to Ms. Solomon on March 31, 1997 and canceled on June 20, 1997 (11)Options become exercisable on the later to occur of (i) October 1, 1997 or (ii) the date the 1997 Plan or the 1997 Plan Option is approved or ratified by the Company's shareholders at the meeting described in Note 10 above; provided that if the 1997 Plan Option or the 1997 Plan has been approved or ratified by the Company's shareholders and if the 1997 Plan Option is not already exercisable in accordance with its terms, the 1997 Plan Option shall become exercisable upon a change in control of the Company. (12)22,500 options became exercisable on the date of grant; the remaining 22,500 options become exercisable on June 20, 1998. (13)Granted in connection with the Company's stock option "rejuvenation" program (the "Rejuvenation"), pursuant to which each employee of the Company, including executive officers, could elect to forfeit the stock options held by him or her which were previously granted pursuant to the 1990 Plan, in exchange for an option to purchase one-half the number of shares of Common Stock of the Company as was represented by the options so forfeited. In each instance, the vesting schedule of the forfeited option was retained, but a new exercise price equal to the fair market value of the Company's Common Stock on June 20, 1997 and a new expiration date of 10 years from June 20, 1997 was assigned. Options became exercisable on the date of grant. Due to Ms. Scanlan's termination, these options will expire on December 23, 1997. (14)Granted pursuant to the Rejuvenation. 15,000 options became exercisable on the date of grant; 7,500 become exercisable on February 15, 1998; 3,500 options become exercisable on the earlier to occur of (i) the Company meeting certain performance goals or (ii) January 17, 2006; 7,500 options become exercisable on the earlier to occur of (i) the Company meeting certain performance goals or (ii) February 9, 2007. The following table sets forth information with respect to options exercised by each of the Named Executive Officers during the fiscal year ended June 30, 1997 and the number and value of their unexercised options and stock appreciation rights as of June 30, 1997. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Number of Securities Value of Underlying Unexercised Unexercised in-the-Money Options/SARs at Options/SARs Fiscal Year End (#) at Fiscal Year End ($)(1) Shares Value Acquired Realized Unexer- Name on ($) Exercisable Unexercisable Exercisable cisable Exercise (#) Susan L. -- -- 495,000/255,000 255,000/0 -- -- Solomon, -- Chief Executive Officer and Chairman of the Board* Cecily -- -- 22,500/0 22,500/0 -- -- Truett, Co-President** Laurence A. -- -- 22,500/0 22,500/0 -- -- Lancit, Co-President*** Arlene J. -- -- 15,000/0 -- -- -- Scanlan, President, The Strategy Licensing Company, Inc.**** Noel -- -- 15,000/0 18,000/0 -- -- Resnick, Senior Vice President-Development * Became Chief Executive Officer and Chairman of the Board commencing April 1, 1997. ** Was Chief Executive Officer and Chairman of the Board until March 31, 1997. *** Was President and Chief Operating Officer until March 31, 1997. **** Terminated, effective September 23, 1997. (1) There were no "in-the-money" options/SARs at the Company's fiscal year-end, based on the closing price of the Company's Common Stock on NASDAQ on June 30, 1997, the last day of trading in the Company's fiscal year ended June 30, 1997, or $3.125. Compensation Committee Interlocks and Insider Participation Laurence A. Lancit served on the Compensation Advisory Committee which administered the 1990 Plan through October 1996, who, during that period was the Company's President and Chief Operating Officer. Each of Cecily Truett, who, during that period, was the Company's Chairman of the Board, and Marc L. Bailin, the Company's Secretary, also served on the Compensation Advisory Committee. Mr. Bailin also served on the Compensation Committee. No executive officer of the Company served on the board of directors or compensation committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors, Compensation Committee or Compensation Advisory Committee. Compensation of Directors Directors who are not also employed by the Company presently receive $1,500 semi-annually, as compensation for serving on the Board. In addition, in December 1994, the Company adopted the 1994 Non-Employee Director Non-Qualified Stock Option Plan (as amended, the "1994 Plan") authorizing the issuance of options for the purchase of a total of up to 45,000 shares of the Company's Common Stock. Only non-employee directors of the Company are eligible to participate in the 1994 Plan. The 1994 Plan provides that each non-employee director shall be granted options to purchase 3,000 shares of the Company's Common Stock on the day of his or her initial appointment to the Board of Directors and annually thereafter on the day of his or her re-election. The exercise price per share for each option granted is the fair market value of the Company's Common Stock on the date of grant. Each option is exercisable in full one year from the date of grant and expires no later than ten (10) years from the date of grant. The 1994 Plan provides for accelerated vesting upon the occurrence of certain transactions which would otherwise cause such options to be extinguished. In addition to the options automatically granted under the 1994 Plan, on June 20, 1997, each of Messrs. Bailin, Costantino, Faxon, Kling and Towbin received an option to purchase 5,000 shares of the Company's Common Stock at an exercise price of $3.15625 under the Company's 1997 Plan, subject to approval of the 1997 Plan by the Company's shareholders. Each option is exercisable in full one year from the date of grant and expires no later than ten (10) years from the date of grant. Options granted under the 1997 Plan provide for accelerated vesting upon the occurrence of certain transactions which would otherwise cause such options to be extinguished. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of October 3, 1997 the ownership of the Company's Common Stock held by (i) each person who owns of record or who is known by the Company to own beneficially more than 5% of such stock, (ii) each of the directors of the Company, (iii) each of the Named Executive Officers and (iv) all of the Company's directors and executive officers as a group. As of such date, the Company had 6,634,750 shares of Common Stock issued and outstanding. The number of shares and the percentage of the class beneficially owned by the persons named in the table and by all directors and executive officers as a group is presented in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended, and includes, in addition to shares actually issued and outstanding, unissued shares which are subject to issuance upon exercise of options or warrants which are or will become exercisable within 60 days. Except as otherwise indicated, the persons named in the table have sole voting and dispositive power with respect to all securities listed. SECURITY OWNERSHIP Percent Amount and Nature of Class of Beneficial (%) Ownership Name and Address of Beneficial Owners Discovery Communications, Inc. 7700 Wisconsin Avenue Bethesda, Maryland 11.9% 20814............................................876,232.(1)... Directors and Executive Officers (2) Laurence A. Lancit............................ 7.8% 575,613 (3) Cecily Truett................................. 7.8% 575,613 (3) Susan L. Solomon.............................. 495,000 (4) 6.7% Arlene J. Scanlan**........................... * 55,000 (5) Noel Resnick.................................. * 15,000 (6) John R. Costantino............................ * 29,400 (7) Marc L. Bailin................................ * 27,000 (8) Joseph Kling.................................. * 6,000 (9) Roger C. * Faxon............................................-.(10)........................ A. Robert * Towbin...........................................-.(11)...................... All Directors and Executive Officers as a Group 25.4% (16 persons).................................. 1,876,906 (12) * Less than 1% ** Terminated, effective September 23, 1997 (1) Includes 438,116 shares which Discovery Communications, Inc. has the right to acquire upon the exercise of currently exercisable warrants. The foregoing information is derived from the Statement on Schedule 13D of Discovery Communications, Inc., filed with the SEC on September 27, 1996. (2) The address for each of the directors and executive officers is c/o Lancit Media Entertainment, Ltd., 601 West 50th Street, New York, New York 10019. (3) Laurence A. Lancit and Cecily Truett are husband and wife. The number of shares shown for each of them includes (i) 553,113 shares of Common Stock held by each of them individually, and (ii) 22,500 shares of Common Stock which are the subject of currently exercisable stock options. The number of shares shown for each of them excludes (i) 2,932 held by their children, as to which each disclaims beneficial ownership, (ii) 40,080 shares held by a trust for the benefit of their children, as to which each disclaims beneficial ownership, and (iii) 553,113 shares of Common Stock held by each other's spouse, as to which each disclaims beneficial ownership, and (iv) 22,500 shares of Common Stock which are the subject of options which are not currently exercisable and will not become exercisable within 60 days. (4) Includes 495,000 shares which are the subject of options granted to Ms. Solomon which are currently exercisable. Excludes (i)255,000 shares which are the subject of options granted to Ms. Solomon which are not currently exercisable and will not become exercisable within 60 days and are subject to ratification by the Company's shareholders, and (ii) any shares which may be issuable, at the option of the Company, upon the conversion of certain stock appreciation rights which were granted to Ms. Solomon. (5) Includes 15,000 shares of Common Stock which are the subject of options granted to Ms. Scanlan which are currently exercisable. (6) Includes 15,000 shares of Common Stock which are the subject of options granted to Ms. Resnick which are currently exercisable. Excludes 18,000 shares of Common Stock which are the subject of options granted to Ms. Resnick which are not currently exercisable and will not become exercisable within 60 days. (7) Includes (i) 13,400 shares which Walden Partners Ltd., of which Mr. Costantino is a vice president, director and principal, has the right to acquire upon the exercise of currently exercisable stock options, and (ii) 6,000 shares which Mr. Costantino has the right to acquire upon the exercise of currently exercisable stock options. Excludes 8,000 shares of Common Stock which are the subject of options granted to Mr. Costantino which are not currently exercisable and will not become exercisable within 60 days. (8) Includes 6,000 shares which Mr. Bailin has the right to acquire upon the exercise of currently exercisable stock options. Excludes (i) 15,000 shares owned by Marie Valdes, M.D., wife of Mr. Bailin, as to which shares Mr. Bailin disclaims any beneficial interest, and (ii) 8,000 shares of Common Stock which are the subject of options granted to Mr. Bailin which are not currently exercisable and will not become exercisable within 60 days. (9) Includes 6,000 shares of Common Stock which Mr. Kling has the right to acquire upon the exercise of currently exercisable stock options. Excludes 8,000 shares of Common Stock which are the subject of options granted to Mr. Kling which are not currently exercisable and will not become exercisable within 60 days. (10) Excludes 8,000 shares of Common Stock which are the subject of options granted to Mr. Faxon which are not currently exercisable and will not become exercisable within 60 days. (11) Excludes 8,000 shares of Common Stock which are the subject of options granted to Mr. Towbin which are not currently exercisable and will not become exercisable within 60 days. (12) Includes an aggregate of 733,400 shares of Common Stock which the executive officers and directors have the right to acquire upon the exercise of currently exercisable stock options or stock options which become exercisable within 60 days, including 15,000 shares of Common Stock subject to stock options held by Ms. Scanlan, whose employment was terminated effective September 23, 1997. Excludes an aggregate of 888,500 shares which are the subject of options granted to the executive officers and directors which are not currently exercisable and will not become exercisable within 60 days. Item 13. Certain Relationships and Related Transactions The Company's corporate secretary, Marc L. Bailin, is a partner in Rubin Bailin Ortoli Mayer Baker & Fry LLP. The Company paid legal fees of $195,040, $121,157, and $135,140 to Rubin Bailin Ortoli Mayer Baker & Fry LLP and its predecessor firm, for the fiscal years ended June 30, 1997, 1996, and 1995, respectively. The Company had entered into an arrangement with Walden Partners, Ltd. ("Walden"), pursuant to which Walden provided the Company with regular and customary consulting advice involving matters relating to the Company's internal operations, corporate transactions and financial markets. The arrangement had a term commencing October 20, 1995 and ending October 31, 1996. Pursuant to the arrangement, the Company paid Walden a monthly fee of $833 and granted Walden an option under the 1990 Plan to purchase 13,400 shares of Common Stock with an exercise price equal to the fair market value of the Common Stock on, and expiring five years from, the date of grant. John R. Costantino is a vice president, director and principal of Walden. Simultaneously with the equity purchase transaction between DCI and the Company on September 25, 1996, the Company entered into a non-exclusive Production Output Agreement pursuant to which the Company will develop and produce children's programming for Discovery Channel's new Sunday children's block. A new agreement was entered into in May 1997, pursuant to which the Company will own the copyright for and expects to derive licensing revenues from, programming it produces for DCI (a minimum of one-sixth of the total "Discovery Kids" programming block). The value of the agreement may vary on a case-by-case basis. In March 1997, the Company entered into an employment agreement with David Michaels, pursuant to which Mr. Michaels would serve as the Company's Senior Vice President - Motion Pictures. Mr. Michaels currently has, and will continue to have, a significant ownership interest in the motion picture/television production company Good Medicine Films, Inc. ("GMF") Under the terms of the employment agreement, GMF granted to the Company first negotiation and matching rights with respect to certain projects under development by GMF. The Company has acquired options to certain properties held by GMF. The dollar value of such rights may vary on a case-by-case basis. In October 1997, the Company entered into an agreement with Arlene J. Scanlan, pursuant to which the Company acquired the remaining 15% of the outstanding shares of the capital stock of Strategy held by her. Additionally, Ms. Scanlan's employment with Strategy and the Company was terminated. In consideration of the foregoing, the Company paid Ms. Scanlan an aggregate of $30,788 and has released Ms. Scanlan from certain restrictions contained in a covenant not to compete with respect to specified properties and entities. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements Page Report of Independent Auditors F-2 Report of Predecessor Independent Auditors F-2a Consolidated Balance Sheets - June 30, 1997 and 1996 F-3 Consolidated Statements of Operations - Years Ended June 30, 1997, 1996 and 1995 F-4 Consolidated Statements of Stockholders' Equity Period from July 1, 1994 through June 30, 1997 F-5 Consolidated Statements of Cash Flows - Years Ended June 30, 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-7 (a)(2) Financial Statement Schedules Report of Independent Auditors F-19 Schedule II - Valuation and Qualifying Accounts F-20 (a)(3) Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1995) 3.2 By-Laws of the Registrant, as amended (filed herewith) 4.1 Specimen Certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-18 (File No. 33-40701-NY)) 4.2 Form of Warrant issued to Robinson Lerer & Montgomery, LLC (filed herewith) 4.3 Form of Warrant issued to Allen & Company, Inc. (filed herewith) 4.4 Form of Stock Purchase Warrant issued to Discovery Communications, Inc. (see Exhibit A to Stock Purchase Agreement, dated as of September 25, 1996, between the Registrant and Discovery Communications, Inc., filed as Exhibit 10.19 to this Annual Report on Form 10-K) 10.1 Employment Agreement, dated as of October 1, 1995, between the Registrant and Laurence A. Lancit (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996) 10.2 Employment Agreement, dated as of October 1, 1995, between the Registrant and Cecily Truett (incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996) 10.3 Employment Agreement, dated as of March 31, 1997, between the Registrant and Susan Solomon (incorporated by reference to Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997) 10.4 Amendment No. 1, dated as of June 20, 1997, to the Employment Agreement, dated as of March 31, 1997, between the Registrant and Susan Solomon (filed herewith) 10.5 Employment Agreement, dated as of February 16, 1996, between the Registrant and Noel Resnick (filed herewith) 10.6 Employment Agreement, dated as of February 25, 1997, between the Registrant and David Michaels (incorporated by reference to Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997) 10.7 Employment Agreement, dated as of June 16, 1997, between the Registrant and Jane M. Abernethy (filed herewith) 10.8 Employment Agreement, dated as of April 14, 1997, between the Registrant and Irene V. Minett (filed herewith) 10.9 Executive Stock Option Plan (incorporated by reference to Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-95582)) 10.10 1990 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.12 of the Registrant's Quarterly Report on From 10-Q for the fiscal quarter ended December 31, 1995) 10.11 1994 Non-Employee Director Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.13 of the Registrant's Quarterly Report on From 10-Q for the fiscal quarter ended December 31, 1995) 10.12 Incentive Bonus Plan (see the description thereof appearing in Footnote (6) to the Summary Compensation Table) 10.13 1997 Incentive Stock Plan (filed herewith) 10.14 1997 Value Incentive Bonus Program (see the description thereof appearing in Schedule A to Amendment No. 1, dated as of June 20, 1997, to the Employment Agreement, dated as of March 31, 1997, between the Registrant and Susan Solomon, filed as Exhibit 10.4 to this Annual Report on Form 10-K) 10.15 Leases for premises at 601 West 50th Street, New York, New York (incorporated by reference to Exhibit 10.1 of the Registrant's Registration Statement on Form S-18 (File No. 33-40701-NY)) 10.16 Fifth Amendment of Lease for premises at 601 West 50th Street, New York, New York (filed herewith) 10.17 Agreement, dated as of October 10, 1997, among Arlene Scanlan, the Registrant, and The Strategy Licensing Company, Inc. (filed herewith). 10.18 Mutual Separation Agreement, dated May 20, 1997, between the Registrant and Britten & Stone and Gary Stein (incorporated by reference to Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997) 10.19 Stock Purchase Agreement, dated as of September 25, 1996, between the Registrant and Discovery Communications, Inc. (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1996) 10.20 Distribution Agreement, dated May 19, 1997, between the Registrant and Discovery Communications, Inc. (filed herewith)(Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) 11 Computation of Earnings Per Share (filed herewith) 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995) 23.1 Consent of Feldman Radin & Co., P.C. (filed herewith) 23.2 Consent of Ernst & Young LLP (filed herewith) 27 Financial Data Schedule (electronic filing only) (b) Reports on Form 8-K Current Report on Form 8-K, filed May 8, 1997 (reporting the change in the Company's certifying accountants) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: October 14, 1997 LANCIT MEDIA ENTERTAINMENT, LTD. By: /s/ GARY APPELBAUM Gary Appelbaum Senior Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated. Name Title(s) Date - ---------------------- ---------------------------- ------------------ Chairman of the Board, Chief Executive Officer and Director October 14, 1997 (Principal Executive /s/ SUSAN L. SOLOMON Officer) - ---------------------- Susan L. Solomon /s/ LAURENCE A. LANCIT Co-President and Director October 14, 1997 - ---------------------- Laurence A. Lancit /s/ CECILY TRUETT Co-President and Director October 14, 1997 - ---------------------- Cecily Truett Senior Vice President, October 14, 1997 Chief Financial Officer and Treasurer (Principal Financial and Accounting /s/ GARY APPELBAUM Officer) - ---------------------- Gary Appelbaum /s/ MARC L. BAILIN Secretary and Director October 14, 1997 - ---------------------- Marc L. Bailin /s/ JOSEPH KLING Director October 14, 1997 - ---------------------- Joseph Kling /s/ JOHN R. COSTANTINO Director October 14, 1997 - ---------------------- John R. Costantino /s/ ROGER C. FAXON Director October 14, 1997 - ---------------------- Roger C. Faxon /s/ A. ROBERT TOWBIN Director October 14, 1997 - ---------------------- A. Robert Towbin Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in (i) the Registration Statement on Form S-3, as amended (File No. 33-70856), (ii) the Registration Statement on Form S-1 (File No. 33-48236), (iii) the Registration Statement on Form S-8 (File No. 33-53472), (iv) the Registration Statement on Form S-8 (File No. 33-77834), (v) the Registration Statement on Form S-8 (File No. 33-90506), (vi) the Registration Statement on Form S-8 (File No. 33-80447), and (vii) the Registration Statement on Form S-8 (File No. 33-80449) of Lancit Media Entertainment, Ltd. (the "Registrant") F/K/A Lancit Media Productions, Ltd. of our report dated August 28, 1996 appearing in this Annual Report on Form 10-K of the Registrant for the fiscal year ended June 30, 1996 and 1995. /s/ FELDMAN RADIN AND CO., P.C. Feldman Radin & Co,, PC Certified Public Accountants New York, New York October 7, 1997 Exhibit 23.2 Consent of Independent Auditors We hereby consent to the incorporation by reference in (i) the Registration Statement on Form S-3, as amended (File No. 33-70856), (ii) the Registration Statement on Form S-1 (File No. 33-48236), (iii) the Registration Statements on Form S-8 (File Nos. 33-53472, 33-77834, 33-90506, 33-80447 and 33-80449) of Lancit Media Entertainment, Ltd. (the "Registrant") of our reports dated October 13, 1997, with respect to the consolidated financial statements and schedule of the Registrant included in this Annual Report (Form 10-K) for the year ended June 30, 1997. /s/ ERNST & YOUNG, LLP Ernst & Young, LLP Certified Public Accountants New York, New York October 13, 1997 LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER REPORT OF INDEPENDENT AUDITORS F-2 REPORT OF PREDECESSOR INDEPENDENT AUDITORS F-2a CONSOLIDATED BALANCE SHEETS F-3 CONSOLIDATED STATEMENTS OF OPERATIONS F-4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7-18 REPORT OF INDEPENDENT AUDITORS F-19 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-20 Report of Independent Auditors The Board of Directors and Stockholders Lancit Media Entertainment, Ltd. We have audited the accompanying consolidated balance sheet of Lancit Media Entertainment, Ltd. and Subsidiaries (the "Company") as of June 30, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lancit Media Entertainment, Ltd. and Subsidiaries at June 30, 1997, and the consolidated results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses in each of the last two fiscal years and as more fully described in Note 2, the Company anticipates that additional funding will be necessary to sustain the Company's operations through the fiscal year ending June 30, 1998. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ ERNST & YOUNG, LLP Ernst & Young LLP Certified Public Accountants New York, New York October 13, 1997 INDEPENDENT AUDITORS' REPORT To The Stockholders and Board of Directors of Lancit Media Productions, Ltd. We have audited the accompanying consolidated balance sheet of Lancit Media Productions, Ltd. and Subsidiaries as of June 30, 1996 and the related statements of operations, stockholders' equity and cash flows for the years ended June 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lancit Media Productions, Ltd. and Subsidiaries as of June 30, 1996 and the results of its operations and cash flows for each of the years ended June 30, 1996 and 1995 in conformity with generally accepted accounting principles. /s/ FELDMAN RADIN & CO., P.C. Certified Public Accountants New York, New York August 28, 1996 LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, ------------------------------ 1997 1996 -------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,461,627 $ 3,358,230 Accounts receivable, net of allowance 1,698,250 2,683,433 Film and program costs, net 1,718,526 5,527,106 Prepaid expenses 270,215 268,175 -------------- ------------- TOTAL CURRENT ASSETS 8,148,618 11,836,944 ACCOUNTS RECEIVABLE - NON-CURRENT 211,500 1,378,078 FIXED ASSETS, NET 525,530 832,606 GOODWILL, NET 263,302 279,754 DEPOSITS 50,363 60,784 -------------- ------------- TOTAL ASSETS $ 9,199,313 $ 14,388,166 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 2,116,028 $ 732,158 Participations payable 1,342,702 1,199,991 Deferred revenue 1,009,413 1,651,279 -------------- ------------- TOTAL CURRENT LIABILITIES 4,468,143 3,583,428 PARTICIPATIONS PAYABLE - NON-CURRENT 88,009 598,461 DEFERRED REVENUE - NON-CURRENT 317,620 828,713 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 195,360 94,056 STOCKHOLDERS' EQUITY: Common stock, $.001 par value, authorized - 15,000,000 shares; issued and outstanding - 6,634,750 shares at June 30, 1997 and 6,187,634 shares at June 30, 1996 6,635 6,188 Additional paid-in capital 17,504,536 12,579,402 Accumulated deficit (13,380,990) (3,302,082) -------------- ------------- TOTAL STOCKHOLDERS' EQUITY 4,130,181 9,283,508 -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,199,313 $ 14,388,166 ============== ============= See notes to consolidated financial statements. F - 3 LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended June 30, ------------------------------------ 1997 1996 1995 ----------- ---------- ---------- REVENUES: Production and royalties $ 1,943,807 $ 6,812,975 $15,532,607 Licensing agent fees 1,208,250 2,248,238 2,349,872 ----------- ---------- ---------- 3,152,057 9,061,213 17,882,479 ----------- ---------- ---------- OPERATING EXPENSES: Production and royalties 3,026,577 6,580,666 13,550,150 Licensing agent - direct costs 809,823 1,175,699 1,184,345 General and administrative 4,073,089 2,438,471 2,168,827 Write-down related to projects and restructuring charge 5,456,180 2,650,000 -- ----------- ---------- ---------- 13,365,669 12,844,836 16,903,322 ----------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS (10,213,612) (3,783,623) 979,157 INTEREST INCOME - NET 255,508 276,570 506,316 ----------- ---------- ---------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST (9,958,104) (3,507,053) 1,485,473 PROVISION FOR INCOME TAXES - CURRENT (19,500) (87,900) (38,000) MINORITY INTEREST (101,304) (105,760) (199,974) ----------- ---------- ---------- NET INCOME (LOSS) $(10,078,908) $(3,700,713) $1,247,499 =========== ========== ========== NET INCOME (LOSS) PER SHARE $ (1.54) $ (0.60) $ 0.20 =========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING 6,538,851 6,177,051 6,365,741 =========== ========== ========== See notes to consolidated financial statements. F - 4 LANCIT MEDIA PRODUCTIONS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Retained ------------------ Earnings Total Additional (Accum- Stock- Paid-in ulated holders' Shares Amount Capital Deficit) Equity --------- ------- ---------- ---------- ---------- BALANCE - June 30, 1994 6,101,634 6,102 12,401,247 (848,868) 11,558,481 Shares issued in connec- tion with exercise of options and warrants (net of expenses) 56,000 56 165,059 -- 165,115 Net income -- -- -- 1,247,499 1,247,499 --------- ------- ---------- ---------- ---------- BALANCE - June 30, 1995 6,157,634 6,158 12,566,306 398,631 12,971,095 Shares issued in connec- tion with exercise of options (net of expenses) 30,000 30 13,096 -- 13,126 Net loss -- -- -- (3,700,713)(3,700,713) --------- ------- --------- ---------- --------- BALANCE - June 30, 1996 6,187,634 6,188 12,579,402 (3,302,082) 9,283,508 Shares issued in connec- tion with exercise of options (net of expenses) 9,000 9 16,241 -- 16,250 Shares issued in connec- tion with investment by Discovery Communications, Inc. (net of expenses) 438,116 438 4,698,893 -- 4,699,331 Warrants issued in exchange for consulting services rendered -- -- 210,000 -- 210,000 Net loss -- -- -- (10,078,908)(10,078,908) --------- ------- ---------- ---------- ---------- BALANCE - June 30, 1997 6,634,750 6,635 17,504,536 (13,380,990)4,130,181 ========= ======= ========== ========== ========= See notes to consolidated financial statements. F - 5 LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30, -------------------------------- 1997 1996 1995 ---------- ---------- ---------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $(10,078,908)(3,700,713) 1,247,499 ---------- ---------- ---------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of film and program costs 1,465,831 3,869,945 6,334,297 Write-down related to projects 5,456,180 2,500,000 - Depreciation and other amortization 378,281 407,313 348,615 Minority interest 101,304 105,760 199,974 Grant of warrants in exchange for services 210,000 - - Changes in operating assets and liabilities: Accounts receivable - current 985,183 3,128,355 (3,796,488) Accounts receivable - non-current 1,166,578 1,227,792 (3,105,670) Film and program costs (3,113,431)(7,076,993)(8,557,597) Prepaid expenses (2,040) (186,308) (24,491) Deposits receivable 10,421 (17,056) 2,185 Accounts payable and accrued expenses 1,383,870 320,501 6,440 Participations payable - current 142,711 293,628 906,363 Participations payable - non-current (510,452) (341,462) 1,220,148 Deferred revenue - current (641,866) (3,479,961)1,611,401 Deferred revenue - non-current (511,093) (938,346) 111,921 ---------- ---------- ---------- 6,521,477 (186,832)(4,742,902) ---------- ---------- ---------- CASH USED IN OPERATING ACTIVITIES (3,557,431)(3,887,545)(3,495,403) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (54,753) (162,589) (334,680) ---------- ---------- ---------- CASH USED IN INVESTING ACTIVITIES (54,753) (162,589) (334,680) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock in connection with DCI agreement 4,699,331 - - Issuance of common stock in connection with exercise of options 16,250 13,126 165,115 ---------- ---------- ---------- CASH PROVIDED BY FINANCING ACTIVITIES 4,715,581 13,126 165,115 ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,103,397 (4,037,008)(3,664,968) CASH AND CASH EQUIVALENTS - beginning of year 3,358,230 7,395,238 11,060,206 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS - end of year $ 4,461,627 3,358,230 7,395,238 ========== ========== ========== CASH PAID DURING THE YEAR FOR: Income taxes $ 52,058 35,867 14,684 ========== ========== ========== See notes to consolidated financial statements. F - 6 LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lancit Media Entertainment, Ltd. and Subsidiaries (the "Company") includes Lancit Media Entertainment, Ltd. ("Lancit"), its wholly-owned subsidiaries Frame Accurate, Inc. ("Frame"), Lancit Copyright Corp. ("LCC"), and The Strategy Licensing Company, Inc. ("Strategy") (see Note 13). Lancit creates, acquires, develops and produces high-quality children's "edutainment" and family programming. Frame is a provider of post-production services which include personnel, facilities, graphics and dubbing, as well as other editing and finishing services. LCC was formed to own and administer various copyrights created by the Company and currently administers all of the music publishing interests which the Company retains with respect to the music sound tracks for both The Puzzle Place and Backyard Safari, as well as for other productions created by the Company. Strategy is a merchandise licensing and promotions company that performs licensing agent functions for properties and characters owned by various copyright holders, including Strategy affiliates. Strategy is the majority partner in The Puzzle Place Marketing Company, a joint venture with Community Television of Southern California ("KCET"). 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Basis of Presentation - The consolidated financial statements include the accounts of Lancit, Frame, LCC and Strategy. All material intercompany accounts and transactions have been eliminated. B. Cash and Cash Equivalents - The Company considers to be cash equivalents all highly liquid temporary cash investments with an original maturity of three months or less when purchased. C. Accounts Receivable - Accounts receivable consists primarily of amounts to be received from minimum contractual royalties and underwriting agreements. Amounts to be received from minimum contractual royalties result from the copyright holder entering into agreements with licensees whereby the Company has licensed the right, during a specified term, to utilize the copyright holder's copyright. Such amounts are due no later than the conclusion of specified time periods which, for the most part, occur within the next twenty-four months after entering into an agreement. Amounts to be received from existing underwriting agreements are due mostly within the next fiscal year. D. Film and Program Costs - Film and program costs ("project costs"), which include acquisition and development costs (such as story rights, scenarios and scripts), production costs (including salaries and costs of talent), production overhead and post-production costs, are stated at the lower of cost less accumulated amortization or net realizable value and are deferred and amortized under the "individual film forecast method" as required by Statement of Financial Accounting Standards No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films" ("SFAS 53"). Project costs are amortized in relation to the revenue recognized from each project, and amortization is calculated based on management's latest estimate of the project's gross profit margin over its remaining life. Film and program costs are re-evaluated periodically and, when necessary, are written down to net realizable value (See Note 12). E. Fixed Assets - Fixed assets are stated at cost. Depreciation on production and office equipment is provided for using the straight-line method over the estimated useful life of the related asset. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. F. Goodwill - Goodwill resulting from business acquisitions represents the remaining unamortized value of the excess of the acquisition costs over the fair value of the net assets of the business acquired. Goodwill is amortized on the straight-line basis over a period not to exceed 20 years. The Company periodically reviews the recoverability of its goodwill. Any impairment is charged to expense when such determination is made. Accumulated amortization at June 30, 1997 and 1996 was $64,496 and $48,044, respectively. G. Participations Payable - Participations payable represent the amount due for profit participations and residuals. The participation amounts are recorded when the revenue which gives rise to such participations is recognized. Participants are paid when the actual cash is received and when the entitled payees have been identified. H. Deferred Revenue - Deferred revenue consists of licensing agent fees remaining to be recognized based on guaranteed royalties, as well as production funding received but not yet recognized as revenues based on percentage of completion. The fees from guaranteed royalties are recognized as revenue over a period which is no longer than the term of each individual license agreement. In addition, any royalty amounts received as advances by the Company as copyright holder are deferred and recognized as revenues when all obligations and commitments associated with such contracts have been met. I. Net Income (Loss) Per Share - Net income per share is computed on the basis of the weighted average number of common shares and common share equivalents outstanding for the respective period. Common share equivalents include dilutive stock options and warrants, and are included in the calculation using the treasury stock method. Net loss per share is computed on the basis of only the weighted average number of common shares outstanding for the period as all common share equivalents would be anti-dilutive. J. Revenue Recognition - Revenues are primarily derived from the following sources: (a) (i) Production - Revenues from such activities, when performed for a third party contracting entity such as a grantor, are recognized using the percentage of completion method, recognizing revenue relative to the proportionate progress on such contracts. When producing a project subject to a commercial network presale, revenues are recorded in accordance with SFAS 53. (ii) Royalties - On many of the original projects it produces, the Company retains, in varying degrees, ownership in such projects, and derives royalties from their exploitation in both primary and secondary markets worldwide. Such revenues are recognized when firm sales are reported to the Company by designated sales representatives in each market area or upon the Company meeting all commitments and obligations (which are primarily broadcast-oriented) related to the minimum contractual royalties under the licensing agreement. Such agreements generally range from two to four years. Typically, on a licensing contract, the Company does not begin to recognize additional copyright-holder related royalty revenues beyond any previously recorded minimum contractual royalty amounts until such time as the licensee has recouped that full amount. Depending on the particular licensee category and on the initial sales success of the products in that category, such recoupment period may range anywhere from one year to several years. The nature of the primary market and the order of market exploitation varies from project to project, as does the length of each project's revenue producing cycle. However, such revenue cycles typically range from two to six years. (b) Licensing agent fees - Revenues from such activities are derived from a negotiated percentage, with the copyright holder, of overall royalty revenue in a wide variety of categories. Licensing agent fees derived from minimum contractual royalty commitments to the copyright holder are recognized over a period which is no longer than the term covered by each individual license. Once royalties generated on sales of licensed product exceed the minimum contractual royalties provided for in such agreements, the licensing agent will record, as revenue, its entitled share of all royalties generated from that point forward, upon knowing the royalties have been earned which may be at the time of receipt. K. Income Taxes - The Company accounts for income taxes by the liability method as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under this method, deferred tax assets and liabilities are recognized with respect to the future tax consequences attributable to differences between the financial statement carrying values and tax bases of existing assets and liabilities and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. L. Compensation Expense Associated with Stock Options and Stock Appreciation Rights ("SARs") - The Company's policy is to record compensation expense when stock options or SARs are granted at an exercise price which is less than the fair market value of the Company's common stock on the date of the grant. The amount recorded as compensation expense is equal to the difference between the exercise price or the measuring value, and the fair market value of the Company's common stock on the date of grant. In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 prescribes accounting and reporting standards for all stock-based compensation plans and stock appreciation rights and requires that compensation expense be recorded (i) using the new fair value method or (ii) using existing accounting rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations with pro forma disclosure of what net income (loss) and earnings per share would have been had the Company adopted the new fair value method. Effective July 1, 1996, the Company has adopted SFAS 123 and, as allowed by the statement, intends to continue to account for its stock-based compensation plans in accordance with the provisions of APB 25. M. 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 amounts reported in the financial statements and the footnotes thereto. Actual results could differ from those estimates. N. Impact of Recently Issued Accounting Standards Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") was issued in February 1997. The Company will be required to adopt the new standard for the quarter ending December 31, 1997. Early adoption of this standard is not permitted. The primary elements of this standard are: (i) replacement of primary earnings per share with basic earnings per share, which eliminates the dilutive effect of options and warrants; (ii) use of an average share price in applying the treasury method to compute dilution for options and warrants for diluted earnings per share; and (iii) disclosure reconciling the numerator and denominator of earnings per share calculations. The Company plans to adopt SFAS 128 in the quarter ending December 31, 1997 and does not anticipate that SFAS 128 will have a material impact on the calculation of net income (loss) per share. 2. CAPITAL REQUIREMENTS Notwithstanding the Company's cash position at June 30, 1997, the Company believes that additional funding will be necessary to sustain the Company's operations through the fourth quarter of fiscal 1998. The Company is actively seeking additional funding and has retained an investment banking firm to assist it in these efforts. Among the alternatives being considered by the Company are a sale of an interest in the Company, an acquisition of the Company, and/or strategic alliances with industry partners. The Company continues to pursue marketing efforts to generate cash from production and licensing activities and, where appropriate, may explore turning to account certain non-strategic assets. While there can be no assurance that any such transactions will be available to the Company or, if available, that they will be on terms favorable to the Company or its shareholders, the Company is devoting considerable management and other resources to these efforts. The Company also has taken steps to reduce, where appropriate, its operating expenses. These steps include relocating Strategy, its merchandising and licensing agent subsidiary, from Westport, Connecticut to the Company's New York City offices, and certain staff reductions. 3. ACCOUNTS RECEIVABLE The allowance for doubtful accounts was $530,052 and $448,175 at June 30, 1997 and 1996, respectively. 