-----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, WhMNQUuQDMw00+xspf854E8/JwxDClOWjiCNOD6tzE3MxtSniXEE/4TtvV7OO4kC iZ3k6ShZirk1h4mZL2Ex3Q== 0000950170-98-002286.txt : 19981203 0000950170-98-002286.hdr.sgml : 19981203 ACCESSION NUMBER: 0000950170-98-002286 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19981201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIG ENTERTAINMENT INC CENTRAL INDEX KEY: 0000912544 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 650385686 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-68209 FILM NUMBER: 98762503 BUSINESS ADDRESS: STREET 1: 2255 GLADES RD STREET 2: STE 237 W CITY: BOCA RATON STATE: FL ZIP: 33431 BUSINESS PHONE: 4079988000 MAIL ADDRESS: STREET 1: 2255 GLADES RD STREET 2: STE 237 W CITY: BOCA RATON STATE: FL ZIP: 33431 S-3 1 As filed with the Securities and Exchange Commission on December 1, 1998 Registration No. 333-______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------- BIG ENTERTAINMENT, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) FLORIDA 65-0385686 - --------------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 2255 Glades Road, Suite 237 West Mitchell Rubenstein Boca Raton, Florida 33431 Chief Executive Officer (561) 998-8000 Big Entertainment, Inc. - --------------------------------------- 2255 Glades Road, Suite 237 West (Address, including zip code and Boca Raton, Florida 33431 telephone number, including area code, Telephone No. (561) 998-8000 of registrant's principal offices) Facsimile No. (561) 998-2974 --------------------------------------- (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES OF COMMUNICATIONS TO: Dale S. Bergman, P.A. Nina S. Gordon, P.A. Broad and Cassel 201 South Biscayne Boulevard Suite 3000 Miami, Florida 33131 Telephone No. (305) 373-9400 Facsimile No. (305) 373-9443 --------------------------- Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective. --------------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE ==================================================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SHARES AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION TO BE REGISTERED BE REGISTERED PER SHARE(1) PRICE(1) FEE - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 620,384(13) $3.4978 $2,169,979.16 $603.25 $.01 par value(2) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 113,071(13) $4.6266 $523,134.29 $145.43 $.01 par value(3) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 133,333(13) $5.00 $666,665.00 $185.33 $.01 par value(4) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 167,517 $4.35 $728,698.95 $202.58 $.01 par value(5)(6) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 112,345 $5.25625 $590,513.41 $164.16 $.01 par value(7)(6) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 33,833 $5.625 $190,310.63 $52.91 $.01 par value(8)(6) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 22,722 $6.75 $153,373.50 $42.64 $.01 par value(9)(6) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 25,000 $5.175 $129,375.00 $35.97 $.01 par value(10)(6) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 16,667 $6.255 $104,252.09 $28.98 $.01 par value(11)(6) shares - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, 20,000 $7.00 $140,000.00 $38.92 $.01 par value(12) shares =====================================================================================----------------------------------------------- Total Fee: $1,500.17 =============================================== (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (2) Represents shares issuable upon the conversion of 200 outstanding shares of the Company's 7% Series D Convertible Preferred Stock at a maximum conversion price of $3.4978 per share. (3) Represents shares issuable upon the conversion of 50 outstanding shares of the Company's 7% Series D Convertible Preferred Stock at a maximum conversion price of $4.6266 per share. (4) Represents shares issuable upon the conversion of 50 outstanding shares of the Company's 7% Series D-2 Convertible Preferred Stock at a maximum conversion price of $5.00 per share. (5) Represents shares issuable upon the exercise of a warrant issued by the Company having an exercise price of $4.35 per share. (6) Also includes such additional shares as may be issuable as a result