4. FIXED ASSETS Fixed assets consists of the following: June 30, ----------------------- 1997 1996 ----------- ----------- Production and office equipment $ 1,858,191 $ 1,826,639 Leasehold Improvements 413,928 390,727 ----------- ----------- 2,272,119 2,217,366 Less accumulated depreciation and amortization (1,746,589) (1,384,760) ----------- ----------- Fixed assets, net $ 525,530 $ 832,606 =========== =========== 5. COMMITMENTS AND CONTINGENCIES A. Leases The Company leases facilities and office equipment under the terms of several operating leases. The major portion of these operating leases relate to the Company's four leases covering its facilities. One lease expires in April 1998, two expire in September 1998 and the fourth expires in February 1999. The following is a schedule of minimum future lease payments under all operating leases at June 30, 1997: Year Ending June 30, Total - ---------------------- ----------- 1998 $ 315,000 1999 107,000 ----------- $ 422,000 =========== Rent expense was approximately $299,000, $296,000 and $355,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Facility leases, in some cases, also provide for escalations based on increases in real estate taxes and maintenance charges. B. Employment Agreements The Company has employment agreements with seven individuals, all of whom are officers of Lancit. The agreements expire at various times through March 2000. Remaining commitments under the terms of these agreements are approximately $2,019,000. C. Bonus Plans Officers as a group, under an incentive bonus plan (the "Bonus Plan"), receive a bonus of 5% of pretax income (before bonus), for a fiscal year, provided that (i) pretax income (before bonus) for such fiscal year is at least $250,000, (ii) net income for such fiscal year exceeds net income for the prior fiscal year and (iii) net income is at least $.05 per share (adjusted for stock splits and stock dividends), on a diluted basis. No amounts were accrued under the Bonus Plan for fiscal 1997 or fiscal 1996 and $78,000 was accrued under the Bonus Plan for fiscal 1995. D. Production Funding In fiscal 1997, the Company substantially completed production on episodes 41-65 of The Puzzle Place. After taking into account the portion of the project funding expected to be contributed via existing underwriting agreements and the Company's partner on the project, KCET, the Company estimates less than $0.1 million will ultimately be required from the Company to meet the current budget needs of the project. The Company also substantially completed production on the initial 13 episodes of Backyard Safari, which has been funded partially through a grant from the National Science Foundation. In the event the Company were to receive no outside production funding, the Company estimates that the remaining cash outlay required for this project would be less than $0.5 million. E. Consulting Agreements The Company entered into several consulting agreements and entered into an agreement terminating its relationship with a previous consultant, during the fiscal year ended June 30, 1997. The term of the ongoing agreements are month-to-month, with cancellation notices required from one to three months in advance, with fees ranging from $5,000 to $10,000 per month. The minimum commitment under the terms of these agreements, in the aggregate, is approximately $206,000. 6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK For the fiscal year ended June 30, 1997, two customers accounted for 64% and 30% of total revenues from production and royalties and two customers accounted for 34% and 13% of licensing agent fees. For the fiscal year ended June 30, 1996, two customers accounted for 35% and 24% of total revenues from production and royalties and three customers accounted for 36%, 10% and 10% of licensing agent fees. For the fiscal year ended June 30, 1995, four customers accounted for 14%, 12%, 12% and 10% of total revenues from production and royalties and two customers accounted for 40% and 20% of licensing agent fees. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. The Company restricts placement of its temporary cash investments to financial institutions with high credit ratings and limits the amount of credit exposure with any one financial institution. At June 30, 1997, amounts receivable from three different entities accounted for 37%, 16% and 12% of the Company's total accounts receivable. At June 30, 1996, amounts receivable from three different entities accounted for 33%, 20% and 15% of the Company's total accounts receivable. Allowances are maintained, as necessary, for any potential credit losses. 7. FILM AND PROGRAM COSTS Components of film and program costs (net of accumulated amortization) consist of the following: June 30, -------------------------------- 1997 1996 ------------ ------------- Productions completed and released $ 828,905 $ 2,329,015 Productions completed and not released 376,165 - Productions in progress 110,340 2,851,378 Story rights and scenarios 403,116 346,713 ------------ ------------- Total film and program costs, net $ 1,718,526 $ 5,527,106 ============ ============= Film and program costs are substantially made up of capitalized television, production, and development costs incurred by the Company. The Company capitalizes such costs and amortizes them to expense in accordance with SFAS 53, which requires the Company to use estimates to determine the future revenue-generating potential of its project which is subject to a variety of risk factors. Revenues generated by television and movie programming and related ancillary products depend in part upon general economic conditions, but are more directly affected by the viewer and retail response to the entertainment product made available to the marketplace. The estimates used are re-evaluated periodically, and such re-evaluations have, in the past, and may, in the future, require that the Company write down unamortized capitalized amounts (See Note 12). 8. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS In July 1990, the Company adopted a stock option plan (as amended, the "1990 Plan") authorizing the issuance of options covering 200,000 shares of the Company's common stock, which, over the years has been increased to cover the issuance of up to 1,000,000 shares of the Company's common stock. Officers, directors, consultants and employees are eligible to participate in the 1990 Plan and to receive non-qualified or, to the extent allowable, incentive stock options pursuant to the 1990 Plan. Options granted under the Plan are exercisable for a period of not more than ten years from the date of grant. Selection of participants, allotment of shares, determination of exercise price and other conditions of the granting of options is determined by the Company. Additionally, the 1990 Plan provides that no options may be issued at an exercise price which is less than the fair market value of the Company's common stock on the date of grant. In June 1997, the Company initiated a stock option rejuvenation program in which options with an exercise price considerably higher than current market value could be exchanged for a lesser number of shares at an exercise price that was reflective of current market value. The effective date of the cancellation of the existing options and the issuance of the new options was June 20, 1997. The Company has outstanding stock options under the 1990 Plan as follows: Weighted Average Exercise Price Exercise Price Per Share Per Share Options ($) ($) --------- --------------- ----- Outstanding at June 30, 1994 181,500 1.67 - 16.29 12.02 Options granted 154,000 11.69 - 16.13 12.70 Options exercised (7,000) 3.75 3.75 --------- -------------- ------ Outstanding at June 30, 1995 328,500 1.67 - 16.29 12.61 Options granted 383,200 9.31 - 15.50 10.79 Options exercised (10,000) 1.67 - 3.75 2.92 Options cancelled (28,500) 10.44 - 15.94 12.64 --------- -------------- ------ Outstanding at June 30, 1996 673,200 1.67 - 16.29 11.72 Options granted 797,350 3.16 - 11.75 3.42 Options exercised (8,000) 1.67 - 3.65 3.39 Options cancelled (645,300) 5.06 - 16.29 10.94 --------- -------------- ------ Outstanding at June 30, 1997 817,250 3.16 - 15.50 4.31 ========= ============== ====== At June 30, 1997, 762,750 options were exercisable with an average remaining term of 9.32 years. The weighted average exercise price of such options is $4.45. At June 30, 1997, 3,750 options remained available for grant. In April 1991, the Company adopted the Stock Performance Based Stock Option Plan (as amended, the "1991 Plan") authorizing the issuance of options covering 250,000 shares of the Company's common stock. Executive management in place at the time of the adoption of the 1991 Plan, was eligible to participate in the 1991 Plan and to receive non-qualified options pursuant to the 1991 Plan at an exercise price of $0.01 per share. Options granted under the 1991 Plan became exercisable at any time after the second anniversary of the effective date of the initial public offering of the Company's common stock upon the Company's common stock meeting certain performance levels. The Company had outstanding stock options under the 1991 Plan as follows: Weighted Average Exercise Price Exercise Price Per Share Per Share Options ($) ($) ------- ------------- ------------- Outstanding at June 30, 1994 195,000 0.01 0.01 Options exercised (15,000) 0.01 0.01 ------- ------------- ------------- Outstanding at June 30, 1995 180,000 0.01 0.01 Options exercised (20,000) 0.01 0.01 Options cancelled (160,000) 0.01 0.01 ------- ------------- ------------- Outstanding at June 30, 1996 and 1997 - - - ======= ============= ============= In December 1994, the Company adopted the 1994 Non-Employee Director Non- Qualified Stock Option Plan (as amended, the "1994 Plan") authorizing the issuance of options covering 45,000 shares of the Company's common stock. Non-employee directors of the Company are eligible to participate in the 1994 Plan. Each non-employee director is granted 3,000 options on the day of his or her initial appointment and annually thereafter on the day of his or her re-election. The exercise price per share for each option granted is the fair market value of the Company's common stock on the date of grant. Each option is exercisable one year from the date of grant and expires no later than ten years from the date of grant. The Company has outstanding stock options under the 1994 Plan as follows: Weighted Average Exercise Price Exercise Price Per Share Per Share Options ($) ($) ------- ------------- ------------ Outstanding at July 1, 1994 - - - Options granted 9,000 13.19 - 13.69 13.35 ------- ------------- ------------ Outstanding at June 30, 1995 9,000 13.19 - 13.69 13.35 Options granted 9,000 13.13 13.13 ------- ------------- ------------ Outstanding at June 30, 1996 18,000 13.13 - 13.69 13.24 Options granted 15,000 3.50 - 6.25 5.44 ------- ------------- ------------ Outstanding at June 30, 1997 33,000 3.50 - 13.69 9.69 ======= ============= ============ At June 30, 1997, 18,000 options were exercisable with an average remaining term of 8.7 years. The weighted average exercise price of such options is $13.24. At June 30, 1997, 12,000 options remained available for grant. In June 1997, the Company adopted the 1997 Incentive Stock Option Plan (as amended, the "1997 Plan") authorizing the issuance of options and other awards covering 650,000 shares of the Company's common stock, and the 1997 Value Incentive Bonus Program (as amended, the "1997 Incentive Program"). Any officer, key employee, directors who are also officers and consultants are eligible to participate in the 1997 Plan and receive non-qualified or, to the extent allowable, incentive stock options pursuant to the 1997 Plan. Options granted under the 1997 Plan are exercisable for a period of not more than ten years from the date of the grant. With the exception of grants to two officers/directors, of which a portion is immediately exercisable, grants which have been made are exercisable one year from the date of the grant. The exercise price per share for each option granted is the fair market value of the Company's common stock on the date of the grant. The 1997 Plan is subject to approval by the Company's shareholders. The Company has outstanding stock options under the 1997 Plan as follows: Weighted Average Exercise Price Exercise Price Per Share Per Share Options ($) ($) -------- ------------ ------------- Outstanding at July 1, 1996 - - - Options granted 370,000 3.16 3.16 -------- ------------ ------------- Outstanding at June 30, 1997 370,000 3.16 3.16 ======== ============ ============= At June 30, 1997, 45,000 options were exercisable with an average remaining term of 10 years. The weighted average exercise price of such options is $3.16. At June 30, 1997, 280,000 options are available for grant. The Company has outstanding SARs under the 1997 Incentive Program as follows: Weighted Average Exercise Price Exercise Price Per Share Per Share SARs ($) ($) ------------ ------------- ------------ Outstanding at July 1, 1996 - - - SARs granted 255,000 $3.16 $3.16 ------------ ------------- ------------ Outstanding at June 30, 1997 255,000 $3.16 $3.16 ============ ============= ============ These SARs are subject to cancellation upon approval of the 1997 Plan by the Company's shareholders on or prior to December 31, 1997. The Company's other various options/warrants, not under any form of a plan, covering shares of the Company's common stock are as follows: Weighted Average Exercise Price Exercise Price Options/ Per Share Per Share Warrants ($) ($) -------- ------------- ------------- Outstanding at June 30, 1994 5,000 3.75 3.75 Options exercised (4,000) 3.75 3.75 -------- ------------- ------------- Outstanding at June 30, 1995 and 1996 1,000 3.75 3.75 Warrants Issued 560,209 3.62 - 13.00 10.96 Options Exercised (1,000) 3.75 3.75 -------- ------------- ------------- Outstanding at June 30, 1997 560,209 3.62 - 13.00 10.96 ======== ============= ============= The remaining warrants outstanding at June 30, 1997 covering 560,209 shares of common stock were exercisable with a weighted average remaining term of 4.0 years. The weighted average exercise price of such warrants is $10.96 Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS 123, and has been determined as if the Company had accounted for its employees' stock options and SARs under the fair value method provided by that Statement. The fair value of the stock options and SARs was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for vested and non-vested options and SARs: Assumptions June 30, June 30, 1997 1996 Risk-Free Interest Rate 6.82% 5.56% Dividend Yield 0% 0% Volatility factor of the expected market price of the 0.678 0.431 Company's Common Stock Average Life 5 years 5 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and SARs. For purposes of pro forma disclosures, the estimated fair value of the options under SFAS 123 is amortized to expense over the options' vesting period. For the year ended June 30, 1997, pro forma net loss and pro forma net loss per share would have increased under SFAS 123 by approximately $3,248,000 and $0.49, respectively. For the year ended June 30, 1996, pro forma net loss and pro forma net loss per share would have increased under SFAS 123 by approximately $1,548,000 and $0.25, respectively. 9. 401(k) AND PROFIT SHARING PLAN Effective as of January 1, 1994, the Company adopted a combined 401(k) Savings and Profit Sharing Plan (as amended, the "Retirement Plan"). The Retirement Plan provides for immediate eligibility for all employees of the Company as of January 1, 1994 and eligibility after completion of six months of service for all employees of the Company employed after January 1, 1994. The 401(k) Savings portion of the Retirement Plan provides for an employer match which is determined on an annual basis. The Profit Sharing portion of the Retirement Plan provides for an employer discretionary contribution which is determined on an annual basis and which is reduced by any 401(k) employer match already received. Amounts expensed under the Retirement Plan were approximately $85,000, $72,000 and $70,000 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. 10. RELATED PARTY TRANSACTIONS Legal fees incurred to one of the Company's law firms, where a principal of that law firm is the Corporate Secretary and Director of the Company, were $195,040, $121,157 and $135,140 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. Consulting fees incurred to one of the Company's consulting firms, where a principal of that firm is a director of the Company were $5,000 and $13,054 for the fiscal years ended June 30, 1997 and 1996, respectively. In addition, that consulting firm, in October 1995, was granted stock options covering 13,400 shares of the Company's common stock, exercisable at $12.25 per share and expiring in October 2000. 11. INCOME TAXES The following table illustrates the sources and status of the Company's major deferred tax asset and (liability) items at June 30, 1997 and 1996: June 30, 1997 1996 Tax benefit of net operating loss carryforward $6,534,068 $2,349,000 Royalty revenue not yet collected (229,347) (154,000) Excess of tax over book depreciation (158,989) (73,000) Other 62,952 48,000 Net deferred tax asset 6,208,684 2,170,000 Valuation allowance (6,208,684) (2,170,000) Net deferred tax asset recorded $ - $ - The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate to income (loss) before provision for income taxes and minority interest as follows: June 30, ----------------------------------- 1997 1996 1995 ----------- ---------- ---------- Income tax provision (benefit) computed at the statutory rate $(3,528,000) $(1,265,000) $ 450,000 Income tax benefit of disqualifying dispositions - (110,000) (127,000) Net tax effect of other permanent differences 20,000 34,000 (39,000) Tax effect of temporary differences - 33,000 (369,000) Income tax benefit not recognized 3,508,000 1,308,000 85,000 Provision for state income taxes 19,500 87,900 38,000 ----------- ---------- ---------- Income tax provision $ 19,500 $ 87,900 $ 38,000 =========== ========== ========== The Company has net operating loss carryforwards for tax purposes totaling approximately $14,850,000 at June 30, 1997 that expire in the years 2006 to 2012. Certain of the Company's subsidiaries file state income tax returns on an unconsolidated basis, and as such, losses may not be available to offset income in all states. 12. WRITE-DOWNS RELATED TO PROJECTS AND RESTRUCTURING The write-down of film and program costs amounted to approximately $5.5 million and $2.5 million in fiscal 1997 and 1996, respectively, of which approximately $2.1 million and $2.5 million relates to The Puzzle Place for fiscal 1997 and 1996, respectively, and approximately $3.3 million relates to Backyard Safari for fiscal 1997. Such write-down reflects the Company's revision of its estimated future net royalty stream with respect to The Puzzle Place and the Company's revision of its anticipated production funding sources and its estimated future net royalty stream with respect to Backyard Safari. As part of the fiscal 1997 charge, the Company accrued for estimated remaining costs on these projects. Also, in fiscal 1996, the Company recorded a restructuring charge of $150,000 which included severance and other benefits paid to terminated employees due to reduced production activity. 13. SUBSEQUENT EVENT In October 1997, the Company entered into an agreement with Arlene J. Scanlan, pursuant to which the Company acquired the remaining 15% of the outstanding shares of the capital stock of Strategy held by her. Additionally, Ms. Scanlan's employment with Strategy and the Company was terminated. In consideration of the foregoing, the Company paid Ms. Scanlan an aggregate of $30,788 and has released Ms. Scanlan from certain restrictions contained in a covenant not to compete with respect to specified properties and entities. Report of Independent Auditors The Board of Directors and Stockholders Lancit Media Entertainment, Ltd. We have audited the consolidated financial statements of Lancit Media Entertainment, Ltd. and Subsidiaries as of June 30, 1997 and for the year then ended, and have issued our report thereon dated October 13, 1997 (included elsewhere in this Form 10-K). Our audit also included the financial statement schedule listed in Item 14 of this Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. The financial statement schedule does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the uncertainty regarding the Company's ability to continue as a going concern. /s/ ERNST & YOUNG, LLP Ernst & Young Certified Public Accountants New York, New York October 13, 1997 Report of Independent Auditors The Board of Directors and Stockholders Lancit Media Productions, Ltd. We have audited the consolidated financial statements of Lancit Media Productions, Ltd. and Subsidiaries as of June 30, 1996 and the years ended June 30, 1996 and 1995, and have issued our report thereon dated August 28, 1996 (included elsewhere in this 10-K). Our audit also included the financial statement schedule listed in this 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein for the periods stated above. /s/ FELDMAN RADIN & CO., P.C. Feldman Radin & Co., P.C. New York, New York August 28, 1996 LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Additions Balance Charged at to Balance Beginning Costs at End of and (a) of Description Period Expenses Deductions Period Year ended June 30, 1995 Allowances deducted from assets to which they apply: Allowance for $111,182 $128,869 $94,483 $145,568 doubtful accounts Year ended June 30, 1996 Allowances deducted from assets to which they apply: Allowance for doubtful $145,568 $411,787 $ 109,180 $448,175 accounts Year ended June 30, 1997 Allowances deducted from assets to which they apply: Allowance for doubtful $448,175 $143,112 $ 61,235 $530,052 accounts (a) Uncollectible receivables written off EX-3.(II) 2 BYLAWS, AS AMENDED EXHIBIT A As Amended October 1, 1997 BY-LAWS OF LANCIT MEDIA ENTERTAINMENT, LTD. ARTICLE I OFFICES Section 1. Principal Office The principal office of the Corporation shall be in the city, incorporated village or town and the county within the State of New York as is designated in the Certificate of Incorporation. Section 2. Additional Offices The Corporation may also have offices and places of business at such other places, within or without the State of New York, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Time and Place Meetings of the shareholders of the Corporation may be held at such time and place within or without the State of New York as shall be stated in the notice of the meeting, or in a duly executed waiver of notice thereof. Section 2. Annual Meeting The annual meeting of the shareholders shall be held within six months following the close of each fiscal year of the Corporation, or on such other date as may be fixed from time to time by resolution of the Board of Directors, and at such place within or without the State of New York as shall be designated by the Board of Directors. Section 3. Notice of Annual Meeting Written notice of the place, date and hour of the annual meeting of shareholders shall be given personally or by mail to each shareholder entitled to vote thereat, not less than ten (10) nor more than fifty (50) days prior to the meeting. Section 4. Special Meetings Special meeting of the shareholders, for any purpose or purposes, unless otherwise prescribed by law or by the Certificate of Incorporation, may be called by the Chief Executive Officer or the Board of Directors, and shall be called by the Chief Executive Officer at the written request of shareholders holding at least twenty percent (20%) in amount of shares of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 5. Notice of Special Meeting Written notice of a special meeting of shareholders, stating the place, date and hour of the meeting, the purpose or purposes for which the meeting is called, and by or at whose direction it is being issued, shall be given personally or by mail to each shareholder entitled to vote thereat, not less than ten (10) nor more than fifty (50) days prior to the meeting. Section 6. Quorum Except as otherwise provided by law or by the Certificate of Incorporation or these By-Laws, the holders of a majority of the shares of the Corporation issued and outstanding and entitled to vote thereat shall be necessary to and shall constitute a quorum for the transaction of business at all meetings of the shareholders; provided, however, that when a specified item of business is required to be voted on by a class or series, voting as a class, the holders of a majority of the share of such class or series issued and outstanding and entitled to vote thereat shall constitute a quorum for the transaction of such specified item of business. If a quorum shall not be present at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, until a quorum shall be present. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. Voting (a) At any meeting of the shareholders every shareholder having the right to vote shall be entitled to vote in person or by proxy. Each shareholder shall have one (1) vote for each share of stock having voting power which is registered in his name on the books of the Corporation. Except where another date shall have been fixed as a record date for the determination of its shareholders entitled to vote, no share of stock shall be voted at any election of Directors which shall have been transferred on the books of the Corporation within twenty (20) days next preceding such election of Directors. (b) Except as otherwise provided by law or by the Certificate of Incorporation or these By-Laws, all elections of Directors shall be decided by a plurality of the votes cast, and all other matters shall be decided by a majority of the votes cast. Section 8. Proxies A proxy, to be valid, shall be executed in writing by the shareholder or by his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except in those cases where an irrevocable proxy is permitted by law. Section 9. Written Consents Whenever shareholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of all outstanding shares entitled to vote thereon. Section 10. Notice of Shareholder Business At an annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or by the Chairman of the Board or the President or any Co-President of the Corporation or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be received at the principal office of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting. Notwithstanding the preceding sentence, if the date of the meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, and if less than 70 days' notice or prior public disclosure of the date of such meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the fifteenth day following the day on which such notice of the date of such meeting was mailed or such public disclosure was made. As used in this Section 10 and in paragraph B of Section 2 of Article III of these By-Laws, the phrase "notice or prior public disclosure of the date of the meeting" shall mean notice or prior public disclosure of the date on which the meeting is originally scheduled to be called to order and shall not refer to notice or prior public disclosure of any date to which such meeting may be adjourned. A shareholder's notice to the Secretary shall set forth, as to each matter the shareholder proposes to bring before the annual meeting, (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's stock transfer books, of the shareholder proposing such business, (c) the class and number of shares of capital stock of the Corporation which are beneficially owned (such term being used in this Section 10 and in paragraph B of Section 2 of Article III of these By-Laws with the meaning ascribed to such term in Rule13d-3 of the rules under the Securities Exchange Act of 1934, as amended, as such Rule was in effect on July 1, 1990) by the shareholder and (d) any material interest of the shareholder in such business. Notwithstanding any other provision of these By-Laws, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Sec tion 10. If the presiding officer of an annual meeting determines and declares that business was not properly brought before the meeting in accordance with this Section 10, any such business shall not be transacted. ARTICLE III DIRECTORS Section 1. Board of Directors Subject to any provision in the Certificate of Incorporation, the business of the Corporation shall be managed by its Board of Directors. Section 2. Election and nomination of Directors A. Number, Term of Office, Qualifications and Election. The Board of Directors shall consist of the number of directors as shall be determined by resolution approved by at least a majority of the then authorized number of directors, but shall not be more than fif teen nor less than three. Each director shall hold office until the next annual meeting of shareholders and until his successor has been duly elected and qualified, or until his death, or until he shall have resigned or he shall have been removed, as hereinafter provided in these By- Laws, or as otherwise provided by statute or by the Certificate of Incorporation. All the directors shall be of full age. Directors need not be shareholders. Except as otherwise required by statute or the Certificate of Incorporation or these By-Laws, directors to be elected at each annual meeting of shareholders shall be elected by a plurality of the votes cast at the meeting by the holders of shares present in person or represented by proxy and entitled to vote for the election of directors. B. Nomination of Directors. Only persons who are nominated in accordance with the procedures set forth in this paragraph B shall be eligible for election as a director at any meeting of shareholders for the election of directors (an "Election Meeting"). Nominations of candidates for election to the Board of Directors of the Corporation at an Election Meeting may be made only by or at the direction of the Board of Directors or by a shareholder entitled to vote at such Election Meeting. All such nominations, except those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation of the shareholder's intention to make such nomination. To be timely, any such notice must be received at the principal office of the Corporation not less than sixty (60) nor more than ninety (90) days prior to the date of the Election Meeting. Notwithstanding the preceding sentence, if the Election Meeting is either (A) a special meeting, or (B) an annual meeting the date of which has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, and if less than 70 days' notice or prior public disclosure of the date of such Election Meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the fifteenth day following the day on which such notice of the date of such Election Meeting was mailed or such public disclosure was made. Such shareholder's notice with respect to a proposed nomination shall set forth (a) as to each person whom the shareholder proposes to nominate as a candidate for election to the Board of Directors (i) the name, age, business address and residence address and the principal occupation or employment of such person, (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by such person, (iii) such other information concerning such person as would be required, under the rules of the Securities and Exchange Commission, in a proxy statement soliciting proxies for the election of such person and (iv) a signed consent of such person to serve as a Director of the Corporation, if elected, and (b) as to the shareholder giving the notice (i) the name and address of such share holder, as they appear in the Corporation's stock transfer books and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by such shareholder. In the event that a person is validly designated as a nominee in accordance with the procedures specified above and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee; provided, however, that in the case of persons not nominated by the Board of Directors, such a substitution may be made only if notice as pro vided above in this paragraph B is received at the principal office of the Corporation not later than the later of (x) thirty (30) days prior to the date of the Election Meeting or (y) five (5) days after the shareholder proposing the original nominee first learned that such original nominee has become unable or unwilling to stand for election. If the presiding officer of an Election Meeting determines and declares that a Director nomination was not made in accordance with the fore going procedures, such nomination shall be void and shall be disregarded for all purposes. Section 3. Resignation; Removal Any Director may resign at any time. Except as otherwise provided by law, the Board of Directors may, by majority vote of all Directors then in office, remove a Director for cause. Subject to applicable provisions of law, any or all of the Directors may be removed with or without cause by vote of the shareholders. Section 4. Vacancies Except as otherwise provided by the Certificate of Incorporation, if any vacancies occur in the Board of Directors by reason of the death, resignation, retirement, disqualification or removal from office of any Director with cause, or if any new directorships are created, all of the Directors then in office, although less than a quorum, may, by majority vote, choose a successor or successors, or fill the newly created directorships, and the Directors so chosen shall hold office until the next annual meeting of the shareholders and until their successors shall be duly elected and qualified, unless sooner displaced; provided, however, that if in the event of any such vacancy, the Directors remaining in office shall be unable, by majority vote, to fill such vacancy within thirty (30) days of the occurrence thereof, the Chief Executive Officer or the Secretary may call a special meeting of the shareholders at which such vacancy shall be filled. In the event of any vacancy created by removal from office of any Director without cause, such special meeting of the shareholders; shall be so called within thirty (30) days of the occurrence thereof, at which meeting such vacancy may be filled. ARTICLE IV MEETINGS OF THE BOARD Section 1. Place Except as otherwise provided by the Certificate of Incorporation, the Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of New York as may be determined by the Board of Directors. Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference, telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 2. Regular Meetings Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. Section 3. Special Meetings Special meetings of the Board of Directors may be called by the Chairman of the Board, if any, or by the Chief Executive Officer. Special meetings shall be called by the Chairman, Chief Executive Officer or Secretary in like manner and on like notice on the written request of one (1) Director. Notice of each special meeting of the Board of Directors shall be given by the Secretary as hereinafter provided in this Section 3, in which notice shall be stated the time and place of the meeting. Notice of each such meeting shall be delivered to each director, either personally (including by courier) or by telephone, telex, telegraph, or facsimile transmission at least twenty-four hours before the time at which such meeting is to be held, or shall be mailed to each director by first-class mail postage prepaid, addressed to him at his residence or usual place of business, at least three days before the day on which such meeting is to be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting without objecting, at the beginning of such meeting, to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise specifically required by these By-Laws, a notice or waiver of notice of any regular or special meeting of the Board of Directors need not state the purpose or purposes of such meeting. Section 4. Quorum; Voting At all meetings of the Board of Directors a majority of the entire Board shall be necessary to constitute a quorum for the transaction of business, and the vote of a majority of the Directors present at the time of the vote if a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by law. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time until a quorum shall be present. Notice of any such adjournment shall be given to any Directors who were not present and, unless announced at the meeting, to the other Directors. Section 5. Compensation Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board of Directors, a fixed fee and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board; provided, however, that nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE V NOTICES Section 1. Form; Delivery Notice of the place, date and time of the holding of each annual and special meeting of the shareholders (and of any change in such place, date and/or time) and the purpose or purposes thereof shall be given personally or by mail in a postage prepaid envelope to each shareholder entitled to vote at such meeting, not less than ten nor more than fifty days before the date of such meeting, and, if mailed, it shall be directed to such shareholder at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Any such notice for any meeting other than the annual meeting of shareholders shall indicate that it is being issued at the direction of the Chairman of the Board or a majority of the Board of Directors. Notice of any meeting shall not be required to be given to any shareholder who shall attend such meeting in person or by proxy and shall not, prior to the conclusion of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. Unless the Board shall fix a new record date for an adjourned meeting, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned were announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 2. Waiver Whenever a notice is required to be given by any statute, the Certificate of Incorporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to such notice. In addition, any shareholder attending a meeting of shareholders in person or by proxy without protesting prior to the conclusion of the meeting the lack of notice thereof to him, such lack of notice shall be conclusively deemed to have waived notice of such meeting. ARTICLE VI OFFICERS Section 1. Officers The officers of the Corporation shall be a Chief Executive Officer, a President or one or more Co-Presidents, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers including a Chairman of the Board as may be determined by the Board of Directors. Any two (2) or more offices may be held by the same person, except the offices of President or Co-President and Secretary; provided, however, that if all of the issued and outstanding stock of the Corporation is owned by one (1) person, such person may hold all or any combination of offices. Section 2. Authority and Duties All officers, as between themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in these By-Laws, or, to the extent not so provided, by the Board of Directors. Section 3. Term of Office; Removal All officers shall be elected by the Board of Directors and each shall hold office until the meeting of the Board of Directors following the next annual meeting of shareholders, and until his successor has been elected or appointed and qualified. Section 4. Compensation The compensation of all officers of the Corporation shall be fixed by the Board of Directors, and the compensation of agents shall either be so fixed or shall be fixed by officers thereunto duly authorized. Section 5. Vacancies If an office becomes vacant for any reason, the Board of Directors shall fill the vacancy. Any officer so appointed or elected by the Board of Directors shall serve only until the unexpired term of his predecessor shall have expired unless reelected by the Board of Directors. Section 6. The Chief Executive Officer The President or one of the Co-Presidents, as appropriate, shall be the Chief Executive Officer of the Corporation, unless the Board of Directors has designated the Chairman of the Board as the Chief Executive Officer of the Corporation, in which case the Chairman of the Board shall be the Chief Executive Officer of the Corporation. The officer so designated shall have, in addition to the powers and duties applicable to the office set forth in these By- Laws, general and active supervision and direction over the business and affairs of the Corporation and over its several officers, agents and employees, subject, however, to the control of the Board of Directors. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are carried into effect and, in general, the Chief Executive Officer shall have such other powers and perform such other duties as may be incidental to the position of Chief Executive Officer or as from time to time may be assigned to him or her by the Board of Directors. Section 7. The President or Co-Presidents The President or, if there be Co-Presidents, the Co-President so designated by Board of Directors, as the case may be, in the absence of the Chairman of the Board, or if there be no Chairman, shall preside at all meetings of the shareholders and Directors; he or she shall have general and active management and control of the business and affairs of the Corporation, subject to the control of the Board of Directors and the Chief Executive Officer, if any, and, in the absence or inability to act of any Chief Executive Officer, shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 8. The Vice-President The Vice-President or, if there be more than one, the Vice-Presidents, in the order of their seniority or in any other order determined by the Board of Directors, shall, in the absence or disability of each of the Chief Executive Officer and the President or each Co-President, as the case may be, to perform the duties and exercise the powers of the Chief Executive Officer and the President or Co-President as the case may be, and shall generally assist each of the Chief Executive Officer and the President or Co-Presidents, as the case may be, and perform such other duties as the Board of Directors, the Chief Executive Officer or the President or Co-Presidents, as the case may be, may prescribe. Section 9. The Secretary The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors and shall perform such other duties as may be prescribed by the Board of Directors, the Chief Executive Officer or President or Co-President, as the case may be, under whose supervision he shall act. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an Assistant Treasurer or Assistant Secretary. He shall keep in safe custody the certificate books and shareholder records and such other books and records as the Board may direct and shall perform all other duties incident to the office of the Secretary. Section 10. The Assistant Secretary During the absence or disability of the Secretary, any Assistant Secretary, or if there be more than one, the one so designated by the Secretary or by the Board of Directors, shall have all the powers and functions of the Secretary. Section 11. The Treasurer The Treasurer shall have the care and custody of the corporate funds, and other valuable effects, including securities, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer, President or Co-Presidents, as the case may be, and Directors, at the regular meetings of the Board of Directors, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. Section 12. The Assistant Treasurer During the absence or disability of the Treasurer, any Assistant Treasurer, or if there be more than one, the one so designated by the Treasurer or by the Board of Directors, shall have all the powers and functions of the Treasurer. Section 13. Bonds In case the Board of Directors shall so require, any officer or agent of the Corporation shall give the Corporation a bond for such term, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. ARTICLE VII SHARE CERTIFICATES Section 1. Form; Signature The certificates for shares of the Corporation shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each certificate shall exhibit the registered holder's name and the number and class of shares, and shall be signed by the Chairman or a Vice- Chairman of the Board of Directors, if there be any, or the President or any Co-President, as the case may be, or a Vice-President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, and shall bear the seal of the Corporation or a facsimile thereof. Section 2. Lost Certificates The Board of Directors may direct a new share certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 3. Registration of Transfer Upon surrender to the Corporation or any transfer agent of the Corporation of a certificate for shares duty endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or such transfer agent to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Registered Shareholders Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends or other distributions, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or legal claim to or interest in such share or shares on the part of any other person, whether or not it has actual or other notice thereof, except as otherwise provided by the laws or the State of New York. Section 5. Record Date For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shares or an adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action affecting the interests of shareholders, the Board of Directors may fix, in advance, a record date. Such date shall not be more than fifty (50) nor less than ten (10) days before the date of any such meeting, nor more than fifty (50) days prior to any other action. In each such case, except as otherwise provided by law, only such persons as shall be shareholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to express such consent or dissent, or to receive payment of such dividend, or such allotment of rights, or otherwise to be recognized as shareholders for the related purpose, notwithstanding any registration of transfer of shares on the books of the Corporation after any such record date so fixed. ARTICLE VIII GENERAL PROVISIONS Section 1. Fiscal Year The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 2. Dividends Dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting and may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and the law. Section 3. Reserves Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as the Board or Directors shall deem conducive to the interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. Section 4. Checks All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 5. Seal The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal New York." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. ARTICLE IX AMENDMENTS Section 1. Adoption; Amendment; Repeal By-Laws of the Corporation may be adopted, amended or repealed by vote of the holders of the shares at the time entitled to vote in the election of any Directors. By-Laws of the Corporation may also be adopted, amended or repealed by the Board of Directors, but any By-Law adopted by the Board of Directors, may be amended or repealed by the shareholders entitled to vote thereon as herein provided. Section 2. Amendments Affecting Election of Directors; Notice If any By-Law regulating an impending election of Directors is adopted, amended or repealed by the Board, there shall be set forth in the notice of the next meeting of shareholders for the election of Directors the By-Law so adopted, amended or repealed, together with a concise statement of the changes made. EX-4 3 WARRANT ISSUED TO ROBINSON LERER MONTGOMERY Exhibit 4.2 THE WARRANTS EVIDENCED BY THIS CERTIFICATE AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND UNDER SUCH LAWS OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE WARRANTS EVIDENCED HEREBY ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH HEREIN. VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON JUNE 2, 2001 No. R-1 JUNE 2, 1997 LANCIT MEDIA ENTERTAINMENT, LTD. WARRANTS TO PURCHASE COMMON STOCK THIS CERTIFIES that Robinson Lerer & Montgomery, LLC ("Robinson Lerer"), and its successors and assigns to the extent permitted hereunder (hereinafter, the "Holder"), is the registered holder of Warrants entitling the Holder to purchase from Lancit Media Entertainment, Ltd., a corporation organized and existing under the laws of the State of New York (the "Company"), subject to the terms and conditions set forth herein, up to ONE HUNDRED TWENTY-TWO THOUSAND NINETY-THREE (122,093) fully paid and non-assessable shares (each, a "Warrant Share") of the Common Stock, par value $0.001 per share, of the Company (subject to adjustment as provided herein, the "Common Stock") at a price per Warrant Share of $3.625 (subject to adjustment as provided herein, the "Purchase Price"). The Holder shall be entitled to exercise the Warrants, in whole or in part, upon surrender of this Warrant Certificate, submission of the subscription form annexed hereto duly executed, and payment in lawful money of the United States of the Purchase Price in respect of the Warrant Shares being purchased at any time on or after the date hereof and at or prior to 5:00 P.M. (New York City Time) on June 2, 2001 at the office of the Company or, if the Company shall designate a warrant transfer agent, at the office of such warrant transfer agent. Upon the partial exercise of the Warrants evidenced by this Certificate, the Company shall issue or cause to be issued to the Holder a certificate evidencing the balance of the Warrants not then exercised. The Warrants represented by this Warrant Certificate may not be exercised as to a fraction of a Warrant Share. Payment of the Purchase Price shall be made by wire transfer to an account designated by the Company in writing or by certified or official bank check. 1. Upon the surrender of this Warrant Certificate, delivery of a duly executed subscription form and payment of the Purchase Price for the Warrants to be exercised, as herein provided, such Warrants shall be deemed to have been exercised and the person exercising the same shall become the holder of record of the Warrant Shares so purchased for all purposes on the date of such surrender, delivery and payment; provided, however, that if such date is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares of Common Stock on the next succeeding date on which the stock transfer books are open. As soon as practicable after such surrender, delivery and payment, the Company shall issue and deliver to the Holder a certificate or certificates representing the Warrant Shares so purchased and, in the case of a fractional interest in a Warrant Share, cash as herein provided. Upon surrender of this Warrant Certificate to the Company (or its warrant transfer agent, if any), the Company (or warrant transfer agent) shall cancel this Warrant Certificate, and to the extent there is a partial exercise of the Warrants evidenced hereby, the Holder of this Warrant Certificate shall receive a replacement Warrant Certificate of like tenor and date evidencing the number of Warrants that shall not have been exercised, unless such Warrants shall have expired. 2. Notwithstanding the foregoing, if the Company shall give notice to its shareholders of the liquidation, dissolution or winding up of the Company, the right to exercise the Warrants evidenced hereby shall terminate at the close of business on the third full business day prior to the record date for determining the Company's shareholders entitled to receive any distribution upon liquidation, dissolution or winding up, as such record date is specified in such notice. 3. The number and kinds of shares of stock of the Company issuable upon exercise, in whole or in part, of the Warrants evidenced hereby are subject to modification and adjustment upon the happening of certain events, as follows: (a) If, at any time after the date hereof, the Company shall declare or pay a dividend or make a distribution to its shareholders consisting of Common Stock, the Holder shall, upon the exercise of such Warrants after the record date for such dividend, receive, in addition to the Warrant Shares otherwise issuable upon such exercise, the number of shares of Common Stock which the Holder would have been entitled to receive had the Holder exercised such Warrants immediately prior to the record date for such dividend. (b) If, at any time after the date hereof, the Company shall, by subdivision, combination or reclassification of Common Stock, or through merger or consolidation, or otherwise, alter or modify the number, kind or class of shares of Common Stock, or other securities or property of the Company, then, as of the record date for such alteration or modification, the Warrant Shares issuable upon the exercise of a Warrant shall be adjusted so as to amount to the number of shares of capital stock or other securities or property of the Company that the Holder would have owned or would have been entitled to receive had the Warrants evidenced hereby been exercised immediately prior to the record date for such subdivision, combination or reclassification of Common Stock, or merger, consolidation or other alteration or modification. (c) Unless the context otherwise indicates, all references to Warrant Shares in this Warrant Certificate shall, in the event of an adjustment hereunder, be deemed to refer also to any other securities or property receivable upon exercise of the Warrants pursuant to such adjustment. (d) This Warrant Certificate need not be amended because of any adjustment in the number and/or content of Warrant Shares pursuant hereto, and any Warrant Certificate delivered after such adjustment may state the same number of Warrant Shares as is stated in the Warrant Certificate originally delivered. However, the Company may, with the prior written consent of the Holder, amend the form of Warrant Certificate, provided such amendment in form does not affect the substance thereof; and any Warrant Certificate thereafter countersigned and delivered, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in such amended form. (e) If, by reason of the calculation of the number of Warrant Shares issuable upon exercise of the Warrants or any adjustment made pursuant to the terms hereof, the Holder would be entitled, upon any exercise hereof, to receive a fractional interest in a share of Common Stock, the Company shall, upon such exercise, purchase such fractional interest for an amount in cash equal to (i) the then current market value of such fractional interest, computed on the basis of the average closing bid and asked prices of shares of Common Stock on the exercise date as furnished to the Company by any member of member firm of a registered national securities exchange selected from time to time by the Company for that purpose or (ii) if such shares of Common Stock are listed on a national securities exchange or traded on a national market system, at the closing price of such shares on the exercise date. (f) Except as otherwise set forth herein, the Holder shall not, upon any exercise hereof, be entitled to any dividends that may have accrued since the date hereof with respect to the Warrant Shares issuable in respect thereof, or to any interest that may have accrued upon any evidence of indebtedness included in the Warrant Shares. (g) Whenever an adjustment in respect of the Warrant Shares or the Purchase Price is made pursuant to the terms hereof, the Company shall promptly mail to the Holder at the address registered with the Company a notice setting forth such adjustment and the reasons therefor and the calculation thereof. In the event that any of the circumstances described in clause (a) or (b) above occur, the Purchase Price shall, if applicable, be adjusted accordingly. Notwithstanding anything to the contrary herein, no provisions of this Warrant Certificate shall entitle the Holder to any adjustment in Warrant Shares as a result of the issuance of any securities of the Company, or any options, warrants or other rights to purchase any such securities, except as expressly provided in clause (a) or (b), above. 4. In the event of the liquidation, dissolution, or winding up of the Company (which shall not include an event described in paragraph 5), a notice thereof shall be filed by the Company with the warrant transfer agent, if any shall have been designated by the Company, at least thirty (30) days prior to the record date (which date shall be specified in such notice) for determining security holders of the Company entitled to receive any distribution upon such liquidation, dissolution, or winding up. Such notice also shall specify the date on which the right to exercise the Warrants shall expire. A copy of such notice shall be mailed to the Holder at the address registered with the Company not more than thirty (30) nor less than twenty (20) days before such record date. 5. In the case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of the class or classes of the Warrant Shares), or in the case of any sale or transfer to another corporation of the property of the Company in its entirety or substantially in its entirety, the Holder, upon the exercise hereof in whole or in part at any time after such consolidation, merger, sale or transfer, shall be entitled to receive the kind and amount of shares of Common Stock and other securities and property which the Holder would have received upon such consolidation, merger, sale, or transfer had the Holder exercised its Warrants immediately prior thereto. 6. The issue of any shares of Common Stock or other certificates upon any exercise of the Warrants shall be made without charge to the Holder for any stamp or transfer tax in respect thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder, and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 7. (a) The Warrants evidenced by this Warrant Certificate may not be sold, assigned, transferred, pledged or hypothecated without the express written consent of the Company in each instance, except to (i) members of Robinson Lerer, (ii) the spouse or any children or grand- children of any such members, or (iii) a trust or trusts for the sole benefit of the Holder and/or one or more of such persons. With respect to any such permitted transfer, or upon the Holder's obtaining such consent, upon surrender of this Warrant Certificate to the Company with a duly executed Assignment Form and funds sufficient to pay any transfer tax, the Company shall, without additional charge, execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor in the name of the assignee named in such Assignment Form, and this Warrant Certificate shall promptly be canceled. Any such transfer shall be subject, if requested by the Company, to the receipt by the Company of a written opinion of legal counsel, which opinion shall be addressed to the Company and be reasonably satisfactory in form and substance to the Company, to the effect that the proposed transfer of this Warrant may be effected without registration under the Securities Act of 1933, as amended (the "Securities Act"). In addition, the Holder and the proposed transferee shall execute any documentation reasonably required by the Company to ensure compliance with the terms of this Warrant Certificate and the Securities Act. The Holder shall not be entitled to transfer this Warrant Certificate, or any part thereof, if such legal opinion is not reasonably acceptable to the Company or if such documentation is not provided. The term "Warrant Certificate" as used herein shall be deemed to include any Warrant Certificates issued in substitution or exchange for this Warrant Certificate. (b) Subject to the provisions of this paragraph 7, in the event of a transfer permitted hereunder, this Warrant Certificate may be divided upon surrender at the principal office or the Company, without charge to the Holder, and upon such division, the Warrant Certificates issued in exchange herefor may be transferred of record as the then holder thereof may specify without charge to such holder (other than any applicable transfer taxes). (c) Except as otherwise contemplated by this paragraph 7, each Warrant Certificate issued upon direct or indirect transfer or in substitution for any Warrant Certificate pursuant to this paragraph 7 shall be stamped or otherwise imprinted with a restrictive legend similar to that set forth on this Warrant Certificate, and each stock certificate for Warrant Shares issued upon the exercise of any Warrant and each stock certificate issued upon the direct or indirect transfer of any such Warrant Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS OR AN EXEMPTION FROM REGISTRATION THEREUNDER. The Holder may require the Company to issue a stock certificate for Warrant Shares, in each case without a legend, if either (i) such Warrant Shares have been registered for resale under the Securities Act of 1933, as amended (the "Securities Act") or (ii)such Holder has delivered to the Company an opinion of legal counsel, which opinion shall be addressed to the Company and be reasonably satis factory in form and substance to the Company, to the effect that such registration is not required with respect to such Warrant Shares. (d) Notwithstanding any contrary provision of this paragraph 7, upon the written request of the Holder, and subject to compliance with any obligations to notify the holders of "piggy- back" registration rights, the Company shall use its best efforts to effect the registration of the Warrant Shares under the Securities Act of 1933, as amended, on Form S-3 and to keep in effect a current registration statement on Form S-3 relating to the Warrant Shares for such time as the Warrants remain exercisable, and shall use its commercially reasonable efforts to cause such Warrant Shares to be listed on such national securities exchange, or to cause such Warrant Shares to be quoted on NASDAQ under such designation, as may then be applicable to the Company's publicly traded common stock, all at the Company's sole expense. Notwithstanding the foregoing, if the Company shall furnish to the Holder a certificate stating that in the good faith judgment of the Board of Directors a registration would require the premature disclosure of material non-public information which disclosure would be seriously detrimental to the Company, the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed 120 days. Following the filing of such a registration statement, the Company shall promptly notify the Holder of the happening of any event of which the Company has knowledge, as a result of which the Company believes the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances then existing, not misleading, and shall use its best efforts to prepare promptly a supplement or amendment to the registration statement to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment (after the same has become effective) to the Holder as the Holder may reasonably request; in such event, the Holder shall suspend sales pursuant to the registration statement until such supplement or amendment has been so filed and delivered. 8. Subject to the terms and conditions hereof, upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of loss, theft or destruction, of such bond or indemnification as the Company may reasonably require, and, in the case of such mutilation, upon surrender and cancellation of this Warrant Certificate, the Company will execute and deliver a new Warrant Certificate of like tenor. 9. This Warrant Certificate and the Warrants evidenced hereby shall not entitle the Holder to any rights of a shareholder of the Company either at law in or equity including, without limitation, the right to vote, to receive dividends and other distributions, to exercise any preemptive rights or to receive any notice of meetings of shareholders or of any other proceedings of the Company, except as expressly provided herein. 10. To the extent then unexercised, this Warrant Certificate, in all events, shall be canceled and have no effect after 5:00 P.M. (New York City Time) on June 2, 2001. 11. In the event that one or more of the provisions of this Warrant Certificate shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant Certificate, but this Warrant Certificate shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 12. The Company hereby represents and warrants to the Holder as of the date hereof as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New York, with full corporate power and authority to own, lease and operate its respective properties and to carry on its business in the places and in the manner as currently conducted and as currently contemplated to be conducted. (b) The execution, delivery and performance by the Company of this Warrant Certificate is within the corporate power of the Company, and this Warrant Certificate has been duly and validly authorized, executed and delivered by the Company. This Warrant Certificate and the Warrants evidenced hereby constitute the valid and binding obligations of the Company, enforceable in accordance with their terms, except as such enforceability may be subject to bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally and to general equitable principles. 13. This Warrant Certificate shall be binding upon the successors and assigns of the Company. 14. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to provisions thereof governing conflicts of law. 15. All the covenants, agreements, representations and warranties contained in this Warrant Certificate shall bind the parties hereto and their respective heirs, executors, administrators, distributors, successors and assigns. Assignability of rights is limited under the terms of this Warrant Certificate. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed and delivered by its officer hereunder duly authorized. LANCIT MEDIA ENTERTAINMENT, LTD. By: /s/ SUSAN L. SOLOMON -------------------------------------------- Susan L. Solomon, Chief Executive Officer [Form of Subscription] (To be Delivered by the Holder desiring to exercise any of the Warrants evidenced by the Warrant Certificate) To: LANCIT MEDIA ENTERTAINMENT, LTD. The undersigned hereby irrevocably elects to exercise Warrants, pursuant to the Warrant Certificate issued by Lancit Media Entertainment, Ltd. (the "Company") to the Holder, dated __________________ (the "Warrant Certificate"), for, and to purchase thereunder, full shares of Common Stock of the Company issuable upon exercise of said Warrants and delivery of $ in the manner specified in the Warrant Certificate, which represents payment in full of the Purchase Price for said Warrants. The undersigned requests that [a] certificate[s] for such shares be issued in the name[s] of . HOLDER'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER: (Please print name and address) (Signature) If said number or Warrants shall not be all of the Warrants evidenced by the Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: (Please print name and address) (Signature) NOTICE: The signature on this subscription form must correspond with the name as written upon the face of the Warrant Certificate, or upon the assignment thereof, in every particular, without alteration, enlargement, or any change whatsoever and must be guaranteed by a participant in a signature guarantee program recognized by The Securities Transfer Association, Inc. FORM OF ASSIGNMENT (To be executed only upon transfer of this Warrant as permitted by the within Warrant Certificate) For value received, the undersigned registered holder of the within Warrant Certificate hereby sells, assigns and transfers unto the right represented by such Warrant Certificate to purchase ___________ shares of Common Stock of Lancit Media Entertainment, Ltd. (the "Company"), to which such Warrant Certificate relates and all other rights of the holder thereof under the Warrants evidenced thereby and appoints _______________ Attorney to make such transfer on the books of the Company maintained for such purpose, with full power of substitution in the premises. Dated: __________________ (Signature) (Print Name) (Street Address) (City) (State) (Zip Code) Signed in the presence of: transfer on the books of the Company maintained for such purpose, with full power of substitution in the premises. Dated: __________________ (Signature) (Print Name) (Street Address) (City) (State) (Zip Code) Signed in the presence of: ___________________________ - --------------------------- EX-4 4 FORM OF WARRANT ISSUES TO ALLEN AND COMPANY Exhibit 4.3 FORM OF WARRANT THE WARRANTS EVIDENCED BY THIS CERTIFICATE AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND UNDER SUCH LAWS OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE WARRANTS EVIDENCED HEREBY ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH HEREIN. VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON September 10, 2002 No. A-1 September 10, 1997 LANCIT MEDIA ENTERTAINMENT, LTD. WARRANTS TO PURCHASE COMMON STOCK THIS CERTIFIES that ALLEN & COMPANY INCORPORATED and its successors and assigns (hereinafter, the "Holder") is the registered holder of Warrants entitling the Holder to purchase from Lancit Media Entertainment, Ltd., a corporation organized and existing under the laws of the State of New York (the "Company"), subject to the terms and conditions set forth herein, up to ONE HUNDRED THOUSAND (100,000) fully paid and non-assessable shares (each, a "Warrant Share") of the Common Stock, par value $0.001 per share, of the Company (subject to adjustment as provided herein, the "Common Stock") at a price per Warrant Share of $3.00 (subject to adjustment as provided herein, the "Purchase Price"). The Holder shall be entitled to exercise the Warrants, in whole or in part, upon surrender of this Warrant Certificate, submission of the subscription form annexed hereto duly executed, and payment in lawful money of the United States of the Purchase Price in respect of the Warrant Shares being purchased at any time on or after the date hereof and at or prior to 5:00 P.M. (New York City Time) on September 10, 2002 at the office of the Company or, if the Com pany shall designate a warrant transfer agent, at the office of such warrant transfer agent. Upon the partial exercise of the Warrants evidenced by this Certificate, the Company shall issue or cause to be issued to the Holder a certificate evidencing the balance of the Warrants not then exercised. The Warrants represented by this Warrant Certificate may not be exercised as to a fraction of a Warrant Share. Payment of the Purchase Price shall be made made by wire transfer to an account designated by the Company in writing or by certified or official bank check. In lieu of the exercise of the Warrants, in whole or in part, pursuant to the above paragraph, the Holder may, as to any Warrant Shares then issuable hereunder as to which the Holder wishes to exercise his rights under this paragraph (the "Conversion Shares"), elect instead to convert his right to purchase such Conversion Shares pursuant to this Warrant Certificate into a number of shares of Common Stock equal to (a) the product of the number of the Conversion Shares times the excess, if any, of (i) the Market Price Per Share (as hereinafter defined) as of the date of exercise of such conversion right over (ii) the Exercise Price, divided by (b) the Market Price Per Share as of the date of exercise of such conversion right. In order to exercise such conversion privilege, the Holder shall surrender to the Company, at its offices, this Warrant Agreement accompanied by a duly completed Notice of Conversion in the form attached hereto. The Warrants (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Agreement for conversion in accordance with the foregoing provisions (the "Conversion Date"). As promptly as practicable on or after the Conversion Date, the Company shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrants are being converted in part only, a new Warrant Certificate representing the unconverted portion of the Warrants. For purposes of this paragraph, the Market Price per Share shall be the average of the last ten "daily sales prices" of the Common Stock on the National Market or Small Cap Market of NASDAQ on the last ten trading days prior to the Conversion Date. 1. Upon the surrender of this Warrant Certificate, delivery of a duly executed subscription form and payment of the Purchase Price for the Warrants to be exercised, as herein provided, such Warrants shall be deemed to have been exercised and the person exercising the same shall become the holder of record of the Warrant Shares so purchased for all purposes on the date of such surrender, delivery and payment; provided, however, that if such date is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares of Common Stock on the next succeeding date on which the stock transfer books are open. As soon as practicable after such surrender, delivery and payment, the Company shall issue and deliver to the Holder a certificate or certificates representing the Warrant Shares so purchased and, in the case of a fractional interest in a Warrant Share, cash as herein provided. Upon surrender of this Warrant Certificate to the Company (or its warrant transfer agent, if any), the Company (or warrant transfer agent) shall cancel this Warrant Certificate, and to the extent there is a partial exercise of the Warrants evidenced hereby, the Holder of this Warrant Certificate shall receive a replacement Warrant Certificate of like tenor and date evidencing the number of Warrants that shall not have been exercised, unless such Warrants shall have expired. 2. Notwithstanding the foregoing, if the Company shall give notice to its shareholders of the liquidation, dissolution or winding up of the Company, the right to exercise the Warrants evidenced hereby shall terminate at the close of business on the third full business day prior to the record date for determining the Company's shareholders entitled to receive any distribution upon liquidation, dissolution or winding up, as such record date is specified in such notice. 3. The number and kinds of shares of stock of the Company issuable upon exercise, in whole or in part, of the Warrants evidenced hereby are subject to modification and adjustment upon the happening of certain events, as follows: (a) If, at any time after the date hereof, the Company shall declare or pay a dividend or make a distribution to its shareholders consisting of Common Stock, the Holder shall, upon the exercise of such Warrants after the record date for such dividend, receive, in addition to the Warrant Shares otherwise issuable upon such exercise, the number of shares of Common Stock which the Holder would have been entitled to receive had the Holder exercised such Warrants immediately prior to the record date for such dividend. (b) If, at any time after the date hereof, the Company shall, by subdivision, combination or reclassification of Common Stock, or through merger or consolidation, or otherwise, alter or modify the number, kind or class of shares of Common Stock, or other securities or property of the Company, then, as of the record date for such alteration or modification, the Warrant Shares issuable upon the exercise of a Warrant shall be adjusted so as to amount to the number of shares of capital stock or other securities or property of the Company that the Holder would have owned or would have been entitled to receive had the Warrants evidenced hereby been exercised immediately prior to the record date for such subdivision, combination or reclassification of Common Stock, or merger, consolidation or other alteration or modification. (c) Unless the context otherwise indicates, all references to Warrant Shares in this Warrant Certificate shall, in the event of an adjustment hereunder, be deemed to refer also to any other securities or property receivable upon exercise of the Warrants pursuant to such adjustment. (d) This Warrant Certificate need not be amended because of any adjustment in the number and/or content of Warrant Shares pursuant hereto, and any Warrant Certificate delivered after such adjustment may state the same number of Warrant Shares as is stated in the Warrant Certificate originally delivered. However, the Company may, with the prior written consent of the Holder, amend the form of Warrant Certificate, provided such amendment in form does not affect the substance thereof; and any Warrant Certificate thereafter countersigned and delivered, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in such amended form. (e) If, by reason of the calculation of the number of Warrant Shares issuable upon exercise of the Warrants or any adjustment made pursuant to the terms hereof, the Holder would be entitled, upon any exercise hereof, to receive a fractional interest in a share of Common Stock, the Company shall, upon such exercise, purchase such fractional interest for an amount in cash equal to (i) the then current market value of such fractional interest, computed on the basis of the average closing bid and asked prices of shares of Common Stock on the exercise date as furnished to the Company by any member of member firm of a registered national securities exchange selected from time to time by the Company for that purpose or (ii) if such shares of Common Stock are listed on a national securities exchange or traded on a national market system, at the closing price of such shares on the exercise date. (f) Except as otherwise set forth herein, the Holder shall not, upon any exercise hereof, be entitled to any dividends that may have accrued since the date hereof with respect to the Warrant Shares issuable in respect thereof, or to any interest that may have accrued upon any evidence of indebtedness included in the Warrant Shares. (g) Whenever an adjustment in respect of the Warrant Shares or the Purchase Price is made pursuant to the terms hereof, the Company shall promptly mail to the Holder at the address registered with the Company a notice setting forth such adjustment and the reasons therefor and the calculation thereof. In the event that any of the circumstances described in clause (a) or (b) above occur, the Purchase Price shall, if applicable, be adjusted accordingly. Notwithstanding anything to the contrary herein, no provisions of this Warrant Certificate shall entitle the Holder to any adjustment in Warrant Shares as a result of the the issuance of any securities of the Company, or any options, warrants or other rights to purchase any such securities, except as expressly provided in clause (a) or (b), above. 4. In the event of the liquidation, dissolution, or winding up of the Company (which shall not include an event described in paragraph 5), a notice thereof shall be filed by the Company with the warrant transfer agent, if any shall have been designated by the Company, at least thirty (30) days prior to the record date (which date shall be specified in such notice) for determining security holders of the Company entitled to receive any distribution upon such liquidation, dissolution, or winding up. Such notice also shall specify the date on which the right to exercise the Warrants shall expire. A copy of such notice shall be mailed to the Holder at the address registered with the Company not more than thirty (30) nor less than twenty (20) days before such record date. 5. In the case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of the class or classes of the Warrant Shares), or in the case of any sale or transfer to another corporation of the property of the Company in its entirety or substantially in its entirety, the Holder, upon the exercise hereof in whole or in part at any time after such consolidation, merger, sale or transfer, shall be entitled to receive the kind and amount of shares of Common Stock and other securities and property which the Holder would have received upon such consolidation, merger, sale, or transfer had the Holder exercised its Warrants immediately prior thereto. 6. The issue of any shares of Common Stock or other certificates upon any exercise of the Warrants shall be made without charge to the Holder for any stamp or transfer tax in respect thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder, and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 7. (a) The Warrants evidenced by this Warrant Certificate may not be sold, assignede, transferred, pledged or hypothecated without the express written consent of the Company in each instance, except to a wholly-owned subsidiary of the Holder. With respect to any such permitted transfer, or upon the Holder's obtaining such consent, upon surrender of this Warrant Certificate to the Company with a duly executed Assignment Form and funds sufficient to pay any transfer tax, the Company shall, without additional charge, execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor in the name of the assignee named in such Assignment Form, and this Warrant Certificate shall promptly be canceled. Any such transfer shall be subject, if requested by the Company, to the receipt by the Company of a written opinion of legal counsel, which opinion shall be addressed to the Company and be reasonably satisfactory in form and substance to the Company, to the effect that the proposed transfer of this Warrant may be effected without registration under the Securities Act of 1933, as amended (the "Securities Act"). In addition, the Holder and the proposed transferee shall execute any documentation reasonably required by the Company to ensure compliance with the terms of this Warrant Certificate and the Securities Act. The Holder shall not be entitled to transfer this Warrant Certificate, or any part thereof, if such legal opinion is not reasonably acceptable to the Company or if such documentation is not provided. The term "Warrant Certificate" as used herein shall be deemed to include any Warrant Certificates issued in substitution or exchange for this Warrant Certificate. (b) Subject to the provisions of this paragraph 7, this Warrant Certificate may be divided upon surrender at the principal office or the Company, without charge to the Holder, and upon such division, the Warrant Certificates issued in exchange herefor may be transferred of record as the then holder thereof may specify without charge to such holder (other than any applicable transfer taxes). (c) Except as otherwise contemplated by this paragraph 7, each Warrant Certificate issued upon direct or indirect transfer or in substitution for any Warrant Certificate pursuant to this paragraph 7 shall be stamped or otherwise imprinted with a restrictive legend similar to that set forth on this Warrant Certificate, and each stock certificate for Warrant Shares issued upon the exercise of any Warrant and each stock certificate issued upon the direct or indirect transfer of any such Warrant Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS OR AN EXEMPTION FROM REGISTRATION THEREUNDER. The Holder may require the Company to issue a stock certificate for Warrant Shares without a legend, if either (i)such Warrant Shares have been registered for resale under the Securities Act or (ii)such Holder has delivered to the Company an opinion of legal counsel, which opinion shall be addressed to the Company and be reasonably satisfactory in form and substance to the Company, to the effect that such registration is not required with respect to such Warrant Shares. (d) Notwithstanding any contrary provision of this paragraph 7, upon the written request of the Holder, and subject to compliance with any obligations to notify the holders of "piggy- back" registration rights, the Company shall use its best efforts to effect the registration of the Warrant Shares under the Securities Act of 1933, as amended, on Form S-3 and to keep in effect a current registration statement on Form S-3 relating to the Warrant Shares for such time as the Warrants remain exercisable. Notwithstanding the foregoing, if the Company shall furnish to the Holder a certificate stating that in the good faith judgment of the Board of Directors a registration would require the premature disclosure of material non-public information which disclosure would be seriously detrimental to the Company, the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed 120 days. In the event that, prior to the filing of a registration statement with respect to the Warrant Shares in accordance wtih this parargraph 7(d), the Company files a registration statement with respect to its Common Stock (other than on Form S-4 or S-8 or comparable forms), it will so notify the Holder to enable the Holder to exercise its registration rights pursuant to this paragraph (in which event the Company may either include the Warrant Shares in such other registration statement or file a separate registration statement as contemplated hereby). Following the filing of any registration statement covering the Warrant Shares, the Company shall promptly notify the Holder of the happening of any event of which the Company has knowledge, as a result of which the Company believes the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances then existing, not misleading, and shall use its best efforts to prepare promptly a supplement or amendment to the registration statement to correct such untrue statement or omission (after the same has become effective), and deliver a number of copies of such supplement or amendment to the Holder as the Holder may reasonably request; in such event, the Holder shall suspend sales pursuant to the registration statement until such supplement or amendment has been so filed and delivered. 8. Subject to the terms and conditions hereof, upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of loss, theft or destruction, of such bond or indemnification as the Company may reasonably require, and, in the case of such mutilation, upon surrender and cancellation of this Warrant Certificate, the Company will execute and deliver a new Warrant Certificate of like tenor. 9. This Warrant Certificate and the Warrants evidenced hereby shall not entitle the Holder to any rights of a shareholder of the Company either at law in or equity including, without limitation, the right to vote, to receive dividends and other distributions, to exercise any preemptive rights or to receive any notice of meetings of shareholders or of any other proceedings of the Company, except as expressly provided herein. 10. To the extent then unexercised, this Warrant Certificate, in all events, shall be canceled and have no effect after 5:00 P.M. (New York City Time) on September 10, 2002. 11. In the event that one or more of the provisions of this Warrant Certificate shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant Certificate, but this Warrant Certificate shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 12. The Company hereby represents and warrants to the Holder as of the date hereof as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New York, with full corporate power and authority to own, lease and operate its respective properties and to carry on its business in the places and in the manner as currently conducted and as currently contemplated to be conducted. (b) The execution, delivery and performance by the Company of this Warrant Certificate is within the corporate power of the Company, and this Warrant Certificate has been duly and validly authorized, executed and delivered by the Company. This Warrant Certificate and the Warrants evidenced hereby constitute the valid and binding obligations of the Company, enforceable in accordance with their terms, except as such enforceability may be subject to bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally and to general equitable principles. 13. This Warrant Certificate shall be binding upon the successors and assigns of the Company. 14. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to provisions thereof governing conflicts of law. 15. All the covenants, agreements, representations and warranties contained in this Warrant Certificate shall bind the parties hereto and their respective heirs, executors, administrators, distributors, successors and assigns. Assignability of rights is limited under the terms of this Warrant Certificate. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed and delivered by its officer hereunder duly authorized. LANCIT MEDIA ENTERTAINMENT, LTD. By: /s/SUSAN L. SOLOMON Susan L. Solomon, Chief Executive Officer Countersigned: /s/LAURENCE A. LANCIT Laurence A. Lancit, Co-President FORM OF SUBSCRIPTION (To be Delivered by the Holder desiring to exercise any of the Warrants evidenced by the Warrant Certificate) To: LANCIT MEDIA ENTERTAINMENT, LTD. The undersigned hereby irrevocably elects to exercise Warrants, pursuant to the Warrant Certificate issued by Lancit Media Entertainment, Ltd. (the "Company") to the Holder, dated __________________ (the "Warrant Certificate"), for, and to purchase thereunder, full shares of Common Stock of the Company issuable upon exercise of said Warrants and delivery of $ in the manner specified in the Warrant Certificate, which represents payment in full of the Purchase Price for said Warrants. The undersigned requests that [a] certificate[s] for such shares be issued in the name[s] of _______________________________________________ HOLDER'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER: (Please print name and address) (Signature) If said number or Warrants shall not be all of the Warrants evidenced by the Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: (Please print name and address) (Signature) NOTICE: The signature on this subscription form must correspond with the name as written upon the face of the Warrant Certificate, or upon the assignment thereof, in every particular, without alteration, enlargement, or any change whatsoever and must be guaranteed by a participant in a signature guarantee program recognized by The Securities Transfer Association, Inc. FORM OF NOTICE OF CONVERSION The undersigned irrevocably elects to convert, pursuant to the Warrant Certificate issued by Lancit Media Entertainment, Ltd. (the "Company") to the Holder, dated __________________ (the "Warrant Agreement"), the undersigned's right to purchase __________ Conversion Shares pursuant to the Warrant Certificate into shares of the Common Stock of the Company. The undersigned hereby requests (a) that certificates for such shares (and any securities or other property issuable upon such exercise) be issued in the name of, and delivered to, ______________ and (b) the Conversion Shares referred to above shall not include all of the Warrant Shares issuable as provided in said Warrant, that a new Warrant Certificate of like tenor and date for the balance of the Warrant Shares issuable thereunder be delivered to the undersigned. Name of Holder Signature Address: NOTICE: The signature on this subscription form must correspond with the name as written upon the face of the Warrant Agreement, or upon the assignment thereof, in every particular, without alteration, enlargement, or any change whatsoever and must be guaranteed by a participant in a signature guarantee program recognized by The Securities Transfer Association, Inc. FORM OF ASSIGNMENT (To be executed only upon transfer of this Warrant as permitted by the within Warrant Certificate) For value received, the undersigned registered holder of the within Warrant Certificate hereby sells, assigns and transfers unto the right represented by such Warrant Certificate to purchase ___________ shares of Common Stock of Lancit Media Entertainment, Ltd. (the "Company"), to which such Warrant Certificate relates and all other rights of the holder thereof under the Warrants evidenced thereby and appoints _______________ Attorney to make such transfer on the books of the Company maintained for such purpose, with full power of substitution in the premises. Dated: __________________ (Signature) (Print Name) (Street Address) (City) (State) (Zip Code) Signed in the presence of: - --------------------------- EX-10 5 AMENDMENT TO SUSAN SOLOMON EMPLOYMENT AGREEMENT Exhibit 10.4 AMENDMENT NO. 1 AMENDMENT NO. 1 dated as of June 20, 1997 to the Employment Agreement (the "Agreement") dated as of March 31, 1997 between LANCIT MEDIA ENTERTAINMENT, LTD., a New York corporation ("Employer") and SUSAN SOLOMON ("Executive"). W I T N E S S E T H: WHEREAS, Employer and Executive entered into the Agreement on March 31, 1997; and WHEREAS, the Board of Directors approved certain amendments to the Agreement on the date hereof; and WHEREAS, capitalized terms used in this Amendment and not separately defined shall have the meanings ascribed thereto in the Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to amend the Agreement as follows: 1. Paragraphs 3(e), 3(f) and 3(g) of the Agreement are hereby amended to provide in their entirety as follows: (e) (i) Employer hereby grants to Executive stock options to purchase four hundred ninety-five thousand (495,000) shares of Employer's common stock (the "Signing Options") under Employer's 1990 Stock Option Plan (the "1990 Plan") on the terms and conditions described in the Stock Option Agreement between Employer and Executive dated as of June 20, 1997, a copy of which is annexed hereto as Exhibit A. Employer represents, warrants and covenants that no fewer than four hundred ninety-five thousand (495,000) authorized but unissued shares of Employer's common stock (or shares of common stock held in treasury) will remain reserved and available for issuance under the 1990 Plan pursuant to such Stock Option Agreement for so long as the Signing Options remain outstanding. Subject to subparagraph 3(f)(v)(B), the Signing Options may not be exercised prior to October 1, 1997. From and after that date (or such earlier date as is provided for hereunder), the Signing Options may be exercised in accordance with their terms. (ii) Employer represents and warrants the shares of common stock issuable pursuant to the Signing Options (the "Signing Option Shares") are registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement on Form S-8 which is currently in effect. Upon the request of Executive, Employer shall promptly prepare and file, by means of a post-effective amendment, and thereafter maintain current and in effect, a re-offer prospectus under such registration statement, registering the resale of all the Signing Option Shares by Executive. Employer agrees to use its reasonable efforts to make timely filings of its periodic reports and to take such other actions as may be necessary or appropriate in order for Employer to remain qualified to use Form S- 8 and such re-offer prospectus as contemplated by this Agreement. Employer covenants and agrees to use its reasonable efforts to maintain current and in effect each of such registration statement and reoffer prospectus until the earliest to occur of (A) the eleventh (11th) anniversary of the Effective Date, or (B) the sale of all of the Signing Option Shares by Executive, or (iii) the date Executive receives an opinion of counsel reasonably acceptable to counsel for Executive (which may be from counsel to Employer) that all of the Signing Option Shares may be sold under the provisions of paragraph (k) of Rule 144 notwithstanding the fact that a portion of the Signing Option Shares may remain unregistered under the Act. (iii)If Employer is unable to maintain in effect the registration of the Signing Option Shares on Form S-8 or fails or is unable to file or thereafter maintain in effect a re-offer prospectus under such registration statement, Executive will be entitled to the demand registration rights described in the Registration Rights Agreement between Employer and Executive dated as of March 31, 1997, a copy of which is annexed hereto as Exhibit B. (iv) Executive agrees that, during any ninety (90) day period, and notwithstanding the registration under the Securities Act of the Signing Option Shares, Executive's right to sell, assign, hypothecate or otherwise transfer any interest in the Signing Option Shares (collectively referred to herein as Executive's "Transfer Rights"), shall be limited to that number of the Signing Option Shares, together with any shares of common stock issuable to Executive pursuant to the Units or the Additional Signing Options hereinafter referred to (collectively, the "Option Shares"), which is equal to the greater of (A) one (1%) percent of the number of shares of Employer's common stock outstanding or (B) the average weekly reported volume of trading in Employer's common stock on all national securities exchanges and/or reported through the automated quotation system of a registered securities association (e.g., NASDAQ) during the four (4) calendar weeks immediately preceding the filing of the notice of sale required to be filed under Rule 144 if the Option Shares are being sold in compliance with SEC Rule 144 or, if compliance with Rule 144 is not required, the date of sale. Employer and Executive agree that the restrictions described in this subparagraph 3(e)(iv) shall expire: (1) if Executive's employment is terminated other than for the reason set forth in subparagraph 4(a)(iv), upon the later of (x) the termination of Executive's employment with Employer or (y) March 24, 2001, or (2) if Executive's employment is terminated for the reason set forth in subparagraph 4(a)(iv), upon the termination of Executive's employment with Employer or (3) in the event of a "Change in Control of Employer" as defined in subparagraph 4(d) of this Agreement. Employer further agrees that if Executive, prior to her termination of employment, has not transferred or sold the maximum number of Option Shares which she had been entitled to transfer or sell hereunder, then, as of the date of termination of her employment, where such date is prior to March 24, 2001, all restrictions on transfer and sale shall expire as of the date of termination of employment as to the number of Option Shares which Executive could have previously transferred or sold cumulatively, less the number of shares which were previously transferred or sold. (v) (A) In the event of (1) the dissolution or liquidation of Employer or (2) a merger or consolidation in which (x) the Employer does not survive as a publicly owned corporation with securities registered under the Exchange Act and (y) the agreements governing such merger or consolidation do not provide for the issuance of substitute options with substantially equivalent terms, as determined by Employer's Board of Directors, in lieu of the Signing Options or for the express assumption (within the meaning of Section 424(a) of the Internal Revenue Code of 1986, as amended (the "Code") of the Signing Options by the surviving corporation, Employer's Board of Directors shall declare that the Signing Options shall terminate as of a date to be fixed by the Board of Directors (the "Termination Date"), provided that the Board of Directors shall cause to be delivered not less than thirty (30) days before the Termination Date written notice of the Termination Date to Executive and Executive shall have the right, during the period between the receipt of the written notice and the Termination Date, to exercise the Signing Options, in whole or in part, whether or not all or any part of the Signing Options would not otherwise be exercisable; provided, however, that unless Executive shall deliver to Employer written notice to the contrary at least three (3) business days prior to the Termination Date, Executive and all other holders of the Signing Options, if any, shall be deemed to have delivered to Employer a notice of exercise of the Signing Options, in whole, on such Termination Date. To the extent that the Signing Options are not exercised in their entirety on or prior to the Termination Date, any and all Signing Options and all rights then remaining hereunder shall terminate as of the Termination Date. (B) Upon a "Change in Control of Employer", the Signing Options, if not already exercisable in accordance with their terms, shall become immediately exercisable in whole or in part. (C) In the event of a "Change in Control of Employer" pursuant to which substitute options are offered to Executive in place of the Signing Options herein granted or the surviving corporation offers to assume the Signing Options, the Board shall cause to be delivered to Executive, not less than thirty (30) days before the effective date of such "Change In Control of Employer", written notice of such effective date to Executive and Executive shall have the right to elect to accept such substitute options or assumption of the Signing Options or to exercise the Signing Options in whole or in part, prior to the such effective date (and such notice shall so state); provided, however, that unless Executive shall deliver to Employer written notice to the contrary at least three (3) business days prior to such effective date, Executive and all other holders of the Signing Options, if any, shall be deemed to have rejected any substitute options offered to Executive and any offer to assume the Signing Options and to have delivered to Employer a notice of exercise of the Signing Options, in whole, on such effective date. (vi) If, at the time Executive purchases any Option Shares upon exercise of Signing Options, such Option Shares are not registered for resale by Executive under the Securities Act, and Executive is entitled to demand registration rights under subparagraph 3(e)(iii) above, and if on the date on which such Option Shares may for the first time be sold by Executive without limitation (whether by means of an effective registration for resale under the Securities Act or otherwise) the "fair market value" of a share of Employer's common stock is, with respect to any such Option Share, below the lesser of (A) the fair market value of such Option Share on the date Executive's notice of election to exercise her registration rights was received by Employer or (B) the fair market value of such Option Share on the date the certificate representing ownership in registered form thereof was issued, Employer will promptly compensate Executive with a bonus payment in an amount of cash or registered shares (valued at their fair market value) equal to the sum of the differences between the fair market value of a share of Employer's common stock on the date on which such registration statement is declared effective and the amount determined to be, with respect to each Option Share described in this subparagraph 3(e)(vi), the lesser of the amounts described in clauses (A) and (B) above. For purposes of the foregoing, the term fair market value shall have the same meaning as is ascribed to such term in Schedule A annexed hereto. (f) (i) As a further financial incentive for Executive, Employer hereby grants Executive an additional value incentive bonus (the "Value Incentive Bonus") of two hundred fifty-five thousand (255,000) units (the "Units") which shall be convertible in accordance with the terms and conditions of this Agreement and Schedule A annexed hereto. The value of each Unit shall be equal to the increased value of one (1) share of Employer's common stock, calculated in the manner described in this Agreement and in Schedule A annexed hereto. Upon conversion of the Units into compensation, as contemplated by Paragraph 2 of Schedule A, employee will be entitled to receive cash or shares of Employer's common stock at the option of Employer's Board of Directors, in accordance with Schedule A. The Value Incentive Bonus is and shall be an employee benefit plan of Employer. (ii) (A) The Units are granted in recognition of the personal services of Executive, and Executive hereby agrees that Executive will not directly or indirectly sell, assign, transfer, pledge, hypothecate, dispose of, encumber or otherwise grant any interest in the Units other than (1) by will or by the laws of descent and distribution or (2) pursuant to a "Qualified Domestic Relations Order" ("QDRO") as defined in the Code, or Title I of the Employment Retirement Income Security Act of 1974, as amended. The Units may be converted during the lifetime of Executive only by Executive or by Executive's guardian or other legal representative or by a transferee thereof pursuant to a QDRO (a "Permitted Transferee"). (B) If Executive shall die while still employed pursuant to this Agreement, the Units may be converted by Executive's executor, administrator or other legal representative, or by a Permitted Transferee to whom the Units were lawfully transferred, if any, at any time prior to the expiration of the Units. (C) If Executive's employment pursuant to this Agreement is terminated by reason of permanent disability (as defined in Paragraph 4(a) below), the Units may be converted by Executive or by Executive's guardian or legal representative, or by a Permitted Transferee to whom the Units were lawfully transferred, if any, at any time prior to the expiration of the Units. (iii)Subject to subparagraph 3(f)(viii)(B) below, the Units may not be converted prior to the earlier to occur of the Shareholders Meeting (as defined in subparagraph 3(g)(ii) below) or December 31, 1997, except as hereinafter provided and provided that the Units do not expire immediately following the Shareholders Meeting (held on or before December 31, 1997) in accordance with subparagraph 3(f)(vii)(A). From and after such date the Units may be converted in whole or from time to time in part at any time before their expiration by giving advance written notice of such conversion to the Chief Financial Officer of Employer in the form of Exhibit I annexed to Schedule A hereto prior to midnight, New York City time, on March 31, 2007 (the "Expiration Date"), specifying the number of Units (not exceeding two hundred fifty-five thousand (255,000)) being converted. (iv) Employer agrees that with respect to the shares of common stock which may be issuable to Executive pursuant to Executive's Value Incentive Bonus (the "Value Incentive Shares"), upon the request of Executive following the earlier of the Shareholders Meeting of Employer referred to in subparagraph 3(g)(ii) below or December 31, 1997 (provided the New Plan and/or Additional Signing Options referred to in Paragraph 3(g) below were not approved or ratified at such meeting on or prior to December 31, 1997), Employer will promptly seek to register the Value Incentive Shares under the Securities Act, on a Form S-8 (or the applicable successor Form) registration statement, and shall thereafter use its reasonable efforts to maintain current and in effect such registration statement. In connection with such registration, Employer shall prepare and file and thereafter maintain current and in effect, a "re-offer prospectus" under such registration statement, registering the resale of all the Value Incentive Shares by Executive. Employer agrees to use its reasonable efforts to make timely filings of its periodic reports and to take such other actions as may be necessary or appropriate in order for Employer to remain qualified to use such Form S-8 and such re-offer prospectus as contemplated by this Agreement. Employer's obligations under this paragraph shall terminate upon the earliest to occur of (i) the eleventh (11th) anniversary of the Effective Date, or (ii) the sale of all of the Value Incentive Shares by Executive or (iii) the date Executive receives an opinion of counsel reasonably acceptable to counsel for Executive (which may be from counsel to Employer) that all of the Value Incentive Shares may be sold under the provisions of paragraph (k) of Rule 144 notwithstanding the fact that a portion of the Value Incentive Shares may remain unregistered under the Securities Act or (iv) expiration of the Units as provided in subparagraph 3(f)(viii) hereof. (v) If Employer is unable to register the Value Incentive Shares on Form S-8 or thereafter fails or is unable to maintain such registration statement in effect or fails or is unable to file or thereafter maintain in effect a re-offer prospectus under such registration statement, Executive will be entitled to the demand registration rights described in the Registration Rights Agreement between Employer and Executive dated as of March 31, 1997, a copy of which is annexed hereto as Exhibit B. (vi) Executive agrees that, during any ninety (90) day period, and notwithstanding the registration under the Securities Act of the Value Incentive Shares, Executive's right to sell, assign, hypothecate or otherwise transfer any interest in the Value Incentive Shares (collectively referred to herein as Executive's "Transfer Rights"), shall be limited as set forth in subparagraph 3(e)(iv) of this Agreement. Employer and Executive agree that the restrictions described in this subparagraph 3(f)(vi) shall expire: (1) if Executive's employment is terminated other than for the reason set forth in subparagraph 4(a)(iv), upon the later of (x) the termination of Executive's employment with Employer or (y) March 30, 2001, or (2) if Executive's employment is terminated for the reason set forth in subparagraph 4(a)(iv), upon the termination of Executive's employment with Employer or (3) upon a "Change in Control of Employer" as defined in subparagraph 4(d) of this Agreement. Employer further agrees that if Executive, prior to her termination of employment, has not transferred or sold the maximum number of Value Incentive Shares which she had been entitled to transfer or sell hereunder, then, as of the date of termination of her employment, where such date is prior to March 30, 2001, all restrictions on transfer and sale shall expire as of the date of termination of employment as to the number of Value Incentive Shares which Executive could have previously transferred or sold cumulatively, less the number of shares which were previously transferred or sold. (vii) The Units shall expire and become null and void at the earliest of: (A) the approval or ratification by Employer's shareholders at the Shareholder's Meeting of the New Plan on or before December 31, 1997, such that the grant of Additional Signing Options granted to Executive to purchase up to two hundred fifty-five thousand (255,000) shares of Common Stock become effective; (B) the Expiration Date; (C) the dissolution of Employer (subject to the provisions of subparagraph 3(f)(viii) below); (D) (1) six (6) months after the termination of this Agreement if such termination occurs on or prior to March 31, 2001 other than by reason of death or "permanent disability" (as defined in subparagraph 4(a) below), or (2) one (1) year after the termination of this Agreement if such termination occurs on or prior to March 31, 2001 by reason of death or disability; (E) one (1) year after the termination of this Agreement if such termination occurs for any reason whatsoever after March 31, 2001 and on or prior to March 31, 2002; (F) two (2) years after the termination of this Agreement if such termination occurs for any reason whatsoever after March 31, 2002 and on or prior to March 31, 2003; or (G) three (3) years after the termination of this Agreement if such termination occurs for any reason whatsoever after March 31, 2003. In the event Executive's employment is terminated within four (4) years of the Effective Date, other than "For Cause" (as defined in subparagraph 4(a) of this Agreement) or in the event Executive delivers her notice of her "Resignation For Cause" (as defined in subparagraph 4(c) of this Agreement), then, notwithstanding any other provisions of this or any other agreement dated as of even date herewith or prior hereto, the Units shall expire no earlier than the date which is two (2) years from the Effective Date with respect to fifty (50%) percent of the Value Incentive Shares or cash issuable upon conversion of the Units, the date which is three (3) years from the Effective Date with respect to an additional twenty-five (25%) percent of the Value Incentive Shares or cash issuable upon conversion of the Units and the date which is four (4) years from the Effective Date with respect to the remaining twenty-five (25%) percent of the Value Incentive Shares or cash issuable upon conversion of the Units. (viii) (A) In the event of (1) the dissolution or liquidation of Employer or (2) a merger or consolidation in which (x) the Employer does not survive as a publicly owned corporation with securities registered under the Exchange Act and (y) the agreements governing such merger or consolidation do not provide for the issuance of a substitute value incentive bonus or options with substantially equivalent terms, as determined by Employer's Board of Directors, in lieu of the Units or for the express assumption (within the meaning of Section 424(a) of the Code) of the Units by the surviving corporation, Employer's Board of Directors shall declare that the Units shall terminate as of a date to be fixed by the Board of Directors (the "Termination Date"), provided that the Board of Directors shall cause to be delivered not less than thirty (30) days before the Termination Date written notice of the Termination Date to Executive, and Executive shall have the right, during the period between the receipt of the written notice and the Termination Date to convert the Units, in whole or in part, whether or not all or any part of the Units would otherwise be convertible; provided, however, that unless Executive shall deliver to Employer written notice to the contrary at least three (3) business days prior to the Termination Date, Executive and all other holders of Units, if any, shall be deemed to have delivered to Employer a notice of conversion of the Units, in whole, on such Termination Date. To the extent that the Units are not converted in their entirety on or prior to the Termination Date, any and all Units and all rights then remaining hereunder shall terminate as of the Termination Date. (B) In the event a "Change in Control of Employer" (as defined in subparagraph 4(d) below) occurs prior to the Units becoming convertible pursuant to Paragraph 3(f)(iii), the Units shall become immediately convertible in whole or in part. (C) In the event of a "Change in Control of Employer" pursuant to which a substitute value incentive bonus units or options are offered to Executive in place of the Units herein granted or the surviving corporation offers to assume Employer's obligations under the value incentive bonus plan, the Board shall cause to be delivered to Executive, not less than thirty (30) days before the effective date of such "Change in Control of Employer", written notice of such effective date to Executive, and Executive shall have the right to elect to accept such substitute value incentive bonus units or options or to convert the Units in whole or in part, prior to the effective date of such "Change in Control of Employer" (and such notice shall so state); provided, however, that unless Executive shall deliver to Employer written notice to the contrary at least three (3) business days prior to such effective date, Executive and all other holders of Units, if any, shall be deemed to have rejected any substitute value incentive bonus units or options offered to Executive and any offer to assume the Units and to have delivered to Employer a notice of conversion of the Units, in whole, on such effective date. (ix) If, at the time Executive converts any Units with respect to which payment is made in Value Incentive Shares, such Value Incentive Shares are not registered for resale under the Securities Act, and Executive is entitled to demand registration rights under subparagraph 3(f)(v) above, and if on the date on which such Value Incentive Shares may for the first time be sold by Executive without limitation (whether by means of an effective registration for resale under the Securities Act or otherwise) the "fair market value" of a share of Employer's common stock is, with respect to any such Value Incentive Share, below the lesser of (A) the fair market value of such Value Incentive Share on the date Executive's notice of election to exercise her registration rights was received by Employer or (B) the fair market value of such Value Incentive Share on the date the certificate representing ownership in registered form thereof was issued, Employer will promptly compensate Executive with a bonus payment in an amount of cash or registered shares (valued at their fair market value) equal to the sum of the differences between the fair market value of a share of Employer's common stock on the date on which such registration statement is declared effective and the amount determined to be, with respect to each Value Incentive Share described in this subparagraph 3(f)(ix), the lesser of the amounts described in clauses (A) and (B) above. For purposes of the foregoing, the term fair market value shall have the same meaning as is ascribed to such term in Schedule A. (g) (i) Employer hereby grants and, subject to the approval of Employer's shareholders at the Shareholders Meeting described in subparagraph 3(g)(ii), Executive agrees to accept in lieu of the Value Incentive Bonus, stock options to purchase two hundred fifty-five thousand (255,000) shares of Employer's common stock (the "Additional Signing Options") on the terms and conditions described in the Stock Option Agreement between Employer and Executive dated as of June 20, 1997, a copy of which is annexed hereto as Exhibit C, pursuant to the 1997 Incentive Stock Plan of Employer (the "New Plan") which has been adopted by the Board of Directors, subject to shareholder approval. Subject to obtaining such approval, Employer represents, warrants and covenants that no fewer than two hundred fifty-five thousand (255,000) authorized but unissued shares of Employer's common stock (or shares of common stock held in treasury) will remain reserved and available for issuance under such New Plan pursuant to such Stock Option Agreement for so long as the Additional Signing Options remain outstanding. (ii) Employer agrees to call an annual or special meeting of its shareholders promptly following the execution of this Agreement, but in no event to be held later than December 31, 1997, for the purpose of seeking such shareholder approval of the New Plan and/or ratification or approval of the grant of the Additional Signing Options (the "Shareholders Meeting"). Executive agrees that if the shareholders approve the New Plan or otherwise ratify or approve the grant of the Additional Signing Options, all of Executive's rights to the Value Incentive Bonus shall be deemed null and void, ab initio. (iii)Employer agrees that with respect to the shares of common stock issuable to Executive upon exercise of the Signing Options (the "Additional Option Shares"), Employer will, upon the request of Executive following the Shareholders Meeting, promptly seek to register the Additional Option Shares under the Securities Act on a Form S-8 (or the applicable successor Form) registration statement, and shall thereafter use its reasonable efforts to maintain current and in effect such registration statement. In connection with such registration, Employer shall prepare and thereafter maintain current and in effect, a "re-offer prospectus" under such registration statement, registering the resale of all of the Additional Option Shares by Executive. Employer agrees to use its reasonable efforts to make timely filings of its periodic reports and to take such other actions as may be necessary or appropriate in order for Employer to remain qualified to use such Form S-8 and such re-offer prospectus as contemplated by this Agreement. Employer's obligations under this paragraph shall terminate upon the earliest to occur of (i) the eleventh (11th) anniversary of the Effective Date, or (ii) the sale of all of the Additional Option Shares by Executive or (iii) the date Executive receives an opinion of counsel reasonably acceptable to counsel for Executive (which may be from counsel to Employer) that all of the Additional Option Shares may be sold under the provisions of paragraph (k) of Rule 144 notwithstanding the fact that a portion of the Additional Option Shares may remain unregistered under the Securities Act. (iv) If Employer is unable to register the Additional Option Shares on Form S-8 or thereafter fails or is unable to maintain such registration statement in effect or fails or is unable to file or thereafter maintain in effect a re-offer prospectus under such registration statement, Executive will be entitled to the demand registration rights described in the Registration Rights Agreement between Employer and Executive dated as of March 31, 1997, a copy of which is annexed hereto as Exhibit B. (v) Executive agrees that, during any ninety (90) day period, and notwithstanding the registration under the Securities Act of the Additional Option Shares, Executive's right to sell, assign, hypothecate or otherwise transfer any interest in the Additional Option Shares (collectively referred to herein as Executive's "Transfer Rights"), shall be limited as set forth in subparagraph 3(e)(iv) above. Employer and Executive agree that the restrictions described in this subparagraph 3(g)(v) shall expire: (1) if Executive's employment is terminated other than for the reason set forth in subparagraph 4(a)(iv), upon the later of (x) the termination of Executive's employment with Employer or (y) March 24, 2001, or (2) if Executive's employment is terminated for the reason set forth in subparagraph 4(a)(iv), upon the termination of Executive's employment with Employer or (3) in the event of a "Change In Control of Employer" as defined in subparagraph 4(d) of this Agreement. Employer further agrees that if Executive, prior to her termination of employment, has not transferred or sold the maximum number of Additional Option Shares which she had been entitled to transfer or sell hereunder, then, as of the date of termination of her employment, where such date is prior to March 24, 2001, all restrictions on transfer and sale shall expire as of the date of termination of employment as to the number of Additional Option Shares which Executive could have previously transferred or sold cumulatively, less the number of shares which were previously transferred or sold. (vi) (A) In the event of (1) the dissolution or liquidation of Employer or (2) a merger or consolidation in which (x) the Employer does not survive as a publicly owned corporation with securities registered under the Exchange Act and (y) the agreements governing such merger or consolidation do not provide for the issuance of substitute options with substantially equivalent terms, as determined by Employer's Board of Directors, in lieu of the Additional Signing Options or for the express assumption (within the meaning of Section 424(a) of the Code) of the Additional Signing Options by the surviving corporation, Employer's Board of Directors shall declare that the Additional Signing Options shall terminate as of a date to be fixed by the Board of Directors (the "Termination Date"), provided that the Board of Directors shall cause to be delivered not less than thirty (30) days before the Termination Date written notice of the Termination Date to Executive and, provided the New Plan or the Additional Signing Options have theretofore been approved or ratified by Employer's shareholders as contemplated by subparagraph 3(g)(ii) above, Executive shall have the right, during the period between the receipt of the written notice and the Termination Date to exercise the Additional Signing Options, in whole or in part, whether or not all or any part of the Additional Signing Options would not otherwise be exercisable; provided, however, that unless Executive shall deliver to Employer written notice to the contrary at least three (3) business days prior to the Termination Date, Executive and all other holders of the Additional Signing Options, if any, shall be deemed to have delivered to Employer a notice of exercise of the Additional Signing Options, in whole, on such Termination Date. To the extent that the Additional Signing Options are not exercised in their entirety on or prior to the Termination Date, any and all Additional Signing Options and all rights then remaining hereunder shall terminate as of the Termination Date. (B) Provided the New Plan or the Additional Signing Options have been approved or ratified by Employer's shareholders as contemplated by the provisions of subparagraph 3(g)(ii) above, upon a "Change in Control of Employer", the Additional Signing Options, if not already exercisable in accordance with their terms, shall become immediately exercisable in whole or in part. (C) In the event of a "Change in Control of Employer" pursuant to which substitute options are offered to Executive in place of the Additional Signing Options herein granted or the surviving corporation offers to assume the Additional Signing Options, the Board shall cause to be delivered to Executive, not less than thirty (30) days before the effective date of such "Change in Control of Employer", written notice of such effective date to Executive and, provided the New Plan or the Additional Signing Options have theretofore been approved or ratified by Employer's shareholders as contemplated by the provisions of subparagraph 3(g)(ii) above, Executive shall have the right to elect to accept such substitute options or assumption of the Additional Signing Options or to exercise the Additional Signing Options in whole or in part, prior to such effective date (and such notice shall so state); provided, however, that unless Executive shall deliver to Employer written notice to the contrary at least three (3) business days prior to such effective date, Executive and all other holders of the Additional Signing Options, if any, shall be deemed to have rejected any substitute options offered to Executive and any offer to assume the Additional Signing Options and to have delivered to Employer a notice of exercise of the Additional Signing Options, in whole, on such effective date. (vii)If, at the time Executive purchases any Additional Option Shares upon exercise of Additional Signing Options, such Additional Option Shares are not registered for resale under the Securities Act, and Executive is entitled to demand registration rights under subparagraph 3(g)(iv) above, and if on the date on which such Additional Option Shares may for the first time be sold by Executive without limitation (whether by means of an effective registration for resale under the Securities Act or otherwise) the "fair market value" of a share of Employer's common stock is, with respect to any such Additional Option Share, below the lesser of (A) the fair market value of such Additional Option Share on the date Executive's notice of election to exercise her registration rights was received by Employer or (B) the fair market value of such Additional Option Share on the date the certificate representing ownership in registered form thereof was issued, Employer will promptly compensate Executive with a bonus payment in an amount of cash or registered shares (valued at their fair market value) equal to the sum of the differences between the fair market value of a share of Employer's common stock on the date on which such registration statement is declared effective and the amount determined to be, with respect to each Additional Option Share described in this subparagraph 3(g)(vii), the lesser of the amounts described in clauses (A) and (B) above. For purposes of the foregoing, the term fair market value shall have the same meaning as is ascribed to such term in Schedule A annexed hereto. 2. Paragraph 4(f) of the Agreement is hereby amended to provide in its entirety as follows: (f) Unless Executive gives Employer written notice not later than five (5) business days prior to the effective date of a Change in Control of Employer that she wishes to remain employed pursuant to this Agreement following such effective date, Executive shall be deemed to have served her written notice of Resignation For Cause pursuant to subparagraph 4(c)(iv) hereof on the effective date of such "Change in Control of Employer". Such resignation shall terminate Executive's obligations under this Agreement effective immediately following such Change in Control of Employer, and Executive shall be entitled to the same amounts as would be payable if Employer had terminated Executive pursuant to subparagraph 4(b) hereof, except (i) that for purposes of calculating such amounts, the remainder of the term of this Agreement shall be deemed to be two (2) years, regardless of the actual length of the then remaining term of this Agreement, and (ii) payment of cash shall be accelerated to the effective date of such Change in Control of Employer. Executive shall also be entitled to any benefits accrued under this Agreement through the date of such Change in Control of Employer or accruing pursuant thereto, including without limitation any amounts payable pursuant to Paragraph 3(c) hereof or any rights under any of Paragraphs 3(e), 3(f) or 3(g) hereof, payable as of the effective date of such Change in Control of Employer. 3. Paragraph 4(g) of the Agreement is hereby amended to provide in its entirety as follows: (g) Immediately upon the occurrence of a "Change in Control of Employer", all restrictions imposed by this Agreement and Exhibits (excluding those restrictions otherwise imposed by law) on the transfer and sale of Value Incentive Shares, the Signing Option Shares or the Additional Option Shares, as applicable, shall cease to apply. 4. Schedule A and Exhibits A, B and C to the Agreement are hereby amended and restated to conform to the provisions of this Amendment and, as so amended and restated, are annexed hereto. 5. Subject to the Amendments effected hereby, the Agreement shall remain in full force and effect. 6. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. Attest: LANCIT MEDIA ENTERTAINMENT, LTD. /s/ MARC L. BAILIN By: /s/ LAURENCE A. LANCIT Secretary Laurence A. Lancit /s/ SUSAN L. SOLOMON Susan Solomon Schedule A CALCULATION AND PAYMENT OF VALUE INCENTIVE BONUS 1. Measurement in Units. Units shall be used solely as a device for the measurement and determination of the amount to be paid to SUSAN L. SOLOMON ("Executive") as her "Value Incentive Bonus" under the employment agreement to which this Schedule is annexed (as amended by Amendment No. 1, dated as of June 20, 1997, and as the same may be further amended, modified or otherwise supplemented from time to time, the "Employment Agreement"). The right to receive an amount equal to the appreciation in market value of one (1) share of the common stock, par value $.001 per share (the "Common Stock"), of LANCIT MEDIA ENTERTAINMENT, LTD. (the "Employer"), is referred to herein as a "Unit". All amounts at any time attributable to the Units shall be and remain the sole property of the Employer and Executive's rights hereunder are limited to the right to receive cash and/or Common Stock as further provided below. The Value Incentive Bonus is and shall be an employee benefit plan of the Employer. 2. Election to Receive Value Incentive Bonus. Executive may elect to receive all or a portion of her Value Incentive Bonus at such time or times as she may desire by electing to convert Units into compensation as provided in this Schedule. No such election may be made, however, prior to the earlier to occur of the Shareholders Meeting (as defined in Paragraph 3(g)(ii) of the Employment Agreement) or December 31, 1997, except as otherwise provided in the Employment Agreement. From and after the date the Units become convertible under the Employment Agreement, Units may be converted in whole or from time to time in part at any time before their expiration by giving advance written notice of Executive's election to convert Units into compensation to the Chief Financial Officer of the Employer in the form of Exhibit I annexed to this Schedule A (an "Election Notice") prior to midnight, New York City time, on March 31, 2007 (the "Expiration Date"), specifying the number of Units (not to exceed, in the aggregate, 255,000) being converted. 3. Determination of Value. Upon Executive's conversion of all or part of the Units, Executive shall be entitled to receive the economic value of the Units being converted. For each such Units, that economic value shall be equal to the excess of (i) the "fair market value" of one share of Common Stock on the date that the Election Notice is received by the Employer's Chief Financial Officer (the "Election Date") over (ii) $3.15625 (the "Measuring Value"); subject, however, to adjustment pursuant to paragraph 6 of this Schedule A. The total economic value of all Units converted by Executive pursuant to an individual Election Notice shall be the economic value of each Unit as determined in the preceding sentence multiplied by the number of Units converted. For the purposes of this Schedule A, the term "fair market value" as of any date of a share of Common Stock means the average of the closing bid and ask quotation for a share of Common Stock as reported on the principal national securities exchange on which such shares are listed or, if not so listed, on the National Association of Securities Dealers, Inc. Automated Quotation System on the relevant date or, if no such shares were sold on such date, on the next preceding date on which such shares were sold or, if no sales shall have occurred within 10 business date preceding such relevant date, fair market value shall be as reasonably determined by the Board of Directors of the Employer in good faith. 4. Payment and/or Issuance of Share Certificates. Full payment of the aggregate economic value of all Units converted by Executive pursuant to an individual Election Notice (the "Total Payment") shall be made by the Employer, either in cash or in shares of Common Stock or any combination thereof, as the Employer's Board of Directors may determine in its sole discretion. If all or any part of the Total Payment due in connection with any conversion of Units hereunder is paid in shares of Common Stock ("Shares"), the number of Shares that shall be issued will be determined by dividing the Total Payment (of the part thereof to be paid in Shares) by the fair market value of a share of Common Stock on the Election Date; provided, however, that Executive shall receive cash in lieu of any fraction of a share of Common Stock issuable hereunder. Certificates for Shares, if any, issued hereunder shall be delivered to Executive, subject to the provisions of Paragraph 6 hereof, as promptly as practicable thereafter. Employer may place an appropriate legend on any certificates representing ownership of Shares to assure compliance with the restrictions on Executive's right to sell Shares contained in the Employment Agreement. 5. Expiration. Executive's right to elect to convert the Units shall expire and become null and void in accordance with Paragraph 3(f)(vii) of the Employment Agreement, if applicable. 6. Recapitalization. If the outstanding shares of the Common Stock of the Employer are subdivided, consolidated, increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Employer through reorganization, merger, recapitalization, reclassification, capital adjustment or otherwise, or if the Employer shall issue Common Stock as a dividend or upon a stock split, then the number of Units convertible by Executive and/or the Measuring Value shall be proportionately adjusted. Adjustments under this Paragraph shall be made by the Employer's independent public accountants. 7. Wage, FICA and Withholding Taxes. Executive hereby agrees that there shall be deducted from the payment of the economic value of any Units converted hereunder the amount necessary to discharge any Federal, state or local taxes (including any wage withholding or stock transfer taxes) imposed upon the Employer in respect of the Units or any payment upon conversion of the Units. 8. Captions. The captions or headings of the paragraphs of this Schedule A are inserted only as a matter of convenience, and in no way define, limit or in any other way describe the scope of this Schedule A or the intent of any provisions hereof. EXHIBIT I to Calculation and Payment of Value Incentive Bonus Schedule A ELECTION NOTICE To: LANCIT MEDIA ENTERTAINMENT, LTD. 601 West 50th Street New York, New York 10019 Attention: Chief Financial Officer I hereby elect to convert ______ Units in accordance with the terms and conditions described in the Calculation and Payment of Value Incentive Bonus Schedule to Employment Agreement, as amended by Amendment No. 1, dated as of June 20, 1997, to which this Election Notice is attached as Exhibit I. All share certificates that may be issued pursuant to this Election Notice are to be issued and delivered as follows: ================================================ ================================================ Date:______________ Signature: _________________________________ Exhibit A Non-Qualified Stock Option for 495,000 Shares Dated: June 20, 1997 (the "Date of Grant") This Option and the Shares issuable upon exercise of this Option are subject to certain restrictions on transfer described in Sections 5 and 6 hereof, and the holder of this Option agrees to be bond by such restrictions. LANCIT MEDIA ENTERTAINMENT, LTD. STOCK OPTION AGREEMENT KNOW ALL PERSONS BY THESE PRESENTS, that LANCIT MEDIA ENTERTAINMENT, LTD., a New York corporation (the "Company"), acting by its Board of Directors (the "Board"), hereby grants to SUSAN L. SOLOMON, residing at 211 Central Park West, New York, New York 10024 ("Optionee"), pursuant to the 1990 Stock Option Plan (the "Plan"), in consideration of services to be rendered to the Company, the right and option (the "Option") to purchase FOUR HUNDRED NINETY- FIVE THOUSAND (495,000) fully-paid and non-assessable shares (the "Shares") of the Company's common stock, par value $.001 per share (the "Common Stock"), on the following terms and conditions (as used throughout, the term "Optionee" shall refer only to the original grantee of the Option, and shall not include subsequent authorized holders thereof, such as legatees, personal representatives or distributees of such grantee or transferees thereof pursuant to a "QDRO" (as defined in Section 8 below), and the term "Holder" shall refer to any authorized holder of the Option): 1. Time and Manner of Exercise. Except as hereinafter provided, the Option granted hereby may not be exercised prior to October 1, 1997. From and after October 1, 1997 (or such earlier date as this Option may become exercisable pursuant to Section 8(c)), the Option may be exercised in whole or from time to time in part by giving advance written notice of such exercise to the Chief Financial Officer of the Company in the form of Exhibit I annexed hereto at any time prior to midnight, New York City time, on March 31, 2007 (the "Expiration Date"), specifying the number of Shares to be purchased. In no event shall a fraction of a Share be purchased or issued hereunder. Such notice must be accompanied by full payment for the Shares to be purchased and any withholding tax due. If the Company does not receive full payment for the Shares to be purchased and any withholding tax due within a reasonable period of time after notice of exercise has been given by Optionee, the notice of exercise shall be deemed to have been withdrawn and the Option shall remain in full force and effect, exercisable in accordance with the terms of this Agreement without any change in the number of Shares purchasable upon exercise of the Option, as though such notice of exercise had never been issued. 2. Exercise Price. The price of the Shares to be purchased pursuant to the Option shall be $3.15625 per share (the "Exercise Price"), subject to adjustment pursuant to Section 8 hereof. The aggregate purchase price of the Shares to be purchased pursuant to any exercise of the Option shall be equal to the product of the number of Shares to be purchased multiplied by the Exercise Price. 3. Payment and Issuance of Share Certificates. Full payment of the aggregate purchase price for the Shares purchased by Holder and any withholding taxes due thereon shall be made to the Company, either in cash or by certified check, bank check, personal check (in which case the Company reserves the right to withhold issuance of such Shares until the funds have cleared) or by wire transfer. If, and only if, the Shares issuable upon exercise of the Option may not be immediately resold without restriction under the Securities Act of 1933, as amended (the "Act"), prior to the date such payment is due, then Holder may pay the full or a partial amount of the purchase price, but not any withholding taxes due, in shares of Common Stock of the Company (including Shares previously issued upon exercise of the Option) valued at the "fair market value" thereof on the date notice of exercise of the Option to purchase such Shares is received by the Company. Certificates for the Shares purchased shall be delivered to Holder, subject to the provisions of Section 8 hereof, promptly thereafter. No Shares shall be issued, and no certificates for Shares shall be delivered, to Optionee until full payment therefor and of any withholding tax due thereon has been made. For the purposes of this Agreement, the term "fair market value" shall have the meaning assigned to it in the Plan. 4. Expiration. The Option shall expire and become null and void at the earliest of: a. the Expiration Date; b. expiration of the Option pursuant to the provisions of Section 8 hereof; c. (i) six (6) months after the termination of Optionee's employment pursuant to Optionee's employment agreement with the Company dated as of March 31, 1997 (as amended by Amendment No. 1, dated as of June 20, 1997, and as the same may be further amended, modified or otherwise supplemented from time to time, the "Employment Agreement") if such termination occurs on or prior to March 31, 2001 other than by reason of death or "permanent disability" (as defined in the Employment Agreement); (ii) one (1) year after the termination of Optionee's employment pursuant to the Employment Agreement if such termination occurs on or prior to March 31, 2001 by reason of death or "permanent disability"; d. one (1) year after the termination of Optionee's employment pursuant to the Employment Agreement if such termination occurs for any reason whatsoever after March 31, 2001 and on or prior to March 31, 2002; e. two (2) years after the termination of Optionee's employment pursuant to the Employment Agreement if such termination occurs for any reason whatsoever after March 31, 2002 and on or prior to March 31, 2003; or f. three (3) years after the termination of Optionee's employment pursuant to the Employment Agreement if such termination occurs for any reason whatsoever after March 31, 2003. In the event Optionee's employment is terminated within four (4) years of the Effective Date of the Employment Agreement other than "For Cause" (as defined in the Employment Agreement) or in the event Optionee effects a "Resignation For Cause" (as defined in the Employment Agreement) then, notwithstanding any other provisions of this or any other agreement dated of even date herewith or prior hereto, the Option shall expire no earlier than the date which is two (2) years from the Effective Date of the Employment Agreement with respect to 50% of the Shares purchasable upon exercise of the Option, the date which is three (3) years from the Effective Date of the Employment Agreement with respect to an additional 25% of the Shares purchasable upon exercise of the Option, and the date which is four (4) years from the Effective Date of the Employment Agreement with respect to the remaining 25% of the Shares purchasable upon exercise of the Option. 5. Securities Laws. a. Optionee acknowledges that Optionee has been informed of, or is otherwise familiar with, the nature and the limitations imposed by the Securities Act of 1933, as amended (the "Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder (in particular, Rule 144 promulgated under the Act ("Rule 144") and Section 16 of the Exchange Act and Rule l6b-3 promulgated thereunder) and the securities ("Blue Sky") laws of the state of Optionee's residence, concerning the Shares issuable upon exercise of the Option and agrees to be bound by the restrictions embodied in such laws, and the rules and regulations promulgated thereunder. Unless the Shares to be issued upon the exercise of the Option have been registered for resale in accordance with a currently effective registration statement under the Act (but without prejudice to any obligations of the Company arising under the Employment Agreement or the Registration Rights Agreement referred to therein to register the Shares), the Board may require, as a condition to the delivery of certificates representing ownership of the Shares, that the Company receive appropriate evidence that Holder is acquiring the Shares for investment and not with a view to the distribution or public offering of the Shares, or any interest in the Shares, and a representation to the effect that Holder shall make no sale or other disposition of the Shares unless (a) the Company shall have received an opinion of counsel satisfactory in form and substance to it that the sale or other disposition may be made without registration under the then applicable provisions of the Act and the rules and regulations promulgated thereunder, or (b) the Shares shall be included in a currently effective registration statement under the Act. The Company reserves the right to place a legend on any certificates representing ownership of Shares to assure compliance with this paragraph. b. The Company acknowledges that the Employment Agreement provides that the Company has registered the Shares under the Act on a Form S-8 registration statement and will use reasonable efforts to maintain same in effect. In connection with such registration, the Company shall prepare and file and thereafter maintain current and in effect a "reoffer prospectus" under such registration statement registering the resale of all the Shares by Optionee. The Company agrees to use reasonable efforts to make timely filings of its periodic reports and to take such other actions as may be necessary or appropriate in order for the Company to remain qualified to use Form S-8 and such reoffer prospectus as herein contemplated. The Company's obligations under this paragraph shall terminate upon the earliest to occur of (i) the eleventh (11th) anniversary of the Date of Grant, or (ii) the sale of all of the Shares by Optionee, or (iii) the date Optionee receives an opinion of counsel (which may be from counsel to the Company) reasonably acceptable to counsel for the Optionee that all of the Shares may be sold under the provisions of paragraph (k) of Rule 144 notwithstanding the fact that a portion of the Shares may remain unregistered under the Act. Optionee is also entitled to the benefit of the Registration Rights Agreement dated as of March 31, 1997 between the Company and Optionee, in accordance with its terms and the terms of the Employment Agreement. 6. Non-Transferability; Death or Disability. a. The Option is granted in recognition of the personal services of Optionee and Optionee hereby agrees that Optionee will not directly or indirectly sell, assign, transfer, pledge, hypothecate, dispose of, encumber or otherwise grant any interest in the Option other than (i) by will or by the laws of descent and distribution or (ii) pursuant to a "Qualified Domestic Relations Order" ("QDRO") as defined in the Internal Revenue Code of 1986, as amended (the "Code"), or Title I of the Employee Retirement Income Security Act of 1974, as amended. The Option may be exercised during the lifetime of Optionee only by Optionee or by Optionee's guardian or other legal representative or by a transferee thereof pursuant to a QDRO (a "Permitted Transferee"). b. Optionee acknowledges that the Employment Agreement contains certain restrictions on Optionee's right to sell Shares and hereby agrees that the Company may place an appropriate legend on any certificates representing ownership of Shares to assure compliance with such restrictions. c. If Optionee shall die, the Option may be exercised by Optionee's executor, administrator or other legal representative, or by a Permitted Transferee to whom the Option was lawfully transferred, if any, at any time prior to the expiration of the Option pursuant to Section 4 hereof. d. If Optionee's employment pursuant to the Employment Agreement is terminated by reason of "permanent disability" (as defined in the Employment Agreement) the Option may be exercised by Optionee or by Optionee's guardian or legal representative, or by a Permitted Transferee to whom the Option was lawfully transferred, if any, at any time prior to the expiration of the Option pursuant to Section 4 hereof. 7. Holder Not a Shareholder. The Option shall not entitle Holder to any dividend, voting or other rights as a shareholder of the Company or to any notice of proceedings of the Company in respect of any Shares issuable upon exercise of the Option unless and until the certificates representing the Shares have been issued to Holder. 8. Recapitalization and Reorganization. a. If the outstanding shares of the Common Stock of the Company are subdivided, consolidated, increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, capital adjustment or otherwise, or if the Company shall issue Common Stock as a dividend or upon a stock split, then the number and kind of shares then purchasable upon exercise of the Option and the Exercise Price hereunder shall be proportionately adjusted. However, no such adjustment shall change the total purchase price of a complete exercise of the unexercised portion of the Option. Adjustments under this Section shall be made by the Company's independent public accountants. In computing any such adjustments, any fractional share which might otherwise become subject to the Option shall be eliminated and paid in cash. b. In the event of (i) the dissolution or liquidation of the Company or (ii) a merger or consolidation in which (A) the Company does not survive as a publicly owned corporation with securities registered under the Exchange Act and (B) the agreements governing such merger or consolidation do not provide for the issuance of substitute options with substantially equivalent terms as determined by the Board in lieu of the Option or for the express assumption (within the meaning of Section 424(a) of the Code) of the Option by the surviving corporation, the Board shall declare that the Option shall terminate as of a date to be fixed by the Board (the "Termination Date"), provided that the Board shall cause to be delivered not less than thirty (30) days before the Termination Date written notice of the Termination Date to Holder and Holder shall have the right, during the Period between the receipt of the written notice and the Termination Date to exercise the Option, in whole or in part, whether or not all or any part of the Option would not otherwise be exercisable; provided, however, that unless Optionee shall deliver to the Company written notice to the contrary at least three (3) business days prior to the Effective Date, the Optionee and every Holder shall be deemed to have delivered to the Company a notice of exercise of the Option, in whole, on the Effective Date. To the extent that the Option is not exercised in its entirety on or prior to the Termination Date, the Option and any and all rights then remaining hereunder shall expire and terminate as of the Termination Date. c. Upon a "Change in Control of Employer" (as defined in the Employment Agreement), the Option, if not already exercisable in accordance with its terms, shall become immediately exercisable in whole or in part. d. In the event of a "Change in Control of Employer" pursuant to which substitute options are offered to Optionee in place of the Option herein granted or the surviving corporation offers to assume the Option, the Board shall cause to be delivered not less than thirty (30) days before the effective date of such "Change in Control of Employer" (the "Effective Date") written notice of the Effective Date to Optionee and Optionee shall have the right to elect to accept such substitute options or assumption or to exercise the Option, in whole or in part, prior to the Effective Date (and such notice shall so state); provided, however, that unless Optionee shall deliver to the Company written notice to the contrary at least three (3) business days prior to the Effective Date, the Optionee and every Holder shall be deemed to have rejected any substitute options offered to Optionee and any offer to assume the Option and to have delivered to the Company a notice of exercise of the Option, in whole, on the Effective Date. 9. Reservation of Shares. The Company will at all times reserve and keep available out of its authorized shares of Common Stock, solely for issuance upon the exercise of the Option and other similar options, at least such number of its shares of Common Stock as shall be issuable upon the exercise of the Option and all other similar options at the time outstanding. 10. Subject to Plan. The Option has been issued under the Plan. In addition to the provisions of this Agreement, the Option will be subject to the power of the Board to interpret the Plan, correct any defect, supply any omission and reconcile any inconsistency in the Plan, prescribe, amend and rescind rules and regulations, forms, notices and agreements relating to it and make all determinations necessary or advisable for its administration and to alter, suspend or discontinue the Plan at any time, except that no such action of the Board may, without the consent of the Holder alter the terms of, or impair the rights of the Holder under this Agreement or the Employment Agreement, except pursuant to Section 8 above. The power of the Board to construe and administer any options granted prior to the termination or suspension of the Plan shall nevertheless continue after and survive such termination or during such suspension. 11. No Employment Agreement. Nothing contained in this Agreement shall confer upon Optionee the right to be continued as an employee or as a director of or as a consultant or advisor to the Company or any subsidiary or affiliate of the Company or shall interfere in any way with the right of the Company or any subsidiary or affiliate of the Company lawfully to terminate Optionee's employment at any time, and no such termination shall in any way affect any of the rights of the Company set forth in this Agreement. Nothing herein contained shall in any way affect the rights of the Company or Optionee arising under the Employment Agreement. 12. Wage, FICA and Withholding Taxes. Holder hereby agrees that Holder will make such arrangements as the Company may reasonably deem necessary to discharge any Federal, state or local taxes (including any wage withholding or stock transfer taxes) imposed upon the Company in respect of this Agreement, the Option covered hereby or the Shares purchasable hereunder. Shares of Common Stock may not be used to discharge Holder's tax obligations. Holder may, however, discharge Holder's tax obligations with respect to any purchase of Shares pursuant to the exercise of the Option by (i) agreeing to sell the Shares so purchased within the thirty (30) day period immediately following such purchase, which period shall be extended by such number of days, if any, during which such sale cannot be affected by reason of the failure or inability of the Company to register such Shares under the Act (as so extended, the "Sale Period") and (ii) delivering to the Company Optionee's promissory note payable upon the earlier to occur of (A) such sale of Shares and (B) the expiration of the Sale Period. 13. Entire Agreement. This Agreement contains the entire agreement of the parties relative to the subject matter hereof, superseding and terminating all prior agreements or understandings, whether oral or written, between the parties hereto relative to the subject hereof, and this Agreement may not be extended, amended, modified or supplemented without the written consent of the parties hereto. 14. Waiver, Modification, Amendment. Except where specific time limits are herein provided, no delay on the part of either party hereto in exercising any power or right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right hereunder preclude other or further exercise thereof or the exercise of any other power or right. No waiver, modification or amendment of this Agreement or any provision hereof, shall be enforceable against either party hereto unless in writing, signed by the party against whom such waiver, modification or amendment is claimed, and with regard to any waiver, shall be limited solely to the one event. 15. Governing Law. This Agreement and all amendments or charges relating hereto shall be deemed to have been entered into pursuant to, and shall be governed by, the laws of the State of New York. 16. Notices. Notices pursuant hereto shall be given in writing, in person (against receipt therefor only if requested) or by retired or certified mail, return receipt requested, and shall be deemed delivered upon delivery in person or four (4) days after deposit in the United States mail, postage prepaid, addressed as follows: If to the Company: LANCIT MEDIA ENTERTAINMENT, LTD. 601 West 50th Street New York, NY 10019 Attn: Chief Financial Officer If to Optionee: SUSAN L. SOLOMON 211 Central Park West New York, NY 10024 or to such other address as either party hereto shall designate to the other party by written notice given in accordance with this Section. 17. Injunctive Relief. In addition to any other rights or remedies available to the Company as a result of any breach of Optionee's covenants under Section 5 hereof, the Company shall be entitled to enforcement of such covenants by seeking an injunction or a decree of specific performance from a court of competent jurisdiction. 18. Captions. The captions or headings of the Sections are inserted only as a matter of convenience, and in no way define, limit or in any other way describe the scope of this Agreement or the intent of any provisions hereof. 19. Optionee Information and Knowledge. Holder hereby certifies that Holder has read the above Agreement, and understands and agrees to all of the terms, conditions and statements contained therein, accepting this Agreement as of the Date of Grant first above written. ATTEST: LANCIT MEDIA ENTERTAINMENT, INC. By: [Assistant] Secretary Laurence A. Lancit, President SUSAN L. SOLOMON EXHIBIT I to Stock Option Agreement - Exhibit A EXERCISE NOTICE To: LANCIT MEDIA ENTERTAINMENT LTD. (the "Company") 601 West 50th Street New York, New York 10019 Attn: Chief Financial Officer I hereby elect to purchase __________ shares of Common Stock ("New Shares") in accordance with the terms and conditions of the Stock Option Agreement to which this Exercise Notice is attached as Exhibit I (the "Agreement"), and hereby tender herewith full payment of the purchase piece and all applicable withholding taxes in the amount of $____________, either in cash or by certified check, bank check, personal check (in which case the Company reserves the night to withhold issuance of such New Shares until the funds have cleared) payable to the order of LANCIT MEDIA ENTERTAINMENT, LTD., or by wire transfer of funds, or, but only if I am permitted to do so under the Agreement, and only with regard to the full or partial amount of the purchase price, in negotiable certificates1 for outstanding shares, of Common Stock of the Company ("Old Shares"), valued at the "fair market value" (as defined in the Agreement) thereof as of the date this Exercise Notice is received by the Company. I further request that if the stock certificate(s) for Old Shares being tendered herewith (if any) is for more shares of Common Stock than are needed to pay the purchase price, that a new stock certificate for the extra shares represented by the certificate(s) delivered herewith be issued and delivered to me. All share certificates issued pursuant to this Exercise Notice are to be issued and delivered as follows: Date:________________ Signature___________________________________________ 1 To be negotiable, certificates must be endorsed to LANCIT MEDIA ENTERTAINMENT, LTD., or in blank, or be accompanied by a stock power so endorsed. 2 The signature on this notice must correspond with Holder's name as written on the face of the Agreement in every particular, without alteration or enlargement or any change whatsoever. Exhibit B REGISTRATION RIGHTS AGREEMENT THIS AGREEMENT, dated as of March 31, 1997 (as amended and restated as of June 20, 1997, the "Agreement"), between LANCIT MEDIA ENTERTAINMENT, LTD., a New York corporation (the "Company"), and SUSAN L. SOLOMON, an individual ("Executive"). W I T N E S S E T H WHEREAS, the Company and Executive have entered into an employment agreement dated March 31, 1997 (as amended by Amendment No. 1, dated as of June 20, 1997, and as the same may be further amended, modified, or supplemented from time to time, the "Employment Agreement"), pursuant to which Executive has been awarded stock options under the Company's 1990 Stock Option Plan (the "1990 Plan Options"), stock options under the Company's 1997 Incentive Stock Plan, which is subject to shareholder approval (the "1997 Plan Options"), and an incentive value bonus ("IVB") pursuant to which the Executive may receive, in the sole discretion of the Company, either cash or shares of common stock, par value $.001 per share (the "Common Stock"), of the Company in satisfaction of the obligations of the Company with respect to the IVB; and WHEREAS, the Company has agreed to register such shares of Company Common Stock as may be issued to Executive upon her exercise of the 1990 Plan Options or the 1997 Plan Options or in satisfaction of the IVB ("New Shares"), in accordance with the terms and conditions hereof; NOW, THEREFORE, the parties hereto agree as follows: 1. Certain Definitions. Unless otherwise defined herein or the context otherwise requires, all capitalized terms used in this Agreement shall have the meanings ascribed to such terms in the Employment Agreement. 2. Registration Rights. a. Although the Company is under no existing obligation under the Securities Act of 1933, as amended (the "Securities Act") or any other domestic or foreign law applicable to the sale or transfer of securities (collectively, the "Securities Laws") to file a registration statement or otherwise resister any New Shares for any purpose, the Company agrees that if, and only if, the Company (i) has not registered the New Shares issuable pursuant to the 1997 Plan Options or the IVB under the Securities Act on Form S-8 within the one hundred seventy (170) day period following the date of this Agreement, or (ii) thereafter fails or is unable to maintain such registration statement or the registration statement covering the 1990 Plan Options in effect, as contemplated by the Employment Agreement, or (iii) fails or is unable to file or thereafter maintain in effect a reoffer prospectus under such registration statements, as contemplated in the Employment Agreement, then unless any such failure or inability is the consequence of a failure on Executive's part to cooperate with the Company in a reasonable manner, such as (by way of illustration and not by way of limitation) by failing to provide information or undertakings reasonably required to prepare and file a reoffer prospectus, upon the written request of Executive with respect to all (but not less than all) of the New Shares which shall have theretofore been issued to Executive and which are not then covered by a currently effective registration statement and reoffer prospectus, the Company will, subject to the limitations set forth below, use reasonable efforts to cause such New Shares (herein referred to as the "Securities") to be registered under the Securities Act for the purposes of permitting the sale or other disposition by the Executive of all or part of the Securities to be so registered (a "Holder's Offering"); provided, however, that under no circumstances shall the Company be required to effect more than three (3) Holder's Offerings under this Agreement per calendar year; and provided, further, that neither the provisions of this Agreement nor the registration of any Securities pursuant hereto shall waive, or release Executive from, any restrictions on the sale, transfer, pledge, hypothecation or other disposition or encumbrance of the New Shares contained in the Employment Agreement or, in any other way, waive, modify or amend any provision of the Employment Agreement. b. The provisions of paragraph (a) above notwithstanding, if the Board of Directors of the Company (the "Board") determines in good faith that the filing or effectiveness of, or sales pursuant to any registration statement otherwise required to be prepared, filed and made and kept effective by it pursuant to this Agreement would materially impede, delay or interfere with any financing, offer or sale of securities, acquisition, corporate reorganization, share repurchase, listing or qualification of any of the Company's securities on any national securities exchange, or other significant transaction involving the Company or any of its affiliates or require disclosure of material information which the Company has a bona fide business purpose for preserving as confidential, the Company shall be entitled to postpone, for a reasonable period of time, the filing or effectiveness of, or suspend the right of Executive to make sales pursuant to, such registration statement; provided, however, that the duration of such postponement or suspension may not exceed ninety (90) days after the cessation of the circumstances upon which such postponement or suspension is based. If the Company shall so postpone the filing or effectiveness of a registration statement it shall, as promptly as possible, notify Executive to withdraw the request for registration by giving written notice to the Company within ten (10) days after receipt of such notice. Any Holder's Offering as to which the withdrawal election referred to in the preceding sentence has been effected shall not be counted for purposes of determining whether the Company has effected a Holder's Offering pursuant to paragraph (a) above during such calendar year. c. The Company's obligations under Section 3 below shall be subject to the obligations of the Executive to furnish all information and materials and to take any and all actions as may be required under applicable Federal and state securities laws and regulations requirements of the Securities and Exchange Commission (the "SEC" or "Commission") and to obtain acceleration of the effective date of a registration statement. 3. Company Obligations. If and whenever the Company is required by the provisions of Section 2 above to effect the registration of Securities under the Securities Act, the Company will use reasonable efforts to: a. Prepare and file with the Commission a registration statement with respect to such Securities and to cause such registration statement to become effective and (by preparing and filing with the SEC such amendments to such registration statement and supplements to the prospectus, if any, contained therein as may be necessary) to remain effective during the period required for the distribution of the Securities covered by such registration statement; provided, however, that the Company may deregister any of such Securities which have not been sold after the earlier to occur of (i) the date the Executive receives an opinion of counsel (which may be from counsel to the Company) that all such securities may be sold under the provisions of SEC Rule 144(k) and (ii) the later to occur of (A) the third anniversary of the effective date of the registration statement and (B) the ninety-first (91st) day after the expiration of any suspension of the right of Executive to make sales pursuant to such registration statement, if any, subject, however, to the requirements of Section 2, above; b. Furnish to the Executive in connection with a Holder's Offering such reasonable number of copies of the registration statement, summary plan description, preliminary prospectus, final prospectus and other documents as may reasonably be requested in order to facilitate the marketing of such Securities; c. Register or qualify such Securities under the securities or "blue sky" laws of such jurisdiction within the United States as the Executive may reasonably request; provided that the Company shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then qualified to do business as a foreign corporation; d. Promptly notify the Executive, promptly after the Company shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; e. Notify the Executive, during any period during which Securities may be distributed pursuant to a Holder's Offering and a prospectus relating to such registration statement is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, if any, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances then existing, not misleading, and at the request of the Executive prepare and furnish to the Executive a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances then existing, not misleading; f. In the case of an underwritten offering, enter into and perform its obligations under an underwriting agreement with the managing underwriter of such offering, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, and in the case of any non-underwritten offering, provide to broker-dealers participating in any distribution of Securities reasonable indemnification substantially similar to that provided by Section 6 hereof whenever requested to do so; g. Promptly notify the Executive (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of any stop order or other suspension of effectiveness of the registration statement, and make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible time; h. Permit counsel for the Executive to review the registration statement and all amendments and supplements thereto for a reasonable period of time prior to their filing with the SEC, and not to file any document in a form to which such counsel reasonably objects; i. Make generally available to its security holders as soon as practical, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the registration statement; j. Make available for inspection by the Executive, any underwriter participating in any disposition pursuant to the registration statement, and any attorney, accountant, or other agent retained by the Executive or any such underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company, as shall be reasonably necessary to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably required by any such Inspector in connection with the registration statement; k. Use reasonable efforts either to (i) cause all the Securities covered by the registration statement to be listed on a national exchange and on each additional national securities exchange on which similar securities issued by the Company are then listed, if any, if the listing of such Securities is then permitted under the rules of such exchange or (ii) secure designation of all the Securities covered by the registration statement as a Nasdaq "National Market Security" within the meaning of Rule 11a2-1 of the SEC and the quotation of the Securities on the Nasdaq National Market System; l. Provide a transfer agent and registrar, which may be a single entity, for the Securities not later than the effective date of the registration statement; m. Cooperate with the Executive and the managing underwriter or underwriters, if any, in a reasonable manner to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Securities to be sold pursuant to the registration statement and enable such certificates to be in such denominations or amounts, as the case may be, and registered in such names as the managing underwriter or underwriters, if any, or the Executive may reasonably request; and n. Take all other reasonable actions necessary and appropriate for the Company to take to expedite and facilitate disposition by the Executive of the Securities pursuant to the registration statement. 4. Executive's Obligations. The Executive's right to have the Securities included in a registration statement pursuant to the provisions of Section 2 above shall be subject to the following further conditions: a. The Executive shall have furnished to the Company in writing such information, agreements and documents regarding the Executive and any distribution of New Shares proposed by her as the Company, the managing underwriter(s) of any proposed issuance of securities by or on behalf of the Company, if any, and its counsel may reasonably request; and b. The Executive shall have executed and delivered to the Company such written undertakings as the Company and its counsel may reasonably require in order to assure full compliance with Applicable provisions of the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which may include, without limitation, undertakings not to buy any securities of the same class as the Securities or to solicit such purchases by others until Executive's distribution of Securities is completed and otherwise to comply with the SEC's anti-manipulation rules, and to inform any exchange upon which the Company's Common Stock may be traded and the managing underwriter(s) or broker(s) participating in Executive's distribution of New Shares of the substance, of the foregoing undertakings and of the restrictions on Executive's right to sell Shares contained in the Employment Agreement. 5. Fees and Costs. a. All fees and costs relating to each Holder's Offering shall be borne by the Company, except that the Executive shall bear all brokerage and underwriting fees, commissions and discounts attributable to the New Shares offered for sale for the account of the Executive. b. The fees and costs of registration to be borne by the Company as provided above, shall include, without limitation, all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, legal fees and disbursements and other expenses of complying with the state securities or "blue sky" laws of the jurisdiction in which the Securities to be offered are to be registered or qualified, and premiums and other costs of policies of insurance, if any, against liability arising out of such public offering. 6. Indemnification and Contribution. a. In connection with any Holder's Offering, the Company will, to the extent permitted by law, indemnify and hold harmless the Executive from and against, and will reimburse the Executive with respect to, any and all losses, damages, costs and expenses the Executive may suffer, insofar as such losses, damages, costs or expenses arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in any such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and shall reimburse the Executive for any legal or any other expenses reasonably incurred in connection with investigating or defending any such loss, damage, cost or expense; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement of material fact or omission or alleged omission to state a material fact made in conformity with information furnished to the Company by the Executive. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Executive and shall survive the transfer of such securities by such Executive. b. Promptly after receipt by an indemnified party under the provisions of this Section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of this Section, notify the indemnifying party of the commencement thereof, but the failure of any indemnified party to provide such notice shall not relieve the indemnifying party of its obligations under this Section 6 except to the extent that the indemnifying party is materially prejudiced thereby, and shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under this Section 6. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, and if, but only if, such counsel will not be required to represent parties with actual differing interests, and, after notice from the indemnifying party to such indemnifying party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, than an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel for the indemnified party, representation of such indemnified party by the counsel retained by the indemnified party would be inappropriate due to actual or potential differing, interests between such indemnified party and any other party represented by such counsel in such proceedings. No indemnifying party shall be liable to an indemnified party for any settlement or compromise of any action or claim to which the indemnifying party has not consented. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. c. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in this Section is for any reason held to be unenforceable although applicable in accordance with its terms, then the Company agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under this Section 6 to the fullest extent permitted by law, and the Executive shall be liable for contribution only to the extent that any costs, expenses or judgments described herein (after deducting any contribution, if any, received by the Company from persons other than the Executive who may also be liable for contribution) are determined by a court (or the parties to any settlement) to have arisen out of or to have been based upon any untrue or alleged untrue statement of any material fact contained in a registration statement, any prospectus contained therein or any amendment or supplement thereto, or upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, made in reliance upon and in conformity with written information furnished to the Company by the Executive specifically stating that it is for use in such registration statement, prospectus, amendment or supplement or document incorporated by reference into any of the foregoing. Notwithstanding the foregoing, the liability of the Executive shall be limited to the aggregate offering price of the Securities sold by Executive under such registration statement pursuant to Section 2 hereof. d. The Company and the Executive agree that it would not be just and equitable if contribution pursuant to paragraph (c) above were determined by pro rata allocation or by any other method of allocation inconsistent with the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities, or judgments referred to in the immediately preceding paragraphs shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meanings of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7. Termination. This Agreement and the rights granted under Section 2 hereof shall terminate on the earliest to occur of (i) the eleventh (11th) anniversary of the date hereof or (ii) the sale of all of the New Shares by the Executive, or (iii) the date the Executive receives an opinion of counsel (which may be from counsel to the Company) reasonably acceptable to counsel for the Executive that all of the New Shares may be sold under the provisions of SEC Rule 144(k) notwithstanding the fact that a portion of the New Shares may remain unregistered under the Securities Act; provide, however, that the Company may elect, in its sole discretion, to include any remaining unregistered New Shares in one or more subsequently filed registration statements registering securities of the Company upon such terms and conditions upon which the Company and the Executive shall then mutually agree. 8. Miscellaneous. a. Notices. All notices under this Agreement shall be in writing and shall be effective (i) upon personal delivery against receipt therefor, or (ii) if sent by mail three (3) business days after deposit in the United States, Postal Service, first-class, postage prepaid, registered or certified, return receipt requested. All notices given hereunder shall be addressed: (i) in the case of the Company to: Lancit Media Entertainment, Ltd. 601 West 50th Street New York, NY 10019 Attn: Chief Financial Officer with a copy to: Rubin, Bailin, Ortoli, Mayer, Baker & Fry, LLP 405 Park Avenue New York, NY 10022 Attn: Marc Bailin, Esq. or (ii) in the case of Executive, to: Susan L. Solomon 211 Central Park West New York, NY 10024 with a copy to: Robert M. Schorr KLS Professional Advisors Group, Inc. 641 Lexington Avenue New York, NY 10022 or to such other address or to such other person as the Company or Executive shall have last designated by notice to the other parties hereto. b. Integration and Modification. This Agreement contains the entire agreement among the parties hereto with respect to the transactions contemplated hereby and there are no agreements, warranties or representations which are not set forth herein. All prior negotiations, agreements and understandings are superseded hereby. This Agreement may not be modified or amended except by an instrument in writing, signed by or on behalf of the parties hereto. c. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws thereof. d. Binding Effect; Successor's Undertakings. This Agreement shall be binding upon the parties and inure to the benefit of the successors, legal representatives and assigns of the parties hereto. Neither this Agreement nor all or any part of the rights granted hereunder may be assigned by the Executive without the prior written consent of the Company, except to a "permitted transferee" (as defined in the agreements covering the 1990 Plan Options and the 1997 Plan Options or the IVB, as applicable); provided, however, that no assignment shall require the Company to effect more Holder's Offerings than are permitted pursuant to Section 2 above during the term of this Agreement regardless of the number of persons to whom the Executive may have assigned part of her rights hereunder following receipt of the Company's consent thereto. Each successor, legal representative and assignee of the Executive shall, as a condition to the extension of the rights of Executive hereunder to such successor, legal representative or assign, execute a written undertaking, in form and substance satisfactory to the Company and its counsel, to observe and perform all of the obligations of Executive under this Agreement and in all other respects to be bound hereby. e. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. f. Headings. The Section and Paragraph headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision hereof. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. LANCIT MEDIA ENTERTAINMENT, LTD. By: Laurence A. Lancit, President Susan L. Solomon Exhibit C Non-Qualified Stock Option for 255,000 Shares Dated: June 20, 1997 (the "Date of Grant") This Option and the Shares issuable upon exercise of this Option are subject to certain restrictions on transfer described in Sections 5 and 6 hereof, and the holder of this Option agrees to be bond by such restrictions. LANCIT MEDIA ENTERTAINMENT, LTD. STOCK OPTION AGREEMENT KNOW ALL PERSONS BY THESE PRESENTS, that LANCIT MEDIA ENTERTAINMENT, LTD., a New York corporation (the "Company"), acting by its Board of Directors (the "Board"), hereby grants to SUSAN L. SOLOMON, residing at 211 Central Park West, New York, New York 10024 ("Optionee"), pursuant to the Company's 1997 Incentive Stock Plan (the "Plan"), in consideration of services to be rendered to the Company, the right and option (the "Option") to purchase TWO HUNDRED FIFTY-FIVE THOUSAND (255,000) fully-paid and non-assessable shares (the "Shares") of the Company's common stock, par value $.001 per share (the "Common Stock"), on the following terms and conditions (as used throughout, the term "Optionee" shall refer only to the original grantee of the Option, and shall not include subsequent authorized holders thereof, such as legatees, personal representatives or distributees of such grantee, and the term "Holder" shall refer to any authorized holder of the Option): 1. Time and Manner of Exercise. The Option herein granted is subject to approval or ratification by the Company's shareholders in compliance with Section 505 of the Business Corporation Law of the State of New York on or prior to December 31, 1997, and may not be exercised unless such approval or ratification has been obtained on or prior to such date. The Option may not be exercised prior to October 1, 1997, except as hereinafter provided. From and after the later to occur of October 1, 1997 (or such earlier date as this Option may become exercisable pursuant to Section 8(c)) and the receipt of such shareholder approval or ratification, the Option may be exercised in whole or from time to time in part by giving advance written notice of such exercise to the Chief Financial Officer of the Company in the form of Exhibit I annexed hereto at any time prior to midnight, New York City time, on March 31, 2007 or such earlier date as may be specified under Section 4 hereof (the "Expiration Date"), specifying the number of Shares to be purchased. In no event shall a fraction of a Share be purchased or issued hereunder. Such notice must be accompanied by full payment for the Shares to be purchased and any withholding tax due. If the Company does not receive full payment for the Shares to be purchased and any withholding tax due within a reasonable period of time after notice of exercise has been given by Optionee, the notice of exercise shall be deemed to have been withdrawn and the Option shall remain in full force and effect, exercisable in accordance with the terms of this Agreement without any change in the number of Shares purchasable upon exercise of the Option, as though such notice of exercise had never been issued. 2. Exercise Price. The price of the Shares to be purchased pursuant to the Option shall be $3.15625 per share (the "Exercise Price"), subject to adjustment pursuant to Section 8 hereof. The aggregate purchase price of the Shares to be purchased pursuant to any exercise of the Option shall be equal to the product of the number of Shares to be purchased multiplied by the Exercise Price. 3. Payment and Issuance of Share Certificates. Full payment of the aggregate purchase price for the Shares purchased by Holder and any withholding taxes due thereon shall be made to the Company, either in cash or by certified check, bank check, personal check (in which case the Company reserves the right to withhold issuance of such Shares until the funds have cleared) or by wire transfer. If, and only if, the Shares issuable upon exercise of the Option may not be immediately resold without restriction under the Securities Act of 1933, as amended (the "Act"), prior to the date such payment is due, then Holder may pay the full or a partial amount of the purchase price, but not any withholding taxes due in shares of Common Stock of the Company (including Shares previously issued upon exercise of the Option) valued at the "fair market value" thereof on the date notice of exercise of the Option to purchase such Shares is received by the Company. Certificates for the Shares purchased shall be delivered to Holder, subject to the provisions of Section 8 hereof, promptly thereafter. No Shares shall be issued, and no certificates for Shares shall be delivered, to Optionee until full payment therefor and of any withholding tax due thereon has been made. For the purposes of this Agreement, the term "fair market value" shall have the meaning assigned to it in the Plan. 4. Expiration. The Option shall expire and become null and void at the earliest of: a. the adjournment of the first meeting of the Company's shareholders to be held after the date first above written unless the Option is approved or ratified by the shareholders at such meeting; b. January 1, 1998 (or such later date as may be mutually agreed in writing by the Company and Optionee), unless the Option or the Plan is ratified or approved by the Company's shareholders at a meeting held prior to such date; c. March 31, 2007; d. expiration of the Option pursuant to the provisions of Section 8 hereof; e. (i) six (6) months after the termination of Optionee's employment pursuant to Optionee's employment agreement with the Company dated as of March 31, 1997 (as amended by Amendment No. 1, dated as of June 20, 1997, and as the same may be further amended, modified or otherwise supplemented from time to time, the "Employment Agreement") if such termination occurs on or prior to March 31, 2001 other than by reason of death or "permanent disability" (as defined in the Employment Agreement); (ii) one (1) year after the termination of Optionee's employment pursuant to the Employment Agreement if such termination occurs on or prior to March 31, 2001 by reason of death or "permanent disability"; f. one (1) year after the termination of Optionee's employment pursuant to the Employment Agreement if such termination occurs for any reason whatsoever after March 31, 2001 and on or prior to March 31, 2002; g. two (2) years after the termination of Optionee's employment pursuant to the Employment Agreement if such termination occurs for any reason whatsoever after March 31, 2002 and on or prior to March 31, 2003; or h. three (3) years after the termination of Optionee's employment pursuant to the Employment Agreement if such termination occurs for any reason whatsoever after March 31, 2003. In the event Optionee's employment is terminated within four (4) years of the Effective Date of the Employment Agreement other than "For Cause" (as defined in the Employment Agreement) or in the event Optionee effects a "Resignation For Cause" (as defined in the Employment Agreement) then, notwithstanding any other provisions of this or any other agreement dated of even date herewith or prior hereto, the Option shall expire no earlier than the date which is two (2) years from the Effective Date of the Employment Agreement with respect to 50% of the Shares purchasable upon exercise of the Option, the date which is three (3) years from the Effective Date of the Employment Agreement with respect to an additional 25% of the Shares purchasable upon exercise of the Option, and the date which is four (4) years from the Effective Date of the Employment Agreement with respect to the remaining 25% of the Shares purchasable upon exercise of the Option. 5. Securities Laws. a. Optionee acknowledges that Optionee has been informed of, or is otherwise familiar with, the nature and the limitations imposed by the Securities Act of 1933, as amended (the "Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder (in particular, Rule 144 promulgated under the Act ("Rule 144") and Section 16 of the Exchange Act and Rule l6b-3 promulgated thereunder) and the securities ("Blue Sky") laws of the state of Optionee's residence, concerning the Shares issuable upon exercise of the Option and agrees to be bound by the restrictions embodied in such laws, and the rules and regulations promulgated thereunder. Unless the Shares to be issued upon the exercise of the Option have been registered for resale in accordance with a currently effective registration statement under the Act (but without prejudice to any obligations of the Company arising under the Employment Agreement or the Registration Rights Agreement referred to therein to register the Shares), the Board may require, as a condition to the delivery of certificates representing ownership of the Shares, that the Company receive appropriate evidence that Holder is acquiring the Shares for investment and not with a view to the distribution or public offering of the Shares, or any interest in the Shares, and a representation to the effect that Holder shall make no sale or other disposition of the Shares unless (a) the Company shall have received an opinion of counsel satisfactory in form and substance to it that the sale or other disposition may be made without registration under the then applicable provisions of the Act and the rules and regulations promulgated thereunder, or (b) the Shares shall be included in a currently effective registration statement under the Act. The Company reserves the right to place a legend on any certificates representing ownership of Shares to assure compliance with this paragraph. b. The Company acknowledges that the Employment Agreement provides that the Company will seek to register the Shares under the Act on a Form S-8 registration statement and thereafter use reasonable efforts to maintain same in effect. In connection with such registration, the Company shall prepare and file and thereafter maintain current and in effect a "reoffer prospectus" under such registration statement registering the resale of all the Shares by Optionee. The Company agrees to use reasonable efforts to make timely filings of its periodic reports and to take such other actions as may be necessary or appropriate in order for the Company to remain qualified to use Form S-8 and such reoffer prospectus as herein contemplated. The Company's obligations under this paragraph shall terminate upon the earliest to occur of (i) the eleventh (11th) anniversary of the Date of Grant, or (ii) the sale of all of the Shares by Optionee, or (iii) the date Optionee receives an opinion of counsel (which may be from counsel to the Company) reasonably acceptable to counsel for the Optionee that all of the Shares may be sold under the provisions of paragraph (k) of Rule 144 notwithstanding the fact that a portion of the Shares may remain unregistered under the Act. Optionee is also entitled to the benefit of the Registration Rights Agreement dated as of March 31, 1997 between Optionee and the Company, in accordance with its terms and the terms of the Employment Agreement. 6. Non-Transferability; Death or Disability. a. The Option is granted in recognition of the personal services of Optionee and Optionee hereby agrees that Optionee will not directly or indirectly sell, assign, transfer, pledge, hypothecate, dispose of, encumber or otherwise grant any interest in the Option other than by will or by the laws of descent and distribution. The Option may be exercised during the lifetime of Optionee only by Optionee or by Optionee's guardian or other legal representative (a "Permitted Transferee"). b. Optionee acknowledges that the Employment Agreement contains certain restrictions on Optionee's right to sell Shares and hereby agrees that the Company may place an appropriate legend on any certificates representing ownership of Shares to assure compliance with such restrictions. c. If Optionee shall die, the Option may be exercised by Optionee's executor, administrator or other legal representative, or by a Permitted Transferee to whom the Option was lawfully transferred, if any, at any time prior to the expiration of the Option pursuant to Section 4 hereof. d. If Optionee's employment pursuant to the Employment Agreement is terminated by reason of "permanent disability" (as defined in the Employment Agreement) the Option may be exercised by Optionee or by Optionee's guardian or legal representative, or by a Permitted Transferee to whom the Option was lawfully transferred, if any, at any time prior to the expiration of the Option pursuant to Section 4 hereof. 7. Holder Not a Shareholder. The Option shall not entitle Holder to any dividend, voting or other rights as a shareholder of the Company or to any notice of proceedings of the Company in respect of any Shares issuable upon exercise of the Option unless and until the certificates representing the Shares have been issued to Holder. 8. Recapitalization and Reorganization. a. If the outstanding shares of the Common Stock of the Company are subdivided, consolidated, increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, capital adjustment or otherwise, or if the Company shall issue Common Stock as a dividend or upon a stock split, then the number and kind of shares then purchasable upon exercise of the Option and the Exercise Price hereunder shall be proportionately adjusted. However, no such adjustment shall change the total purchase price of a complete exercise of the unexercised portion of the Option. Adjustments under this Section shall be made by the Company's independent public accountants. In computing any such adjustments, any fractional share which might otherwise become subject to the Option shall be eliminated and paid in cash. b. In the event of (i) the dissolution or liquidation of the Company or (ii) a merger or consolidation in which (A) the Company does not survive as a publicly owned corporation with securities registered under the Exchange Act and (B) the agreements governing such merger or consolidation do not provide for the issuance of substitute options with substantially equivalent terms as determined by the Board in lieu of the Option or for the express assumption (within the meaning of Section 424(a) of the Code) of the Option by the surviving corporation, the Board shall declare that the Option shall terminate as of a date to be fixed by the Board (the "Termination Date"), provided that the Board shall cause to be delivered not less than thirty (30) days before the Termination Date written notice of the Termination Date to Holder and, provided the Option has theretofore been approved or ratified by the Company's shareholders as contemplated by the provisions of Section 1 above, Holder shall have the right, during the Period between the receipt of the written notice and the Termination Date to exercise the Option, in whole or in part, whether or not all or any part of the Option would not otherwise be exercisable; provided, however, that unless Optionee shall deliver to the Company written notice to the contrary at least three (3) business days prior to the Effective Date, the Optionee and every Holder shall be deemed to have delivered to the Company a notice of exercise of the Option, in whole, on the Effective Date. To the extent that the Option is not exercised in its entirety on or prior to the Termination Date, the Option and any and all rights then remaining hereunder shall expire and terminate as of the Termination Date. c. Provided the Option or the Plan has been approved or ratified by the Company's shareholders as contemplated by the provisions of Section 1 above, upon a "Change in Control of Employer", the Option, if not already exercisable in accordance with its terms, shall become immediately exercisable in whole or in part. d. In the event of a "Change in Control of Employer" pursuant to which substitute options are offered to Optionee in place of the Option herein granted or the surviving corporation offers to assume the Option, the Board shall cause to be delivered not less than thirty (30) days before the effective date of such "Change in Control of Employer" (the "Effective Date") written notice of the Effective Date to Optionee and provided the Option has theretofore been approved or ratified by the Company's shareholders as contemplated by the provisions of Section 1 above, Optionee shall have the right to elect to accept such substitute options or assumption or to exercise the Option, in whole or in part, prior to the Effective Date (and such notice shall so state); provided, however, that unless Optionee shall deliver to the Company written notice to the contrary at least three (3) business days prior to the Effective Date, the Optionee and every Holder shall be deemed to have rejected any substitute options offered to Optionee and any offer to assume the Option and to have delivered to the Company a notice of exercise of the Option, in whole, on the Effective Date. 9. Reservation of Shares. The Company will at all times reserve and keep available out of its authorized shares of Common Stock, solely for issuance upon the exercise of the Option and other similar options, at least such number of its shares of Common Stock as shall be issuable upon the exercise of the Option and all other similar options at the time outstanding. 10. Subject to Plan. The Option has been issued under the Plan. In addition to the provisions of this Agreement, the Option will be subject to the power of the Board or the Committee, as the case may be, to interpret the Plan, correct any defect, supply any omission and reconcile any inconsistency in the Plan, prescribe, amend and rescind rules and regulations, forms, notices and agreements relating to it and make all determinations necessary or advisable for its administration and to alter, suspend or discontinue the Plan at any time, except that no such action of the Board or the Committee, as the case may be, may, without the consent of the Holder alter the terms of, or impair the rights of the Holder under this Agreement or the Employment Agreement, except pursuant to Section 8 above. The power of the Board or the Committee, as the case may be, to construe and administer any options granted prior to the termination or suspension of the Plan shall nevertheless continue after and survive such termination or during such suspension. 11. No Employment Agreement. Nothing contained in this Agreement shall confer upon Optionee the right to be continued as an employee or as a director of or as a consultant or advisor to the Company or any subsidiary or affiliate of the Company or shall interfere in any way with the right of the Company or any subsidiary or affiliate of the Company lawfully to terminate Optionee's employment at any time, and no such termination shall in any way affect any of the rights of the Company set forth in this Agreement. Nothing herein contained shall in any way affect the rights of the Company or Optionee arising under the Employment Agreement. 12. Wage, FICA and Withholding Taxes. Holder hereby agrees that Holder will make such arrangements as the Company may reasonably deem necessary to discharge any Federal, state or local taxes (including any wage withholding or stock transfer taxes) imposed upon the Company in respect of this Agreement, the Option covered hereby or the Shares purchasable hereunder. Shares of Common Stock may not be used to discharge Holder's tax obligations. Holder may, however, discharge Holder's tax obligations with respect to any purchase of Shares pursuant to the exercise of the Option by (i) agreeing to sell the Shares so purchased within the thirty (30) day period immediately following such purchase, which period shall be extended by such number of days, if any, during which such sale cannot be affected by reason of the failure or inability of the Company to register such Shares under the Act (as so extended, the "Sale Period") and (ii) delivering to the Company Optionee's promissory note payable upon the earlier to occur of (A) such sale of Shares and (B) the expiration of the Sale Period. 13. Entire Agreement. This Agreement contains the entire agreement of the parties relative to the subject matter hereof, superseding and terminating all prior agreements or understandings, whether oral or written, between the parties hereto relative to the subject hereof, and this Agreement may not be extended, amended, modified or supplemented without the written consent of the parties hereto. 14. Waiver, Modification, Amendment. Except where specific time limits are herein provided, no delay on the part of either party hereto in exercising any power or right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right hereunder preclude other or further exercise thereof or the exercise of any other power or right. No waiver, modification or amendment of this Agreement or any provision hereof, shall be enforceable against either party hereto unless in writing, signed by the party against whom such waiver, modification or amendment is claimed, and with regard to any waiver, shall be limited solely to the one event. 15. Governing Law. This Agreement and all amendments or charges relating hereto shall be deemed to have been entered into pursuant to, and shall be governed by, the laws of the State of New York. 16. Notices. Notices pursuant hereto shall be given in writing, in person (against receipt therefor only if requested) or by retired or certified mail, return receipt requested, and shall be deemed delivered upon delivery in person or four (4) days after deposit in the United States mail, postage prepaid, addressed as follows: If to the Company: LANCIT MEDIA ENTERTAINMENT, LTD. 601 West 50th Street New York, NY 10019 Attn: Chief Financial Officer If to Optionee: SUSAN L. SOLOMON 211 Central Park West New York, NY 10024 or to such other address as either party hereto shall designate to the other party by written notice given in accordance with this Section. 17. Injunctive Relief. In addition to any other rights or remedies available to the Company as a result of any breach of Optionee's covenants under Section 5 hereof, the Company shall be entitled to enforcement of such covenants by seeking an injunction or a decree of specific performance from a court of competent jurisdiction. 18. Captions. The captions or headings of the Sections are inserted only as a matter of convenience, and in no way define, limit or in any other way describe the scope of this Agreement or the intent of any provisions hereof. 19. Optionee Information and Knowledge. Holder hereby certifies that Holder has read the above Agreement, and understands and agrees to all of the terms, conditions and statements contained therein, accepting this Agreement as of the Date of Grant first above written. ATTEST: LANCIT MEDIA ENTERTAINMENT, INC. ______________________________________ By: ______________________________ [Assistant] Secretary Laurence A. Lancit, President ------------------------------ SUSAN L. SOLOMON EXHIBIT I to Stock Option Agreement - Exhibit C EXERCISE NOTICE To: LANCIT MEDIA ENTERTAINMENT LTD. (the "Company") 601 West 50th Street New York, New York 10019 Attn: Chief Financial Officer I hereby elect to purchase __________ shares of Common Stock ("New Shares") in accordance with the terms and conditions of the Stock Option Agreement to which this Exercise Notice is attached as Exhibit I (the "Agreement"), and hereby tender herewith full payment of the purchase piece and all applicable withholding taxes in the amount of $____________, either in cash or by certified check, bank check, personal check (in which case the Company reserves the night to withhold issuance of such New Shares until the funds have cleared) payable to the order of LANCIT MEDIA ENTERTAINMENT, LTD., or by wire transfer of funds, or, but only if I am permitted to do so under the Agreement, and only with regard to the full or partial amount of the purchase price, in negotiable certificates1 for outstanding shares, of Common Stock of the Company ("Old Shares"), valued at the "fair market value" (as defined in the Agreement) thereof as of the date this Exercise Notice is received by the Company. I further request that if the stock certificate(s) for Old Shares being tendered herewith (if any) is for more shares of Common Stock than are needed to pay the purchase price, that a new stock certificate for the extra shares represented by the certificate(s) delivered herewith be issued and delivered to me. All share certificates issued pursuant to this Exercise Notice are to be issued and delivered as follows: Date:______________ Signature________________________________ - -------- 1 To be negotiable, certificates must be endorsed to LANCIT MEDIA ENTERTAINMENT, LTD., or in blank, or be accompanied by a stock power so endorsed. 2 The signature on this notice must correspond with Holder's name as written on the face of the Agreement in every particular, without alteration or enlargement or any change whatsoever. EX-10 6 EMPLOYMENT AGREEMENT WITH NOEL RESNICK Exhibit 10.5 EMPLOYMENT AGREEMENT made as of the 15th day of February, 1996 by and between LANCIT MEDIA PRODUCTIONS, LTD. with offices at 601 West 50th Street, New York, New York 10019 (hereinafter "Employer") and NOEL RESNICK, residing at 10335-1/2 Wilshire Blvd., Los Angeles, California 90024 (hereinafter "Employee"). WHEREAS, the parties desire to set forth the terms and conditions of employment of Employee by Employer. NOW, THEREFORE, in consideration of the agreements hereinafter contained, the parties hereto agree as follows: 1. Term: Employer hereby employs Employee as Senior Vice President Development for a period of two (2) years commencing on February 16, 1996 ("Initial Term"). 2. Services: (a) Employee shall be responsible for Employer's development of quality children's and family entertainment television, film and other media projects and allied activities consistent with Employer's primary mission to deliver quality content and quality production values, and expanding Employer's presence into mainstream children and family programming venues. (b) Employee will perform her services within a mutually agreed annual budget, it being understood that if Employer and Employee cannot agree on such budget, Employer's decision regarding such budget shall be final. Employee agrees to devote her full working time and efforts to the business and affairs of Employer and to all of its subsidiaries and affiliates, if any (hereinafter collectively referred to as the "Corporate Group"), and hold such additional offices in components of the Corporate Group to which she shall accept, such acceptance not to be unreasonably withheld and to which from time to times she may be elected or appointed, provided that they are of the same general character and of at least the same degree of responsibility as the offices in Employer which she shall hold at the time of the execution of this Agreement. Employer agrees that Employee will be a named insured under Employer's Director & Officer liability insurance policy, as the same may be modified from time to time, a copy of the Certificate of Insurance naming Employee is annexed hereto as Exhibit A. Employer will not be asked to be an officer or director of any component of the Corporate Group not covered by such policy. (c) Employee shall have a private, enclosed office and will share a secretary/assistant employed by Employer with one other employee of Employer and will have a reserved parking space at the Employer's office. Employee's primary place of employment will be at Employer's office in Los Angeles, California. Employer and Employee will mutually agree on the times when Employee shall render her services in New York City, it being understood that if Employer and Employee cannot agree on such times, Employer's decision shall be final. Employer acknowledges that the current expectation is that Employee will be in New York City, on average, for no more than one (1) week per month. Employer agrees to discuss any such change in such expectation with Employee, and in no event shall Employer require Employee to relocate her primary residence outside of the Los Angeles, California metropolitan area. (d) Nothing contained in this Agreement shall be construed to prevent Employee from managing her private investments in any business, except that Employee will be permitted to own not more than two (2%) percent of the issued and outstanding stock or other securities of a competitive company. Employee shall, in the performance of her duties, be at all times subject to the direction and supervision of Employer, and shall report directly to the Chief Executive Officer of Employer. (e) Notwithstanding the provisions of subparagraph 2(a), Employer acknowledges that Employee currently has and will continue to have an interest in the projects described in Exhibit B annexed hereto (hereinafter "Outside Projects"). Employee will be permitted to continue to be involved in the Outside Projects upon the following conditions: (i) Employee's involvement in such activities shall not interfere with the performance of Employee's duties hereunder, as determined in Employer's sole reasonable discretion; (ii) Employee shall not engage in line producing or other similar activities which require anything other than supervisory involvement during the term of this agreement; and (iii)Employee agrees that she will use her reasonable best efforts to attach Employer to each Outside Project as a producer providing services to the entity controlling such Outside Project, but Employee shall not be required to attach Employer to any Outside Project as a condition of her employment. "Reasonable best efforts" shall include, at a minimum, good faith efforts to arrange a meeting with representatives of the entity controlling each Outside Project. Employer acknowledges that the timing of Employee's efforts to attach Employer to the Outside Projects depends on events outside the control of Employee, but Employee agrees to commence such efforts at the earliest practicable time. (f) Subject to all of the provisions of this Agreement including, without limitation, subparagraph 2(b) hereof, Employer acknowledges that Employee shall be entitled to render non- exclusive services in connection with Outside Projects and projects produced by Employee prior to the date hereof and to receive contractual passive producer fees for such projects. Notwithstanding the foregoing, if Employer is attached to any Outside Project and, as a result of such attachment, Employee's and Employer's respective fees are paid as a single fee, Employer and Employee will negotiate in good faith regarding how such fee should be allocated between Employee and Employer. (g) In connection with productions acquired, developed or set up by Employee hereunder, Employee shall be entitled to receive credit as Executive Producer for supervisory producing services rendered by Employee. In connection with productions acquired, developed or set up by Employee hereunder with respect to which Employee which does not render day to day supervisory production services, Employee will receive a producing credit, the exact form of which shall fairly reflect Employee's services and be negotiated in good faith by Employer and Employee. For purposes of this Agreement, a production will have been "set up" by Employee if, due to the efforts of Employee, the production has been placed in active development with a third party financier(s) who has agreed to provide at least 50% of the budget (exclusive of development costs) for the production. Employer will accord Employee its executive producer or other producer credit on the same card and wherever and whenever the other like producers of such production receive credit, subject to approval of the distributor of such production. Employer agrees to use best efforts to obtain such approval, but Employee acknowledges that best efforts shall not require Employer to make such approval a condition of such distributor's participation in the project. An inadvertent failure by Employer to grant Employee such credit shall not be a breach of this Agreement, although Employer shall, upon receipt of written notice of such failure from Employee, use reasonable efforts to cure such failure on a prospective basis. It is acknowledged and agreed that if Employee has rendered such services in connection with a production during the term of this Agreement, such credit shall be accorded regardless of whether or not Employee is an employee of Employer at the time the production is actually produced. 3. Compensation: (a) As compensation for services rendered to the Corporate Group during the term of this Agreement, Employee shall be paid compensation at the annual base rate (the "Base Salary") of $125,000 per year during the first year of this Agreement. The Base Salary during the second year of this Agreement shall be not less than $130,000 per year, but may also be raised based on Employee's performance and in amounts as may be determined by her supervisor and approved in accordance with company policies. The Base Salary shall be payable in accordance with Employer's then applicable payroll practice. (b) Employer has adopted an Incentive Bonus Plan whereby executive officers of Employer as a group shall receive a bonus of five (5%) percent of pre-tax income of Employer, as set forth in Employer's audited financial statements provided that: (i) Employer's pre-tax income in any given fiscal year is at least $250,000; (ii) in such fiscal year, Employer's net income per share is at least $.05 per share (adjusted for stock splits and stock dividends); and (iii) the net income in such fiscal year exceeds the net income in the immediately preceding fiscal year. The amount of any bonus to be paid to Employee which may be available for distribution pursuant to such Incentive Bonus Plan, in any year of this Agreement, shall be determined by Employer. Employee shall be eligible to participate in such Incentive Bonus Plan starting with the fiscal year which commences on July 1, 1996, and if the term of Employee's employment terminates prior to the close of Employer's fiscal year, Employee shall be eligible to participate in a pro-rata portion of any bonus payable as of the close of such fiscal year. (c) (i) Subject to the terms of this Agreement, Employer's 1990 Stock Option Plan (as it may be amended from time to time) and any applicable I.R.S. regulations, Employee was granted an option to purchase 45,000 shares of Employer's Common Stock (the "Signing Options") effective as of February 16, 1996 (the "Effective Date"). The Signing Options vested and become exercisable in accordance with the provisions below. The Signing Options were granted pursuant to Employer's 1990 Stock Option Plan. Options with respect to 15,000 shares of the Signing Options become exercisable as of the Effective Date. Options with respect to an additional 15,000 shares of the Signing Options become exercisable as of February 16, 1997. Options with respect to the final 15,000 shares of the Signing Options become exercisable as of February 15, 1998. All such Signing Options are exercisable at an exercise price per share equal to $10.3125 per share, which was the average of the closing bid and asked quotations for a share of Employer's Common Stock on the Effective Date. (ii) Subject to the terms of this Agreement, Employer's 1990 Stock Option Plan and any applicable I.R.S. regulations, Employee was also granted an additional option to purchase 21,000 shares of Employer's Common Stock (the "Bonus Options") effective as of Effective Date. The Bonus Options vest and become exercisable in accordance with the provisions below. The Bonus Options were granted pursuant to Employer's 1990 Stock Option Plan. Options with respect to 7,000 shares of the Bonus Options become exercisable on the earlier of (A) the date that aggregate gross revenues received by Employer, directly attributable to projects acquired, developed or set up by Employee on behalf of Employer, equal $2,000,000 or (B) January 17, 2006. Options with respect to an additional 7,000 shares of the Bonus Options become exercisable on the earlier of (A) the date that aggregate gross revenues received by Employer, directly attributable to projects acquired, developed or set up by Employee on behalf of Employer, equal $4,000,000 or (B) February 9, 2006. Options with respect to the final 7,000 shares of the Bonus Options become exercisable on the earlier of (A) the date that aggregate gross revenues received by Employer, directly attributable to projects acquired, developed or set up by Employee on behalf of Employer, equal $6,000,000 or (B) February 9, 2006. All such Bonus Options are exercisable at an exercise price per share equal to $10.3125 per share, which was the average of the closing bid and the closing asked per share price of Employer's Common Stock on the Effective Date. For the purposes of this subparagraph 3(c)(ii), "aggregate gross revenues" shall be defined as all forms of compensation received by or credited to Employer in respect of development and/or production costs, including, without limitation, license fees, producer fees, contingent compensation (when and if actually received) and the cash value of "in kind" materials, products or services and barter received. (iii) The terms of the Signing Options and the Bonus Options are governed by Employer's 1990 Stock Option Plan and Employee's Stock Option Agreement (including the provisions regarding the effect of Employer's liquidation, merger and consolidation), copies of which have been delivered to Employee prior to the execution hereof. (iv) Employee acknowledges and agrees that, as a corporate officer of Employer, she may be deemed a "Named Executive Individual" and is an insider, for the purposes of SEC filings and reporting and securities laws. Employee agrees to comply with all applicable securities laws including, without limitation, timely filing of Form 3, "Initial Statement of Beneficial Ownership of Securities." Employer acknowledges that Employee has filed Form 3 in a timely fashion. 4. Termination: (a) In addition to any other rights and remedies provided by law or this agreement, Employer may terminate Employee's employment hereunder upon written notice for "cause". For purposes of this paragraph, "cause" shall include: (i) commission of any act of material fraud or gross negligence by Employee in the course of her employment hereunder which, in the case of gross negligence, has a materially adverse effect on the business or financial condition of Employer; (ii) willful and material misrepresentation at any time during the term hereof by Employer to any officer of Employer; (iii) failure, refusal or neglect by Employee to comply with a reasonable instruction of the Chief Executive Officer of Employer; (iv) engagement by Employee in any act, whether with respect to her employment or otherwise, which is in violation of the criminal laws of the United States or any state thereof or any similar foreign law to which Employee may be subject involving acts of moral turpitude; or (v) death or disability of Employee. Employee shall be deemed disabled if she shall be unable by reason of mental or physical incapacity from performing her duties hereunder for a period of 90 consecutive days or an aggregate of 120 days in any consecutive six-month period. In case of each provision above, when a cure is possible, Employee shall be given notice, details of the grounds for termination and a reasonable opportunity to cure, provided that the foregoing opportunity to cure shall not be available with respect to conduct which has been the subject of a previous notice and opportunity to cure. If Employee's employment shall be terminated pursuant to this subparagraph 4(a), Employee shall be entitled to receive only the base salary actually earned and payable to Employee pursuant to subparagraph 3(a) above through the date of the termination of her employment and any properly reimbursable expenses and other accrued employee benefits through the date of termination. Options which are vested as of the date of such termination may only be exercised by Employee during the ninety (90) day period (one (1) year if termination is due to death or disability) following such date and unexercised vested options shall expire on the last day of such period. Options granted pursuant to subparagraph 3(c) which are not vested as of the date of termination shall, notwithstanding termination pursuant to this subparagraph 4(a), vest as provided in subparagraph 3(c), subject to the further condition that the options may only be exercised by Employee during the ninety (90) day period (one (1) year if termination is due to death or disability) following vesting, and any unexercised options remaining after such period shall expire on the last day of such period. Employee shall not thereafter be entitled to receive any further salary, expenses, benefits (other than medical or disability benefits if applicable) or other compensation of any kind hereunder. Any bonus which has been earned, but not paid, shall be paid at the time it would otherwise be payable. (b) If Employer shall terminate Employee's employment other than for "cause", as provided in subparagraph 4(a) above: (i) Employee shall be entitled to receive, as damages, and as her sole and exclusive right and remedy on account of such termination, the base salary to which Employee would otherwise have been entitled hereunder throughout the remaining term hereof together with any properly reimbursable business expenses and other employee benefits to the date of termination. Amounts payable by Employer under this subparagraph 4(b)(i) shall be payable when and as the same would otherwise have been payable under the terms hereof and shall not be subject to any duty to mitigate damages by using reasonable efforts to seek other comparable employment; however, compensation (in whatever form) earned by Employee on account of other employment during the unexpired term of this Agreement shall be applied in reduction of Employer's obligations hereunder. Employee shall not thereafter be entitled to receive any further salary, expenses, benefits (other than medical or disability benefits, if applicable) or other compensation hereunder, except that Employee shall be eligible to receive a pro-rata share of any bonus due hereunder for the fiscal year in which Employee is terminated under this subparagraph 4(b)(i). In the event of termination pursuant to this subparagraph 4(b)(i), Employee shall not be entitled to any damages by reason of such termination other than as set forth in this subparagraph 4(b)(i). (ii) With respect to the options granted pursuant to subparagraph 3(c) which are not vested as of the date of termination, such options shall vest as provided in subparagraph 3(c), subject to the further condition that the options may be exercised by Employee during the ninety (90) day period following vesting, and any unexercised options remaining after such period shall expire on the last day of such period. (c) Employee may not terminate this Agreement, except in the event of a material breach of this Agreement by Employer. 5. Expenses: Employer shall reimburse Employee for all reasonable expenses of business travel (including car service to and from airports), hotel, business-related car telephone, entertainment or otherwise incurred by Employee in connection with and on behalf of the business of Employer upon presentation of receipt, voucher or itemization of expenses in accordance with Employer's then applicable expense reimbursement policies and procedures for senior executives. Air travel and hotel expenses shall be reimbursed at rates comparable to those reimbursed for Employer's other senior management executives. In addition, and in lieu of the gas/mileage reimbursement which would normally be payable to Employee in connection Employee's use of her car for Employer's business, Employer shall pay Employee a $600 monthly non-accountable car allowance. Employee acknowledges and agrees that such car allowance payments shall be reported to the Internal Revenue Service as part of Employee's gross compensation. 6. Disability: If Employee is unable to perform her duties hereunder by reason of any illness, disability or incapacity, as determined by Employer, she shall be entitled to one hundred (100%) percent of her Base Salary for the first ninety (90) days of her disability, and fifty (50%) percent of those amounts for the next ninety (90) days, unless she is terminated for disability pursuant to subparagraph 4(a), less such benefits or compensation payable to Employee by reason of State, Federal, Social Security, disability, worker's compensation or comparable government benefits and such policies of disability insurance procured by Employer. Notwithstanding the foregoing sentence, if Employer agrees that Employee is unable to perform her duties hereunder by reason of any illness, disability or incapacity, as determined by Employer in its sole reasonable discretion, she shall be entitled to terminate this Agreement at any time during the one hundred eighty (180) day period described above. The foregoing periods of disability during which compensation shall be paid constitute aggregate periods during the full term of this Agreement. 7. Employee Benefits: Employee shall be entitled to participate, to the extent she is eligible under the terms and conditions thereof, in any bonus, pension, profit-sharing, retirement, hospitalization, insurance, medical service, or other employee benefit plan including disability insurance generally available to the senior executives of Employer which may be in effect from time to time during the period of her employment hereunder. Employer shall be under no obligation to continue the existence of any such employee benefit plan. Employee shall be entitled to two (2) weeks vacation time (exclusive of any company-wide holidays or vacations). 8. Disclosure of Confidential Information: Employee recognizes and acknowledges that certain information is proprietary to and confidential with Employer and/or the Corporate Group, including without limitation the following: Employer's and the Corporate Group's strategic and/or business plan, pending projects, projects in development, acquisition targets at both the individual project and corporate level, co- production arrangements, joint ventures, funding sources, distribution arrangements, the contacts at such entities and the financial terms of such agreements with Employer and/or the Corporate Group (collectively, "Confidential Information"). Confidential Information shall not include information (a) already lawfully known to the receiving party, (b) generally known to the public, or (c) lawfully obtained from any third party without any confidentiality obligation. Employee will not directly or indirectly, on behalf of herself or others, during or at any time after the termination of her providing services hereunder, irrespective of time, manner or reason for termination, disclose, publish, disseminate or utilize such Confidential Information, or any part thereof except in furtherance of the business of Employer or another member of the Corporate Group. Employee will not remove or duplicate in any manner at any time any lists or other records, or any parts thereof, concerning Employer's Confidential Information and upon termination of her employment will return to Employer any and all lists and records concerning Employer's Confidential Information thereof in her possession. 9. Interference with Employer's Business: (a) Employee agrees that during the Non-Solicitation Period (defined below), neither Employee nor any Related Person (defined below) shall knowingly, either directly or indirectly, for herself or for any other person or entity, (i) call upon, solicit or take away, or attempt to call upon, solicit or take away, any person then employed by Employer or the Corporate Group or (ii) knowingly employ any employee of Employer or the Corporate Group who voluntarily terminates such employment until six (6) months have passed following termination of such employment, unless such condition is waived by Employer in writing. "Non-Solicitation Period" shall mean the period from the date hereof until one (1) year after the termination of this agreement. "Related Person" shall mean any person or entity who or which, directly or indirectly, is controlled by Employee or any person who is a member of Employee's family. (b) Employee agrees that during the term of her employment with Employer and for the two (2) years following termination of such employment, neither Employee nor any Related Person shall knowingly, either directly or indirectly, for herself or for any other person or entity, enter into any agreement, or assist any other person or entity in entering into any agreement or other arrangement regarding any of the projects introduced to Employer or the Corporate Group during the term of Employee's employment, without Employer's prior written consent, such consent not to be unreasonably withheld. Employer agrees that the restriction of this subparagraph 9(b) shall not apply to (i) any project which was the subject of a written agreement between Employer and a third party, the term of which has ended, and which is not then the subject of a negotiation for an extended or new term or (ii) projects which were rejected by Employer during the term of this Agreement. Notwithstanding the foregoing, projects shall only qualify as having been "rejected by Employer during the term of this Agreement" if Employee, within thirty (30) days following the end of the term of this Agreement, provides Employer with a written notice identifying such projects, and Employer acknowledges in writing that such projects have been rejected. Employer agrees not to withhold its acknowledgement unreasonably. At the end of the term of this Employee's right to enter into an agreement or other arrangement regarding projects described by the subparagraph 9(b)(i) shall be subject to Employee's obligation to send Employer notice of Employee's intention to do so, and Employer's failure to commence negotiations for such project, within five (5) business days after receipt of such notice. 10. Severability: In the event any of the terms or provisions of this Agreement are found to be invalid, void or voidable for any reason whatsoever such finding will not affect the remaining terms and provisions of this Agreement and they shall remain in full force and effect. 11. Governing Law: This Agreement shall be governed in all respects by the laws of the State of New York. 12. Notices: Any notice required or given under this Agreement shall be sufficient if in writing and sent by registered mail or certified mail to the addresses hereinabove set forth or to such other addresses as any of the parties hereto may designate in writing, transmitted by registered or certified mail to the other. Duplicate copies of any notices to Employer shall also be sent to Rubin, Bailin, Ortoli, Mayer, Baker & Fry, LLP, 405 Park Avenue, 15th Floor, New York, New York 10022, Attention: Marc L. Bailin, Esq. Duplicate copies of any notices to Employee shall also be sent to Robert M. Lange, Esq. at Kleinberg Lopez Lange Brisbin & Cuddy, 1880 Century Park East, Suite 1150, Los Angeles, California 90067. 13. Entire Agreement: This Agreement contains the entire agreement between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. No modification or amendment of this Agreement can be made other than in writing signed by the parties hereto. 14. Injunctive Relief: Employee acknowledges that the services to be rendered by her hereunder are of a special, unique and intellectual character which gives them peculiar value, and that a breach or threatened breach of any provision of this Agreement, including, without limitation the material provisions of Paragraphs 8 and 9, will cause Employer immediate irreparable injury and damage which cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, Employee agrees that Employer shall be entitled to injunctive relief to enforce and protect its rights under this Agreement. Nothing herein shall be construed to prohibit Employer from pursuing any other legal or equitable remedies available to it for such breach, including the recovery of damages form Employee. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. LANCIT MEDIA PRODUCTIONS, LTD. BY: /s/CECILY TRUETT /s/NOEL RESNICK ------------------------------ Noel Resnick, Employee EXHIBIT A Director and Officer Liability Policy Certificate of Insurance EXHIBIT B Outside Projects 1. "Nutcracker" 2. "Canterville Ghost" 3. "Not Quite Human" EX-10 7 EMPLOYMENT AGREEMENT WITH JANE M. ABERNETHY Exhibit 10.7 Susan L. Solomon Chief Executive Officer Chairman of the Board As of June 16, 1997 Ms. Jane M. Abernethy 685 West End Avenue, #11E New York, New York 10025 Dear Jane: This letter will confirm our agreement regarding your continued employment as Vice President - Legal & Business Affairs of Lancit Media Entertainment, Ltd. (the "Company"), as follows: 1. Effective with the pay period commencing June 16, 1997, your annual salary shall be $125,000; 2. In the event that your employment is terminated other than for "cause" (as such term is defined in the currently effective employment agreement between Larry Lancit and the Company), you shall be entitled to six (6) months' severance. If the foregoing is acceptable to you, please so indicate by your signature below and return a fully-executed copy of this letter to me. Sincerely yours, LANCIT MEDIA ENTERTAINMENT, LTD. By: /s/ Susan L. Solomon Susan L. Solomon Accepted and agreed: /s/ Jane M. Abernethy Jane M. Abernethy EX-10 8 EMPLOYMENT AGREEMENT WITH IRENE V. MINETT Exhibit 10.8 Agreement made as of April 14, 1997 between IRENE MINETT ("you"), residing at 12 Huntington Road, Port Washington, New York 11050, and LANCIT MEDIA ENTERTAINMENT, LTD., having an office at 601 West 50th Street, New York, New York 10019 (the "Company"). 1. EMPLOYMENT 1.01.The Company hereby employs you, and you accept employment, as Vice President - Marketing. You shall perform such additional services, of a similar nature and degree of responsibility as those of your primary duties, as may from time to time be assigned to you. 1.02.During the term of this agreement, you will devote substantially all of your working time and attention to the interests of the Company. Your services will be rendered exclusively to the Company during that term, and you will not render any services to others or engage in any other business, directly or indirectly. You will discharge your responsibilities in a diligent and faithful manner, consistent with sound business practices. 1.03.Your principal place of employment will be at such offices as the Company may provide in or around New York City, or such other place as you and the Company mutually designate. You will travel as reasonably necessary for the performance of your duties. 2. TERM 2.01.The term of this agreement will begin on April 14, 1997 and will continue for a one (1) year period ending on April 13, 1998 (the "Expiration Date"). 2.02.You grant the Company one (1) option to extend the term for a period of one year commencing April 14, 1998 (the "Option Year"). The Company may, in its sole discretion, exercise such option by giving you notice not later than March 13, 1998. 3. BASE SALARY 3.01 The Company will pay you a base salary at the rate of $110,000 per year during the term of this agreement. Your base salary may be subject to such merit increases, if any, as the Company may determine in its sole discretion from time to time, based on its periodic review of your performance in accordance with its regular policies and procedures. 4. OTHER COMPENSATION; BENEFITS AND EXPENSES 4.01 You shall be eligible to participate in all plans now existing or adopted in the future for the general benefit of all employees of the Company, such as pension plans, investment funds, and group or other insurance plans and benefits, to the extent that you are and remain eligible to participate, and subject to the provisions of such plans in effect from time to time. The Company reserves its right to modify, suspend or discontinue any and all such benefits at any time without recourse by you. 4.02.The Company will reimburse you for your reasonable business expenses incurred in connection with the performance of your duties under this agreement, in accordance with the Company's general policies regarding expenses and expense accounting. 4.03.All compensation payable to you under this agreement will be subject to applicable tax withholding. 4.04.During the first year of the term of this agreement, you should be entitled to 10 days of vacation. During the Option Year, if applicable, you shall be entitled to 15 days of vacation. 5. TERMINATION 5.01.The term of this agreement will terminate at your death. The term may be terminated at the Company's option, by notice to you, as a result of your disability (defined in paragraph 5.02), for cause (defined in paragraph 5.03), or without cause (subject to the provisions of subparagraph 5.04(b)). 5.02."Disability" means illness or other physical or mental disability or incapacity which, in the Company's judgment, has substantially prevented you from performing your duties during any period of 90 consecutive days or for 90 days during any period of 180 consecutive days, and which can reasonably be expected to continue in the judgment of a physician selected by the company. The Company will have the right to terminate your employment as a result of your disability by giving written notice to you not later than 30 days after the expiration of any such 90-day period. 5.03."Cause" for termination means (i) fraud, embezzlement, or other misappropriation, (ii) your material breach of your obligations with respect to any rules or regulations of employment which may be adopted or amended from time to time by the Company, (iii) your failure to perform your duties, which failure is not cured within thirty (30) days after the date on which the Company gives you written notice of such failure, or (iv) your default of any obligations under this agreement (other than those specified in clauses (i) through (iii) above), which default is not cured within thirty (30) days after the date on which the Company gives you written notice of such default. If your employment is terminated by the Company for cause, the Company's obligations to you will terminate immediately except as expressly provided in subparagraphs 5.04(a) and (c). 5.04.(a) If your employment is terminated during the term of this agreement by your voluntary action, death, or disability or by the Company for cause, the Company will pay, in lieu of any other payments hereunder (including bonus payments), your base salary that has actually accrued to the date of termination and any vacation pay that has accrued to that date and is payable under the Company's standard policies. You acknowledge that upon receipt of such payments pursuant to this subparagraph, the Company will have no further obligations to you under this agreement, except as provided under subparagraph 5.04(c). (b) If your employment is terminated during the term of this agreement other than by your voluntary action, death or disability, or by the Company for cause, you shall receive, in lieu of all amounts otherwise payable hereunder (including bonus payments), the balance of the base salary (excluding the Option Year salary if the Company has not yet opted for the Option Year at the time of termination) which would be payable during the remainder of the term, but in no event shall such amount be less than the base salary for six (6) months. Such payments will be made at the same intervals as they would have been made if this agreement had not been terminated. In addition, you shall receive any base salary that has actually accrued to the date of termination and any vacation pay that has accrued to that date and is payable under the Company's standard policies. You acknowledge that upon receipt of such payments pursuant to this subparagraph, the Company will have no further obligations to you under this agreement, except as provided under subparagraph 5.04(c). (c) If your employment is terminated for any reason, you will be entitled to any benefits then vested under benefit plans and otherwise payable in accordance with the provisions of the plan concerned. (d) In the event of any termination of your employment, this paragraph 5.04 will apply in place of any Company severance policies that might otherwise be applicable, and the Company will have no obligation to make any payments to you except those expressly prescribed in subparagraphs 5.04(a), 5.04(b), and 5.04(c). 6. RESTRICTIONS 6.01.Without limiting the generality of paragraph 1.02, you shall not engage or be financially interested, directly or indirectly, at any time during the term of this agreement, in any activity competitive with any business then carried on by the Company or by any other enterprise directly controlled by the Company. Notwithstanding the preceding sentence, you may own less than one percent (1%) of the number of shares outstanding of any securities that are listed for trading on any securities exchange. 6.02.You recognize and acknowledge that certain information is proprietary to and confidential with the Company, including without limitation the following: the Company's strategic and/or business plan, pending projects, projects in development, acquisition targets at both the individual project and corporate level, co-production arrangements, joint ventures, funding sources, distribution arrangements, the contacts at such entities and the financial terms of such agreements with the Company (collectively, "Confidential Information"). You will not directly or indirectly, on behalf of yourself or others, during or at any time after the termination of your providing services hereunder, irrespective of time, manner or reason for termination, disclose, publish, disseminate or utilize such Confidential Information, or any part thereof except in furtherance of the business of the Company. You will not remove or duplicate in any manner at any time any lists or other records, or any parts thereof, concerning the Company's Confidential Information and upon termination of your employment will return to the Company any and all lists and records concerning the Company's Confidential Information thereof in your possession. 6.03.(a) You agree that during the Term of your employment with the Company and for the two (2) years following termination of such employment, neither you nor any Related Person shall knowingly, either directly or indirectly, for yourself or for any other person or entity, enter into any agreement, or assist any other person or entity in entering into any agreement or other arrangement regarding any of the projects introduced to or acquired or developed by the Company during the term of your employment. The Company agrees that the restriction of this subparagraph 6.03 shall not apply to any project which was the subject of a written agreement between the Company and a third party, the term of which has ended, and which is not then the subject of a negotiation for an extended or new term. Your right to enter into an agreement or other arrangement regarding projects described by the previous sentence shall be subject to your obligation to send the Company notice of your intention to do so, and the Company's failure to commence negotiations for such project, within five (5) business days after receipt of such notice. "Related Person" shall mean any person or entity who or which, directly or indirectly, is controlled by you or any person who is a member of your family. (b) You also agree that prior to the date twelve months after the date on which your employment with the Company is terminated neither you nor any entity with whom you are at the time affiliated shall, by virtue of any action taken or information supplied by you, directly or indirectly hire, offer to hire, entice away, or in any other manner persuade or attempt to persuade any officer, employee, agent, representative, customer or supplier of the Company to discontinue his or her relationship with the Company. 7. NOTICES 7.01.All notices under this agreement shall be in writing and shall be given by courier or other personal delivery or by registered or certified mail at the appropriate address below or at a substitute address designated by written notice by the party concerned:. TO YOU: The address shown above. TO THE COMPANY: The address shown above. Each notice to the Company shall be addressed for the attention of its President and Chief Executive Officer and a copy of each such notice shall be sent to Rubin, Bailin, Ortoli, Mayer, Baker & Fry LLP, 405 Park Avenue, New York, New York 10022, Attention: Marc L. Bailin, Esq. Notices shall be deemed given when mailed or, if personally delivered, when so delivered, except that a notice of change of address shall be effective only from the date of its receipt. 8. MISCELLANEOUS 8.01 This agreement supersedes all previous agreements between the parties hereto, and contains the entire understanding of the parties relating to its subject matter. No change or termination of this agreement will be binding upon the Company unless it is made by an instrument signed by an officer of the Company. No change of this agreement will be binding upon you unless it is made by an instrument signed by you. A waiver by either party of any provision of this agreement in any instance shall not be deemed to waive it for the future. All remedies, rights, undertakings, and obligations contained in this agreement shall be cumulative, and none of them shall be in limitation of any other remedy, right, undertaking, or ligation of either party. 8.02 The Company may assign its rights under this agreement in whole or in part to any subsidiary, affiliated or controlling corporation, to any entity owning or acquiring a substantial portion of the stock or assets of the Company, or to any partnership or other venture in which the Company participates, provided that no such assignment shall relieve the Company of any obligations hereunder. You shall not assign any of your rights or delegate any of your duties under this agreement without the prior express written consent in each instance of the Company. 8.03.Neither party will be entitled to recover damages or to terminate the term of this agreement by reason of any breach by the other party of its material obligations hereunder, unless the other party has failed to remedy such breach within a reasonable time after it has been given notice of such breach. In any action or proceeding against the Company for breach of this agreement by reason of termination, damages shall in no event exceed lost salary under paragraph 3.01, and you shall have the obligation to locate new employment and, upon re-employment, to offset amounts earned against any amounts due under this agreement. 8.04 You hereby warrant and represent that you have full power and authority to enter into this agreement and that your execution, performance and delivery of this agreement will not (a) violate, conflict with, or result in the breach of any terms, conditions, covenants, or provisions of, or constitute a default under, any agreement to which you are a party or (b) violate the rights of any party. Notwithstanding anything in paragraph 8.03 to the contrary, you will at all times indemnify and hold harmless the Company from and against any and all claims, damages, liabilities, costs and expenses, including legal expenses and reasonable counsel fees, arising out of any breach or alleged breach by you of the warranties and representations made by you in this agreement or any other act or omission by you. 8.05.THIS AGREEMENT HAS BEEN ENTERED INTO IN THE STATE OF NEW YORK, AND THE VALIDITY, INTERPRETATION AND LEGAL EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK. THE NEW YORK COURTS (STATE AND FEDERAL) WILL HAVE EXCLUSIVE JURISDICTION OF ANY CONTROVERSIES REGARDING THIS AGREEMENT; ANY ACTION OR OTHER PROCEEDING WHICH INVOLVES SUCH A CONTROVERSY WILL BE BROUGHT IN THOSE COURTS, IN NEW YORK COUNTY, AND NOT ELSEWHERE. ANY PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY, AMONG OTHER METHODS, BE SERVED UPON YOU BY DELIVERING IT OR MAILING IT, BY REGISTERED OR CERTIFIED MAIL, DIRECTED TO THE ADDRESS FIRST ABOVE WRITTEN OR SUCH OTHER ADDRESS AS YOU MAY DESIGNATE PURSUANT TO ARTICLE 7. 8.06.The provisions of this agreement will survive any termination of your employment, unless the context requires otherwise. 8.07 If any provision of this agreement or the application thereof is held invalid, the invalidity shall not affect other effect without the invalid provisions or application, and to t his end the provisions of this agreement are declared to be severable. 8.08 This agreement shall not become effective until executed by both parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. LANCIT MEDIA ENTERTAINMENT, LTD. BY: /s/SUSAN L. SOLOMON Authorized Officer EMPLOYEE: /s/ IRENE MINETT Name:IRENE MINETT Social Security Number: ###-##-#### EX-10 9 1997 INCENTIVE STOCK PLAN Exhibit 10.13 LANCIT MEDIA ENTERTAINMENT, LTD. 1997 INCENTIVE STOCK PLAN 1. Purpose. The purpose of the 1997 Incentive Stock Plan (the "Plan") is to aid the Company in attracting, retaining and motivating officers, consultants, key employees and directors of the Company by providing them with incentives for making significant contributions to the growth and profitability of the Company. The Plan is designed to accomplish this goal by offering stock options and other incentive awards, thereby providing Participants with a proprietary interest in the growth, profitability and success of the Company. 2. Definitions. (a) Award. Any form of stock option, stock appreciation right, stock or cash award granted under the Plan, whether granted singly, in combination or in tandem, pursuant to such terms, conditions and limitations as the Board or the Committee may establish in order to fulfill the objectives, and in accordance with the terms and conditions, of the Plan. (b) Award Agreement. An agreement between the Company and a Participant setting forth the terms, conditions and limitations applicable to an Award. (c) Board. The Board of Directors of Lancit Media Entertainment, Ltd. (d) Code. The Internal Revenue Code of 1986, as amended from time to time. (e) Committee. Such committee of the Board as may be designated from time to time by the Board to administer the Plan or any subplan under the Plan. Any such committee shall consist of not less than two members of the Board who are not officers or employees of the Company, provided that, unless the Board otherwise determines, each such non-employee director on such committee must meet the requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, and Section 162(m) of the Code. (f) Company. Lancit Media Entertainment, Ltd. and its direct and indirect parents and subsidiaries. (g) Fair Market Value. If the Stock is listed on the New York Stock Exchange (or other national exchange), the average of the high and low sale prices as reported on the New York Stock Exchange (or such other exchange) or, if the Stock is not listed on a national exchange, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices for a share of the Stock in the over-the-counter market, as reported by the National Association of Securities Dealers through its Automated Quotation System or otherwise, in either case for the date in question; provided that if no transactions in the Stock are reported for that date, the average of the high and low sale prices or last quoted sale price or, if not so quoted, the average of the high bid and low asked prices as so reported for the preceding day on which transactions in the Stock were effected, and provided, further, that if no transactions in the Stock were effected within 10 business days preceding such relevant date, or if otherwise deemed appropriate by the Board or the Committee, the fair market value of the Stock shall be as determined by the Board or the Committee. (h) Lancit. Lancit Media Entertainment, Ltd. (i) Participant. An officer, consultant, key employee or director of the Company to whom an Award has been granted. (j) Stock. Authorized and issued or unissued shares of Common Stock, par value $.001 per share, of Lancit or any security issued in exchange or substitution therefor. 3. Eligibility. Only officers, key employees, and directors who are also officers or employees of the Company or who have been designated by the Board as eligible to receive Awards and consultants who have been so designated by the Board or the Committee are eligible to receive Awards under the Plan. Key employees are those employees who hold positions of responsibility or whose performance, in the judgment of the Board or the Committee, can have a significant effect on the growth and profitability of the Company. 4. Stock Available for Awards. Subject to Section 14 hereof, a total of 400,000 shares of Stock shall be available for issuance pursuant to Awards granted under the Plan; provided, however, that the aggregate number of shares of Stock subject to options and upon which stock appreciation rights are based pursuant to Awards hereunder shall not exceed 200,000 shares for any Participant during any fiscal year; and, provided, further, that the Board or the Committee shall have the power to grant Awards to a Participant exceeding such annual maximum amount, but such Awards shall not qualify as "performance based" for purposes of Section 162(m) of the Code to the extent of such excess. From time to time, the Board and appropriate officers of Lancit shall file such documents with governmental authorities and, if the Stock is listed on the New York Stock Exchange (or other national exchange), with such stock exchange, as are required to make shares of Stock available for issuance pursuant to Awards and publicly tradeable. Shares of Stock related to Awards, or portions of Awards, that are forfeited, canceled or terminated, expire unexercised, are surrendered in exchange for other Awards, or are settled in cash in lieu of Stock or in such manner that all or some of the shares of Stock covered by an Award are not and will not be issued to a Participant, shall be restored to the total number of shares of Stock available for issuance pursuant to Awards. 5. Administration. (a) General. The Plan shall be administered by the Board or, to the extent determined by the Board, by the Committee, which shall have full and exclusive power to (i) authorize and grant Awards to persons eligible to receive Awards under the Plan; (ii) establish the terms, conditions and limitations of each Award or class of Awards, including terms, conditions and limitations governing the extent (if any) to which the Award may be assigned or transferred provided that, awards shall not be assignable or transferable to any person who is not at the time of transfer a member of the Participant's immediate family or to any entity that is not established for the benefit of, or wholly-owned by, the Participant or a member or members of the Participant's immediate family; (iii) construe and interpret the Plan and all Award Agreements; (iv) grant waivers of Plan restrictions; (v) adopt and amend such rules, procedures, regulations and guidelines for carrying out the Plan as it may deem necessary or desirable; and (vi) take any other action necessary for the proper operation and administration of the Plan, all of which powers shall be exercised in a manner consistent with the objectives, and in accordance with the terms and conditions, of the Plan. The powers of the Board or the Committee, as applicable, shall include, but shall not be limited to, the authority to (A) adopt such subplans as may be necessary or appropriate (1) to provide for the authorization and granting of Awards to promote specific goals or for the benefit of specific classes of Participants, (2) to provide for grants of Awards by means of formulae, standardized criteria or otherwise, or (3) for any other purposes as are consistent with the objectives of the Plan, and to segregate shares of Stock available for issuance under the Plan generally as being available specifically for the purposes of one or more subplans, and (B) subject to Section 11 hereof, adopt modifications, amendments, rules, procedures, regulations, subplans and the like as may be necessary or appropriate (1) to comply with provisions of the laws of other countries in which the Company may operate in order to assure the effectiveness of Awards granted under the Plan and to enable Participants employed in such other countries to receive advantages and benefits under the Plan and such laws, (2) to effect the continuation, acceleration or modification of Awards under certain circumstances, including events which might constitute a Change in Control (as set forth in Section 7 hereof) of Lancit, or (3) for any other purposes as are consistent with the objectives of the Plan. All such modifications, amendments, rules, procedures, regulations and subplans shall be deemed to be a part of the Plan as if stated herein. (b) Committee Actions. All actions of the Committee with respect to the Plan shall require the vote of a majority of its members or, if there are only two members, by the vote of both. Any action of the Committee may be taken by a written instrument signed by a majority (or both members) of the Committee, and any action so taken shall be as effective as if it had been taken by a vote at a meeting. All determinations and acts of the Committee as to any matters concerning the Plan, including interpretations or constructions of the Plan and any Award Agreement, shall be conclusive and binding on all Participants and on any parties validly claiming through any Participants. 6. Delegation of Authority. The Board or the Committee may delegate to the Chief Executive Officer of Lancit and to other executive officers of the Company certain of its admini strative duties under the Plan, pursuant to such conditions or limitations as the Board or the Commit tee may establish, except that neither the Board nor the Committee may delegate its authority with respect to (a) the selection of eligible persons as Participants in the Plan, (b) the granting or timing of Awards, (c) establishing the amount, terms and conditions of any such Award, (d) interpreting the Plan, any subplan or any Award Agreement or (e) amending or otherwise modifying the terms or provisions of the Plan, any subplan or any Award Agreement. 7. Awards. Subject to Section 4 and Section 19, the Board or the Committee shall determine the types and timing of Awards to be made to each Participant and shall set forth in the related Award Agreement the terms, conditions and limitations applicable to each Award. Awards may include, but are not limited to, those listed below in this Section 7. Awards may be granted singly, in combination or in tandem, or in substitution for Awards previously granted under the Plan. Awards may also be made in combination or in tandem with, in substitution for, or as alternatives to, grants or rights under any other benefit plan of the Company, including any such plan of any entity acquired by, or merged with or into, the Company. Any such Awards made in substitution for, or as alternatives to, grants or rights under a benefit plan of an entity acquired by, or merged with or into, the Company in order to give effect to the transaction shall be deemed to be issued in accordance with the terms and conditions of the Plan. Awards shall be effected through Award Agreements executed by the Company in such forms as are approved by the Board or the Committee from time to time. All or part of any Award may be subject to conditions established by the Board or the Committee and set forth in the Award Agreement, which conditions may include, without limitation, achievement of specific business objectives, increases in specified indices, attainment of growth rates and other measurements of Company performance. The Board or the Committee may determine to make any or all of the following Awards: (a) Stock Options. A grant of a right to purchase a specified number of shares of Stock at an exercise price not less than 100% of the Fair Market Value of the Stock on the date of grant, during a specified period, all as determined by the Board or the Committee. Without limitation, a stock option may be in the form of (i) an incentive stock option which, in addition to being subject to such terms, conditions and limitations as are established by the Board or the Committee, complies with Section 422 of the Code or (ii) a non-qualified stock option subject to such terms, conditions and limitations as are established by the Board or the Committee. (b) Stock Appreciation Rights. A right to receive a payment, in cash or Stock, equal to the excess of the Fair Market Value (or other specified valuation) of a specified number of shares of Stock on the date the stock appreciation right ("SAR") is exercised over the Fair Market Value (or other specified valuation) on the date of grant of the SAR, except that if an SAR is granted in tandem with a stock option, valuations on the grant and exercise dates shall be no less than as determined on the basis of Fair Market Value. The eventual amount, vesting or issuance of an SAR may be subject to future service, performance standards and such other restrictions and conditions as may be established by the Board or the Committee. (c) Stock Awards. An Award made in Stock or denominated in units of Stock. The eventual amount, vesting or issuance of a Stock Award may be subject to future service, performance standards and such other restrictions and conditions as may be established by the Board or the Committee. Stock Awards may be based on Fair Market Value or another specified valuation. (d) Cash Awards. An Award made or denominated in cash. The eventual amount of a cash Award may be subject to future service, performance standards and such other restrictions and conditions as may be established by the Board or the Committee. Dividend equivalency rights, on a current or deferred basis, may be extended to and be made part of any Award denominated in whole or in part in Stock or units of Stock, subject to such terms, conditions and restrictions as the Board or the Committee may establish. Notwithstanding the provisions of the paragraphs of this Section 7, Awards may be subject to acceleration of exercisability or vesting in the event of a Change in Control of Lancit (i) as set forth in agreements between Lancit and certain of its officers, directors and key employees which provide for certain protections and benefits in the event of a change in control (as defined in such agreements) or (ii) as may otherwise be determined by the Board or the Committee under and in accordance with the terms and conditions of the Plan. "Change in Control" for purposes of the Plan shall mean a change in control of Lancit under such circumstances as shall be specified by (x) the Board or the Committee or (y) where applicable to any Awards granted under the Plan by such agreements between Lancit and a Participant as (1) may have been entered into prior to the effective date of the Plan or (2) shall be entered into after the effective date of the Plan with, to the extent such an agreement is applicable to an Award, the approval of the Board or the Committee. A "Change in Control" may, without limitation, be deemed to have occurred if (A) any "person" or "group" of persons (as the terms "person" and "group" are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) is or becomes the beneficial owner, directly or indirectly, of securities of Lancit representing 50.1% or more of the combined voting power of the then outstanding securities of Lancit, or (B) a change of more than 25% in the composition of the Board occurs within a two-year period, unless such change in composition was approved in advance by at least two-thirds of the previous directors. 8. Payment under Awards. Payment by the Company pursuant to Awards may be made in the form of cash, Stock or combinations thereof and may be subject to such restrictions as the Board or the Committee determines, including, in the case of Stock, restrictions on transfer and forfeiture provisions. Stock subject to transfer restrictions or forfeiture provisions is referred to herein as "Restricted Stock". The Board or the Committee may provide for payments to be deferred, such future payments to be made in installments or by lump-sum payment. The Board or the Committee may permit selected Participants to elect to defer payments of some or all types of Awards in accordance with procedures established by the Board or the Committee to assure that such deferrals comply with applicable requirements of the Code. The Board or the Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and of dividend equivalencies on deferred payments to be made in Stock or units of Stock. At the discretion of the Board or the Committee, a Participant may be offered an election to substitute an Award for another Award or Awards, or for awards made under any other benefit plan of the Company, of the same or different type. 9. Stock Option Exercise or Conversion. The price at which shares of Stock may be purchased upon exercise of a stock option shall be paid in full at the time of the exercise, in cash or, if permitted by the Board or the Committee, by (a) tendering Stock or surrendering such option or another Award, including Restricted Stock, or an option or other award granted under another benefit plan of the Company, in each case valued at, or on the basis of, Fair Market Value on the date of exercise, (b) delivery of a promissory note issued by a Participant to the Company in a form determined by the Board or the Committee, or (c) any other means acceptable to the Board or the Committee. The Board or the Committee shall determine acceptable methods for tendering Stock or surrendering options or other Awards or grants and may impose such conditions on the use of Stock or other Awards or grants to exercise a stock option as it deems appropriate. If shares of Restricted Stock are tendered as consideration for the exercise of a stock option, the Board or the Committee may require that the number of shares issued upon exercise of the stock option equal to the number of shares of Restricted Stock used as consideration therefor be subject to the same restrictions as the Restricted Stock so tendered and any other restrictions as may be imposed by the Board or the Committee. The Board or the Committee may also permit Participants to exercise stock options and simultaneously sell some or all of the shares of Stock so acquired pursuant to a brokerage or similar arrangement which provides for the payment of the exercise price substantially concurrently with the delivery of such shares. 10. Tax Withholding. Unless otherwise expressly provided under the terms of any Award Agreement, the Company shall have the right to deduct applicable taxes from any Award payment or shares of Stock receivable under an Award and to withhold an appropriate number of shares of Stock for payment of taxes required by law or to take such other action as may be neces sary in the opinion of the Company to satisfy all tax withholding obligations. In addition, the Board or the Committee may permit Participants to elect to (a) have the Company deduct applicable taxes resulting from any Award payment to, or exercise of an Award by, such Participant by withholding an appropriate number of shares of Stock for payment of tax obligations or (b) tender to the Company for the purpose of satisfying tax payment obligations other Stock held by the Participant. If the Company withholds shares of Stock to satisfy tax payment obligations, the value of such Stock in general shall be its Fair Market Value on the date of the Award payment or the date of exercise of an Award, as the case may be. If a Participant tenders shares of Stock pursuant to clause (b) above to satisfy tax payment obligations, the value of such Stock shall be the Fair Market Value on the date the Participant tenders such Stock to the Company. 11. Amendment, Modification, Suspension or Termination of the Plan. The Board may amend, modify, suspend or terminate the Plan, or adopt subplans under the Plan, (a) for the purpose of meeting or addressing any changes in any applicable tax, securities or other laws, rules or regulations or (b) for any other purpose permitted by law. Except as otherwise required by applicable law, no amendment to this Plan or any subplan established hereunder will require stockholder approval; provided, however, that the Plan may not be amended in a manner that would alter, impair, amend, modify, suspend or terminate any rights of a Participant or obligation of the Company under any Awards theretofore granted, in any manner adverse to any such affected Participant, without the consent of such affected Participant. 12. Termination of Employment. Except as otherwise set forth in an applicable Award Agreement or determined by the Board or the Committee, or as otherwise provided in para graph (a) or (b) of this Section 12, if a Participant's employment or association with the Company terminates, all unexercised, deferred and unpaid Awards (or portions of Awards) shall be canceled immediately. (a) Retirement, Resignation or Other Termination. If a Participant's employment or association with the Company terminates by reason of the Participant's retirement or resignation, or for any other reason (other than the Participant's death or disability), the Board or the Committee may, under circumstances in which it deems an exception from the provisions of the first sentence of this Section 12 to be appropriate to carry out the objectives of the Plan and to be consistent with the best interests of the Company, permit Awards to continue in effect and be exercisable or payable beyond the date of such termination, up until the expiration date specified in the applicable Award Agreement and otherwise in accordance with the terms of the applicable Award Agreement, and may accelerate the exercisability or vesting of any Award, in either case, in whole or in part. (b) Death or Disability. (i) In the event of a Participant's death, the Participant's estate or beneficiaries shall have a period, not extending beyond the expiration date specified in the applicable Award Agreement (except as otherwise provided in such Award Agreement), within which to exercise any outstanding Award held by the Participant, as may be specified in the Award Agreement or as may otherwise be determined by the Board or the Committee. All rights in respect of any such outstanding Awards shall pass in the following order: (A) to beneficiaries so designated in writing by the Participant; or if none, then (B) to the legal repre sentative of the Participant; or if none, then (C) to the persons entitled thereto as determined by a court of competent jurisdiction. Awards so passing shall be exercised or paid at such times and in such manner as if the Participant were living, except as otherwise provided in the applicable Award Agreement or as determined by the Board or the Committee. (ii) If a Participant ceases to be employed by or associated with the Company because the Participant is deemed by the Company to be disabled, outstanding Awards held by the Participant may be paid to or exercised by the Participant, if legally competent, or by a committee or other legally designated guardian or representative if the Participant is legally incompetent, for a period, not extending beyond the expiration date specified in the applicable Award Agreement (except as otherwise provided in such Award Agreement), following the termination of his employment or association with the Company, as may be specified in the Award Agreement or as may otherwise be determined by the Board or the Committee. (iii)After the death or disability of a Participant, the Board or the Committee may at any time (A) terminate restrictions with respect to Awards held by the Participant, (B) accelerate the vesting or exercisability of any or all installments and rights of the Participant in respect of Awards held by the Participant and (C) instruct the Company to pay the total of any accelerated payments under the Awards in a lump sum to the Participant or to the Participant's estate, beneficiaries or representatives, notwithstanding that, in the absence of such termination of restrictions or acceleration of payments, any or all of the payments due under the Awards might ultimately have become payable to other beneficiaries. (iv) In the event of uncertainty as to the interpretation of, or controversies concerning, paragraph (b) of this Section 12, the Board or the Committee's determinations shall be binding and conclusive on all Participants and any parties validly claiming through them. 13. Nonassignability. (a) Except as provided for in paragraphs (a) and (b) of Section 12 hereof and paragraph (b) of this Section 13, and except as may otherwise be determined by the Board or the Committee (subject to paragraph (a)(ii) of Section 5 hereof and set forth in the applicable Award Agreement, no Award or any other benefit under the Plan, or any right with respect thereto, shall be assignable or transferable, or payable to or exercisable by, anyone other than the Participant to whom it is granted. (b) If a Participant's employment or association with the Company terminates in order for such Participant to assume a position with a governmental, charitable or educational agency or institution, and the Participant retains Awards pursuant to paragraph (a) of Section 12 hereof, the Board or the Committee, in its discretion and to the extent permitted by law, may authorize a third party (including, without limitation, the trustee of a "blind" trust), acceptable to the applicable authori ties, the Participant and the Board or the Committee, to act on behalf of the Participant with respect to such Awards. 14. Adjustments. In the event of any change in the outstanding Stock by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger or similar event, the Board or the Committee shall adjust proportionally (a) the number of shares of Stock (i) reserved under the Plan, (ii) available for options or other Awards and available for issuance pursuant to options, or upon which SARs may be based, for individual Participants and (iii) covered by outstanding Awards denominated in Stock or units of Stock; (b) the prices related to outstanding Awards; and (c) the appropriate Fair Market Value and other price determinations for such Awards. In the event of any other change affecting the Stock or any distribution (other than normal cash dividends) to holders of Stock, such adjustments as may be deemed equitable by the Board or the Committee, including adjustments to avoid fractional shares, shall be made to give proper effect to such event. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board or the Committee shall be authorized to issue or assume stock options or other awards, whether or not in a transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options or Awards for previously issued options or awards or an assumption of previously issued stock options or awards. 15. Notice. Any written notice to Lancit required by any of the provisions of the Plan shall be addressed to the Board, c/o the Secretary of Lancit, and shall become effective when received by the Secretary. 16. Unfunded Plan. Insofar as the Plan provides for Awards of cash or Stock, the Plan shall be unfunded unless and until the Board or the Committee otherwise determines. Although bookkeeping accounts may be established with respect to Participants who are entitled to cash, Stock or rights thereto under the Plan, any such accounts shall be used merely as a bookkeeping convenience. Unless the Board otherwise determines, (a) the Company shall not be required to segregate any assets that may at any time be represented by cash, Stock or rights thereto, nor shall the Plan be construed as providing for such segregation, nor shall the Company, the Board or the Committee be deemed to be a trustee of any cash, Stock or rights thereto to be granted under the Plan; (b) any liability of the Company to any Participant with respect to a grant of cash, Stock or rights thereto under the Plan shall be based solely upon any contractual obligations that may be created by the Plan and an Award Agreement; (c) no such obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any property of the Company; and (d) neither the Company, the Board nor the Committee shall be required to give any security or bond for the performance of any obligation that may be created by or pursuant to the Plan. 17. Payments to Trust. Notwithstanding the provisions of Section 16 hereof, the Board or the Committee may cause to be established one or more trust agreements pursuant to which the Board or the Committee may make payments of cash, or deposit shares of Stock, due or to become due under the Plan to Participants. 18. No Right to Employment. Neither the adoption of the Plan nor the granting of any Award shall confer on any Participant any right to continued employment or association with the Company or in any way interfere with the Company's right to terminate the employment or association of any Participant at any time, with or without cause, and without liability therefor. Awards, payments and other benefits received by a Participant under the Plan shall not be deemed a part of the Participant's regular, recurring compensation for any purpose, including, without limitation, for the purposes of any termination indemnity or severance pay law of any jurisdiction. 19. Governing Law. The Plan and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by the Code or the securities laws of the United States, shall be governed by and construed under the laws of the state of incorporation of Lancit (the "Governing Law"). No Award shall be made under the Plan which is other than in conformity with the Governing Law and, in the event of a conflict between any for of Award Agreement and any provision of the Governing Law, the Award Agreement shall be deemed modified to the extent necessary to comply with the Governing Law. 20. Effective and Termination Dates. This Plan, and any amendment hereof requiring stockholder approval, shall become effective as of the date of its approval by the stockhold ers of Lancit by the affirmative vote of the number of shares required by the Governing Law at a stockholders' meeting at which the approval of the Plan (or any such amendment) is considered. The Plan shall terminate on December 31, 2007, subject to earlier termination by the Board pursuant to Section 11 hereof, except as to Awards then outstanding. EX-10 10 FIFTH AMENDMENT FOR PREMISES AT 601 W. 50TH ST. Exhibit 10.16 THIRD AMENDMENT OF LEASE THIS THIRD AMENDMENT OF LEASE (this "Amendment") made as of this _____ day of May, 1997, by and between SAAR CO., L.L.C., a New York limited liability company, having a business address at 601 West 50th Street, New York, New York 10019 ("Landlord") and LANCIT MEDIA ENTERTAINMENT, LTD., a New York corporation, having a business address at 601 West 50th Street, New York, New York 10019 ("Tenant"). WITNESSETH: WHEREAS: a. West 50th Street Associates, Landlord's predecessor-in-interest, and Tenant have heretofore entered into a certain Standard Form of Office Lease dated as of July 24, 1985 (the "Standard Form of Office Lease"), pursuant to which Tenant leased approximately 6,000 rentable square feet (the "Premises") consisting of a portion of the sixth (6th) floor of that certain building known as 601 West 50th Street, New York, New York (the "Building"), upon and subject to all of the terms, covenants and conditions as are more particularly described in the Standard Form of Office Lease. b. The Mutual Life Insurance Company of New York, Landlord's predecessor-in-interest, and Tenant thereafter entered into a First Amendment of Lease dated as of March 29, 1995 (the "First Amendment of Lease"). c. Landlord and Tenant thereafter entered into a Second Amendment of Lease dated as of May 29, 1996, to amend the Standard Form of Office Lease in certain respects as stated therein (the Standard Form of Office Lease, together with and as amended by the First Amendment of Lease and the Second Amendment of Lease, is hereinafter collectively referred to as the "Lease") and pursuant to which Second Amendment of Lease, the expiration date of the Lease was extended to September 30, 1997. d. The Lease by its terms expires on September 30, 1997 (the "Second Modified Expiration Date"). e. The parties hereto desire to provide for, among other things, to extend the term of the Lease to September 30, 1998, at a modified rental as fully set forth herein. NOW THEREFORE, in consideration of the Premises and the mutual covenants hereinafter contained, the parties hereto agree as follows: 1 . All capitalized terms used herein which are not otherwise defined herein shall have the respective meanings ascribed to them in the Lease. 2. The effective date (the "Third Amendment Effective Date") of this Amendment shall be the date upon which Landlord executes this Amendment and delivers same to Tenant. 3. The expiration date of the Lease shall be extended from the Second Modified Expiration Date to September 30, 1998 (the "Third Modified Expiration Date"). 4. From and after October 1, 1997, monthly installments of Base Rental shall be $6,375.00. 5. Except as set forth herein and to the contrary, all provisions of the Lease remain in full force and effect. Notwithstanding the above, however, the following provisions of the Lease shall not be applicable to the Premises commencing as of October 1, 1997: Article 37, Electricity (with the exception of Subsections 37.02 and 37.03); Article 38, Increase In Real Estate Taxes; and Article 40, Fuel Expenses; it being understood and agreed that Tenant's obligations to make any escalation payments with respect to the period from and after October 1, 1997 shall cease. 6. Landlord and Tenant each represents and warrants to the other that it has not dealt with any broker other than Newmark & Company Real Estate, Inc. and Harper-Lawrence Inc. (collectively, the "Broker") in connection with the negotiation or execution of this Amendment. Each party agrees to indemnify and hold the other harmless from and against any and all damage, loss, cost or expense, including, without limitation, all reasonable attorneys' fees and disbursements incurred by reason of any claim of or liability to any other broker or other person for commissions or other compensation or charges arising out of the dealings with the indemnifying party in the negotiation, execution and delivery of this Amendment and such obligations shall survive the expiration or sooner termination of the Lease, as amended hereby. Landlord shall pay any commission due Broker pursuant to separate agreement with Newmark & Company Real Estate, Inc. 7. Except as otherwise provided in the Lease, as amended hereby, the covenants, agreements, terms and conditions contained in this Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and respective assigns. 8. This Amendment may not be changed orally, but only by an agreement in writing executed by Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. TENANT: LANDLORD: LANCIT MEDIA ENTERTAINMENT, LTD. SAAR CO., L.L.C. By:/s/LAURENCE A. LANCIT By:/s/KENNETH ASHENDORF Name:________________________ Name:______________________ Title:_______________________ Title:_____________________ Date:________________________ Date:______________________ FIFTH AMENDMENT OF LEASE THIS FIFTH AMENDMENT OF LEASE (this "Amendment") made as of this _____ day of May, 1997, by and between SAAR CO., L.L.C., a New York limited liability company, having a business address at 601 West 50th Street, New York, New York 10019 ("Landlord") and LANCIT MEDIA ENTERTAINMENT, LTD., a New York corporation, having a business address at 601 West 50th Street, New York, New York 10019 ("Tenant"). WITNESSETH: WHEREAS: a. West 50th Street Associates, Landlord's predecessor-in-interest, and Tenant have heretofore entered into a certain Standard Form of Office Lease dated as of May 7, 1987 (the "Standard Form of Office Lease"), pursuant to which Tenant leased approximately 6,000 rentable square feet (the "Initial Premises") consisting of a portion of the sixth (6th) floor of that certain building known as 601 West 50th Street, New York, New York (the "Building"), upon and subject to all of the terms, covenants and conditions as are more particularly described in the Standard Form of Office Lease. b. The Mutual Life Insurance Company of New York, Landlord's predecessor-in-interest ("MONY"), and Tenant thereafter entered into a First Amendment of Lease dated as of December 16, 1993 (the "First Amendment of Lease") to amend the Standard Form of Office Lease in certain respects as stated therein, and pursuant to which First Amendment of Lease, Tenant leased approximately 1,478 additional rentable square feet (the "First Additional Premises") consisting of a portion of the sixth (6th) floor of the Building, upon and subject to all of the terms, covenants and conditions as are more particularly described in the First Amendment of Lease. c. MONY and Tenant thereafter entered into a Second Amendment of Lease dated as of April 7, 1994 (the "Second Amendment of Lease") to further amend the Standard Form of Office Lease as previously amended by the First Amendment of Lease, pursuant to which Second Amendment of Lease, Tenant leased approximately 2,421 additional rentable square feet (the "Second Additional Premises") consisting of a portion of the sixth (6th) floor of the Building, upon and subject to all of the terms, covenants and conditions as are more particularly described in the Second Amendment of Lease. d. MONY and Tenant thereafter entered into a Third Amendment of Lease dated as of March 29, 1995 (the "Third Amendment of Lease") to further amend the Standard Form of Office Lease as previously amended by the First Amendment of Lease and the Second Amendment of Lease, pursuant to which Third Amendment of Lease, Tenant leased approximately 1,601 additional rentable square feet (the "Third Additional Premises") consisting of a portion of the sixth (6th) floor of the Building, upon and subject to all of the terms, covenants and conditions as are more particularly described in the Third Amendment of Lease, and the expiration date of the Lease was extended to September 30, 1996. e. Landlord and Tenant thereafter entered into a Fourth Amendment of Lease dated as of May 29, 1996 (the "Fourth Amendment to Lease"), pursuant to which Fourth Amendment of Lease, the expiration date of the Lease was extended to September 30, 1997 (the Standard Form of Office Lease, together with and as amended by the First Amendment of Lease, the Second Amendment of Lease, the Third Amendment of Lease and the Fourth Amendment of Lease, is hereinafter collectively referred to as the "Lease"). f. The Lease by its terms expires on September 30, 1997 (the "Second Modified Expiration Date"). g. The parties hereto desire to provide for, among other things, to extend the term of the Lease to September 30, 1998, at a modified rental as fully set forth herein. NOW THEREFORE, in consideration of the Premises and the mutual covenants hereinafter contained, the parties hereto agree as follows: 1 . All capitalized terms used herein which are not otherwise defined herein shall have the respective meanings ascribed to them in the Lease. 2. The effective date (the "Fifth Amendment Effective Date") of this Amendment shall be the date upon which Landlord executes this Amendment and delivers the same to Tenant. 3 . The expiration date of the Lease shall be extended from the Second Modified Expiration Date to September 30, 1998 (the "Third Modified Expiration Date"). 4.___From and after October 1, 1997, monthly installments of Base Rental shall be payable as follows: Initial Premises - $6,375.00 First Additional Premises - $1,570.38 Second Additional Premises - $2,572.31 Third Additional Premises - $1,701.06 Tenant shall receive separate billing with respect to the Initial Premises, First Additional Premises, Second Additional Premises and Third Additional Premises. 5. Except as set forth herein and to the contrary, all provisions of the Lease remain in full force and effect. Notwithstanding the above, however, the following provisions of the Lease shall not be applicable to the Initial Premises, First Additional Premises, Second Additional Premises and Third Additional Premises, commencing as of October 1, 1997: Article 37, Electricity (with the exception of Subsections 37.02 and 37.03); Article 38, Increase In Real Estate Taxes; Article 39, Escalation--Other Building Expenses; Article 40, Fuel Expenses; Article 50, Air Conditioning and Ventilation (with the exception of Subsection of 50.02); and Article 63, Electricity Services (Rent Inclusion); it being understood that Tenant's obligation to make any escalation payments with respect to the period from and after October 1, 1997 shall cease. 6. Landlord and Tenant each represents and warrants to the other that it has not dealt with any broker other than Newmark & Company Real Estate, Inc. and Harper-Lawrence Inc. (collectively, the "Broker") in connection with the negotiation or execution of this Amendment. Each party agrees to indemnify and hold the other harmless from and against any and all damage, loss, cost or expense, including, without limitation, all reasonable attorneys' fees and disbursements incurred by reason of any claim of or liability to any other broker or other person for commissions or other compensation or charges arising out of the dealings with the indemnifying party in the negotiation, execution and delivery of this Amendment and such obligations shall survive the expiration or sooner termination of the Lease, as amended hereby. Landlord shall pay any commission due Broker pursuant to separate agreement with Newmark & Company Real Estate, Inc. 7. Except as otherwise provided in the Lease, as amended hereby, the covenants, agreements, terms and conditions contained in this Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and respective assigns. 8. This Amendment may not be changed orally, but only by an agreement in writing executed by Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. TENANT: LANDLORD: LANCIT MEDIA ENTERTAINMENT, LTD. SAAR CO., L.L.C. By:/s/LAURENCE A. LANCIT By:/s/KENNETH ASHENDORF Name:________________________ Name:_____________________ Title:_______________________ Title:____________________ Date:________________________ Date:_____________________ EX-10 11 AGREEMENT WITH ARLENE SCANLAN AGREEMENT, entered into as of October 10, 1997 (the "Agreement"), among Arlene Scanlan ("Scanlan"), Lancit Media Entertainment, Ltd. ("Lancit") and The Strategy Licensing Company, Inc. ("Strategy"). WHEREAS, pursuant to a Stock Exchange Agreement between Lancit and Scanlan, dated October 1, 1993, Lancit acquired 85% of the outstanding shares of capital stock of Strategy from Scanlan and Scanlan retained the remaining 15% of the stock; WHEREAS, in connection with the sale of the stock to Lancit, Scanlan and Lancit entered into an Employment Agreement pursuant to which Scanlan acted as President of Strategy and, among other things, to a provision restricting her ability to compete with Strategy after the termination of her employment; WHEREAS, the employment period under the Employment Agreement expired and Scanlan continued her employment with Strategy after the expiration; and WHEREAS, Lancit, Strategy and Scanlan now desire to terminate Scanlan's employment with Strategy and Lancit desires to acquire the remaining 15% of the Strategy stock. NOW THEREFORE, in consideration of the mutual covenants and representations herein set forth the parties agree as follows: 1. Definitions. "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the Person specified. For purposes of this definition, the term "control" (including the terms "controlling," "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to (i) vote 50% or more of the Voting Stock of such Person or (ii) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Claims" means any and all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, notes, bills, specialities, covenants, contracts, controversies, variances, trespasses, damages, judgments, executions, claims (including without limitation, claims for indemnity, contribution, costs or attorneys's fees), demands and any and all proceedings whatsoever, whether in law, admiralty, equity or otherwise. "Employment Agreement" means the Employment Agreement between Strategy and Scanlan, dated July 1, 1993. "Person" means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, limited liability company, trust, estate, unincorporated organization, governmental or regulatory body or other entity. "Shareholders Agreement" means the Shareholders Agreement among Strategy, Lancit and Scanlan, dated December 14, 1993. "Strategy Related Entities" means Strategy and its Affiliates (including without limitation Lancit), Affiliates hereafter created, predecessors, representatives, heirs, successors and assigns, and the officers, directors, employees, shareholders, partners and agents, past, present and future, and the heirs, executors, administrators, insurers, legal representatives, predecessors, successors and assigns of each of the foregoing. 2. Stock Transfer. In consideration for all of the covenants and agreements contained herein, and in complete redemption of all her right, title and interest to all of the shares of capital stock of Strategy held by Scanlan (the "Shares"), concurrently with the execution of this Agreement, Scanlan shall transfer to Lancit, all of the Shares by executing a stock power in the form of Exhibit A hereto. 3. Payment; Resignation. 3.1 Resignation. Effective September 23, 1997 (the "Termination Date"), Scanlan's employment is terminated and she is no longer President of Strategy or a member of the Board of Directors of Strategy, and she no longer holds any other positions with Strategy and/or Lancit and any of their respective Affiliates. Scanlan has no right to reinstatement as an employee of Strategy and shall not seek reemployment, or employment by Lancit or any of its Affiliates. 3.2 Severance Payment. Strategy shall pay Scanlan $30,788.43 (the "Severance Payment"). Except for the Payment, Scanlan has no right to receive any money from Strategy or any of the Strategy Related Entities. 3.3 Termination of Shareholders Agreement. Effective as of the date hereof the parties agree that the Shareholders Agreement shall be deemed terminated. 3.4 Exercise of Options. As of the date hereof, Scanlan holds 15,000 options to purchase Lancit common stock. Notwithstanding anything herein to the contrary, Scanlan shall have 3 months from the Termination Date to exercise such options. 4. Releases and Exceptions to the Noncompete. 4.1 Exception to the Noncompete. Effective as of the date hereof, Strategy hereby waives its rights under the Covenant Not to Compete (the "Noncompete") contained in Section 7 of the Employment Agreement with respect to the properties and/or entities listed on Schedule A hereto. It is expressly agreed by the parties hereto that Scanlan shall continue to be bound by the terms of the Noncompete in all other respects, as well as the provisions of Sections 8 and 9 of the Employment Agreement. Scanlan acknowledges that except as provided on Schedule A hereto, the obligations created by the Noncompete expire on September 23, 1999, and that until such time she is bound by the terms thereof with the exception of the provisions of the first sentence of this Section 4.1. 4.2 Scanlan Release of the Strategy Related Entities. Effective as of the date hereof, except for any Claims arising out of the obligations under this Agreement, Scanlan hereby releases and forever discharges the Strategy Related Entities from any and all Claims against any of the Strategy Related Entities, whether or not well-founded in fact or law, and whether or not known to Scanlan, which Scanlan ever had, now has, or might have in the future, upon or by reason of any matter, cause or thing, or any action or inaction, whatsoever from the beginning of the world to and including the date of this Agreement, including, without limitation, all Claims relating to her employment, the Employment Agreement or the Shareholders Agreement and all Claims which could arise under Title VII of the Civil Rights Act of 1964, as amended, the New York Human Rights Law, the Age Discrimination in Employment Act of 1967, and any and all other laws or obligations regulating the employment relationship between the parties. 4.3 The Strategy Related Entities Release of Scanlan. Scanlan represents that she is not aware of any Claims that the Strategy Related Entities may have against her as of the date of this Agreement and that she is not aware that she has acted or failed to act in a manner giving rise to any such Claims. Based upon and subject to such representations, except for any rights they may have under this Agreement (including without limitation the provisions of the Employment Agreement referred to in Section 4.1), the Strategy Related Entities forever release and discharge Scanlan from any and all Claims against Scanlan, her heirs, successors and assigns, whether or not well-founded in fact or law, which they ever had, now have, or may have against Scanlan in the future upon or by reason of any matter, cause or thing, or any action or inaction whatsoever from the beginning of the world to and including the date of this Agreement, except for any Claims (i) caused by Scanlan's gross neglect or intentional misconduct, and (ii) arising out of the obligations created by the Agreement. 5. Settlement a Compromise; Not an Admission. The parties hereto, and each of them, understand and agree that the settlement effectuated by this Agreement is a compromise of disputed Claims, and is not intended nor is it to be construed as an admission of liability by any party hereto. 6. Irreparable Harm. Scanlan acknowledges that a breach of Sections 4.1 and 8 hereof could cause irreparable injury and harm to Strategy and Lancit and would cause damage for which a remedy at law would be inadequate. Therefore, the parties agree that Strategy and Lancit will be entitled, in addition to any other remedies that it may have, to a temporary restraining order, preliminary injunction, and/or permanent injunction or other equitable relief in any court of competent jurisdiction to prevent or otherwise to restrain a breach, or to compel specific performance, of any or all of Sections 4.1 and 8 of this Agreement. Nothing in this Section 6 shall be construed to prohibit or restrain Strategy and Lancit from pursuing any other remedies or rights available to Strategy and Lancit for any breach of this Agreement, including the remedy of damages and right of set-off. 7. Representations and Warranties. 7.1 Representations and Warranties of Scanlan. Scanlan makes the following representations and warranties to the Strategy Related Entities: 7.1.1 No Assignment of Claims. Scanlan has not assigned or otherwise transferred any of the Claims being released herein. 7.1.2 Possession of Documents. Scanlan does not have in her possession, custody or control, any books, records, videotapes, memoranda, papers, reports, correspondence, data, lists or documents of any description (whether in hard copy or on computer disks, computer hard drives or in other embodiments) which belong to Strategy or Lancit, or contain information relating to Strategy or Lancit. 7.1.3 Authority. Scanlan has the authority to enter into this Agreement and to perform the transactions contemplated hereby. This Agreement when executed and delivered will constitute the valid and binding obligation of Scanlan, enforceable in accordance with its terms. 7.1.4 No Representations by Strategy. Scanlan acknowledges that none of the Strategy Related Entities has made any representations or warranties in connection with this Agreement or the transactions contemplated herein except those expressly set forth in Section 7.2. 7.1.5 Knowledge; No Reliance. Scanlan is a sophisticated investor, familiar with the licensing industry generally and the business of Strategy in particular, and is being advised by, or has access to advice from, an experienced financial advisor. Scanlan has been a shareholder and the President of Strategy since its inception. Scanlan is aware of and has made full investigation of the operations, condition and prospects of Strategy and discussed and is familiar with the business, management, financial affairs and prospects of Strategy. Scanlan has, independently (or together with her financial advisor) and based upon such documents and information as she has available, made her own analysis and decision to enter into this Agreement. In connection with that decision, neither Strategy nor any of the Strategy Related Entities has made (and has no responsibility with respect to), and Scanlan is not relying upon, any representation or warranty, express or implied, or any duty of disclosure by Strategy as to any matter, including without limitation matters relating to the Shares. 7.2 Representations and Warranties of Strategy and Lancit. Each of Strategy and Lancit has the authority to enter into this Agreement and to perform the transactions contemplated hereby. This Agreement when executed and delivered will constitute the valid and binding obligation of each of Strategy and Lancit, enforceable in accordance with its terms. 8. Confidentiality; Nondisparagement. Neither party, nor anyone acting on such party's behalf, shall publish, disseminate or communicate to any person whatsoever, directly or indirectly (except as required by law and to such parties' attorneys, accountants or tax advisors), information concerning this Agreement. Scanlan shall not make or cause to be made, any statement or communicate any information that disparages the reputation of the Strategy Related Entities or any business or property in which such entities have an interest. Strategy and Lancit shall use reasonable efforts to cause their officers, directors, shareholders and employees not to make or cause to be made, any statement or communicate any information that disparages the reputation of Scanlan. 9. Return of Property; Cooperation. 9.1 Return of Property. Strategy shall deliver to Scanlan at the address listed in Section 11, all of the furniture listed on Schedule B hereto. Upon receipt of the furniture listed on Schedule B, Scanlan shall have received from the Strategy Related Entities all of her personal property. 10. Taxes. All payments hereunder are subject to all applicable federal state and local tax, FICA and other withholding requirements. 11. Notices. All notices, requests, demands or other communications required by or otherwise with respect to this Agreement shall be in writing and shall be deemed to have been duly given to any party when delivered personally (by courier service or otherwise), when delivered by facsimile (and receipt thereof has been confirmed by return facsimile), in each case to the applicable addresses set forth below; provided that delivery shall be deemed complete when delivered to the address designated below and shall not require actual receipt by the individual to whom the communication's attention has been marked: If to Scanlan: Arlene Scanlan 15 Summer Hill Road Westport, Connecticut Facsimile No.: (203) 259-4432 with a copy to: Tenzer Greenblatt LLP 405 Lexington Avenue New York, New York 10174 Attn: Michael Mullman, Esq. Facsimile No.: (212) 885-5001 If to Lancit or Strategy, to each at: 601 West 50th Street New York, New York 10019 Attn: Jane M. Abernethy, Esq. Facsimile No.: (212) 977-9164 with a copy to: Friedman Kaplan & Seiler LLP 875 Third Avenue New York, NY 10022 Attn.: Lisa Gersh Hall, Esq. Facsimile No.: (212) 355-6401 12. Arbitration. The parties agree that all disputes arising hereunder shall be settled by arbitration to be held in New York, New York in accordance with the applicable rules of the American Arbitration Association or any successor thereto. The arbitrator may grant injunctions or other relief in such dispute. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Nothing contained herein shall prevent any party from seeking injunctive relief, if necessary from a court of competent jurisdiction. 13. Cooperation between the Parties. At the request of Strategy or Lancit, Scanlan shall provide reasonable cooperation in connection with any matters relating to tax issues of either Strategy or Lancit and will execute all documents necessary to effectuate the terms of this Agreement. 14. New York Law. This Agreement is entered into in the State of New York and shall be interpreted in accordance with the internal laws of the State of New York, without regard to New York's choice-of-law rules. 15. Binding Nature. This Agreement shall inure to the benefit of, and be binding upon, and enforceable against, the successors, heirs, personal representatives and permitted assigns of the parties hereto. 16. Amendments. This Agreement may not be modified, amended or terminated except by a writing signed by the parties against which such modification, amendment or termination is sought to be enforced. 17. Blue Penciling. If any court determines that any portion of this Agreement is unenforceable because of scope or duration, such court shall have the power to reduce the duration or scope of such portion of the Agreement, and, in its reduced form, the Agreement shall then be enforceable. 18. Counterparts. This Agreement may be executed in counterparts, each executed counterpart constituting an original but all together only one agreement among the parties hereto. 19. Delay. No course of dealing and no delay on the part of a party in exercising any right, power or remedy conferred by this Agreement shall operate as a waiver thereof or otherwise prejudice such party's rights, powers or remedies. No single or partial exercise of any rights, powers or remedies shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 20. Assignment. No party may assign or transfer any of its rights or obligations under this Agreement without the express written consent of the others, which consent may be withheld for any reason. However, the Strategy Related Parties may transfer their respective rights and obligations under this Agreement as part of a larger transfer of respective rights and obligations by operation of law to a successor in connection with any merger, reorganization, liquidation or amalgamation involving any of the Strategy Related Entities. 21. Advice of Counsel. In connection with the negotiation and execution of this Agreement (including the ADEA Waiver appended hereto), Scanlan has been advised by Tenzer Greenblatt LLP, counsel of her own choosing. Scanlan has read this Agreement in its entirety, fully understands its terms and is signing it voluntarily of her own free will. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Agreement to be executed and delivered at New York, New York as of the date first written above. THE STRATEGY LICENSING COMPANY, INC. By /s/LAURENCE A. LANCIT LANCIT MEDIA ENTERTAINMENT, LTD. By /s/SUSAN L. SOLOMON /s/ ARLENE SCANLAN Arlene Scanlan Exhibit A STOCK POWER For value received, ARLENE SCANLAN, does hereby sell, assign and transfer unto LANCIT MEDIA ENTERTAINMENT, LTD., fifteen (15) shares of Common Stock of The Strategy Licensing Company, Inc. standing in her name on the books of said corporation, and does hereby irrevocably constitute and appoint JANE M. ABERNETHY attorney to transfer the said stock on the books of said corporation with full power of substitution in the premises. Dated: October 10, 1997 By/s/ ARLENE SCANLAN Arlene Scanlan Schedule A Properties and/or Entities from which Scanlan is released from Non-Compete 1. "America's Dumbest Criminals" 2. "WORLD WILDLIFE FUND," and the marks "WWF" and the Panda design. 3. Except as set forth in item 2 above, all properties owned by World Wildlife Fund, Inc., a Delaware corporation, but such release shall not be effective until after July 31, 1998. 4. "Love Letters" 5. "The American Experience" 6. Except as set forth in item 5 above, all properties owned by WGBH Educational Foundation, a non-profit charitable Massachusetts corporation, but such release shall not be effective until after July 31, 1998. 7. "Sonic the Hedgehog" 8. "Bedtime Buddies" 9. "Class of 2000" and all properties owned by the owner thereof. 10. "Psycho Chihuahua"/Wrench, L.L.C. Schedule B Furniture to be Returned to Scanlan. Two burgundy lamps with shades Four small black chairs Six burgundy chairs One desk/conference room table WAIVER OF CLAIMS UNDER AGE DISCRIMINATION IN EMPLOYMENT ACT (ADEA) This statement is attached to and made a part of the Agreement dated October 10, 1997. By signing this statement, I am waiving any claims that I may now have against the Strategy Related Entities under the Age Discrimination in Employment Act (ADEA). My signature below acknowledges that I have read and fully understand this waiver and the terms of the appended severance proposal (collectively, the "Agreement"), that I have had the opportunity to consult with an attorney regarding the terms of the Agreement, that I have had at least 21 days to consider this waiver, that I am entering into this Agreement freely and without coercion, not in reliance on any representation or promises other than those contained in the Agreement, and that I intend to be bound by the terms of the Agreement. I understand that the benefits provided under the Agreement are conditioned upon this waiver. I agree that I have had seven days to consider the terms of the Agreement and to consider whether to revoke my acceptance of the terms of this Agreement. I understand that I shall be bound by all of the terms of the Agreement if I have not so revoked my acceptance as described in the preceding sentence. ACCEPTED AND AGREED TO: /s/ ARLENE SCANLAN Arlene Scanlan STOCK POWER For value received, ARLENE SCANLAN, does hereby sell, assign and transfer unto LANCIT MEDIA ENTERTAINMENT, LTD., fifteen (15) shares of Common Stock of The Strategy Licensing Company, Inc. standing in her name on the books of said corporation, and does hereby irrevocably constitute and appoint JANE M. ABERNETHY attorney to transfer the said stock on the books of said corporation with full power of substitution in the premises. Dated: October 10, 1997 By /s/ARLENE SCANLAN Arlene Scanlan EX-10 12 DISTRIBUTION AGREEMENT WITH DCI Exhibit 10.20 CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR A PORTION OF THIS DOCUMENT. THE OMITTED PORTION IS INDICATED BY ASTERISKS (*) Discovery Communications Incorporated 641 Lexington Avenue 8th Floor New York, New York 10022-4503 212-751-2120 May 19, 1997 Jane M. Abernethy Lancit Media Entertainment Ltd. 601 West 50th Street, 6th Floor New York, New York 10019 Dear Jane: This letter will confirm the points that have been agreed between Lancit and Discovery Communications, Inc. ("DCI") regarding the Discovery Channel Kids block (the "Block"): 1. Based on Lancit's commitment to provide DCI with a range of programming opportunities suitable for exhibition as part of the Block, DCI shall license and air a minimum of one-sixth of the Block of programming from Lancit. 2. DCI shall order a minimum of thirteen (13) half-hours per year for a minimum of two years from Lancit It is expected that the first series of half-hours will air in calendar 1998 or sooner. 3. DCI's minimum air commitment shall expand proportionately as the Block expands. For example, if DCI expands the Block to six hours of programming, DCI would license and air one hour of Lancit-produced programming. 4. The license fee that DCI shall pay per program for such Lancit programming shall be **************************************************** *******************************************************************************. Please sign in the space below to confirm Lancit's acceptance of these points. I will then ask our Legal Department to prepare a formal agreement incorporating these items. Sincerely, DISCOVERY COMMUNICATIONS, INC. By: /s/ MARJORIE KAPLAN ACKNOWLEDGED AND AGREED: LANCIT MEDIA ENTERTAINMENT, LTD. By: /s/ JANE M. ABERNETHY EX-11 13 COMPUTATION OF EARNINGS PER SHARE Lancit Media Entertainment, Ltd. Exhibit 11 - Computation of Earnings Per Share Fiscal year ended June 30, 1997 1996 1995 ---------- ---------- ---------- Primary Weighted average shares out- standing 6,538,851 6,177,051 6,148,631 Net effect of dilutive stock options - based on the treasury stock method using average market price - - 217,110 ---------- ---------- ---------- Total 6,538,851 6,177,051 6,365,741 ========== ========== ========== Net Income (Loss) $(10,078,908)$(3,700,713)$1,247,499 ========== ========== ========== Per share amount $ (1.54) $ (0.60) $ 0.20 ========== ========== ========== Fully Diluted Weighted average shares out- standing 6,538,851 6,177,051 6,148,631 Net effect of dilutive stock options - based on the treasury stock method using average market price - - 237,428 ---------- ---------- ---------- Total 6,538,851 6,177,051 6,386,059 ========== ========== ========== Net Income (Loss) $(10,078,908)$(3,700,713)$1,247,499 ========== ========== ========== Per share amount $ (1.54) $ (0.60) $ 0.20 ========== ========== ========== EX-21 14 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Wholly-Owned Subsidiaries: The Strategy Licensing Company, Inc., a Connecticut corporation Frame Accurate, Inc., a New York corporation Lancit Copyright Corp., a Delaware corporation Other Subsidiaries: The Puzzle Place Marketing Company, a joint venture, of which 50.1% is owned by The Strategy Licensing Company, Inc. EX-27 15 FDS --
5 0000868796 Lancit Media Entertainment, Ltd. 1 US Dollars 12-MOS Jun-30-1997 Jul-01-1996 Jun-30-1997 1 4,461,627 0 1,909,750 0 0 8,148,618 525,530 0 9,199,313 4,468,143 0 0 0 6,635 4,123,546 9,199,313 0 3,152,057 0 7,756,365 0 0 0 (9,958,104) 19,500 (10,078,908) 0 0 0 (10,078,908) (1.54) (1.54)
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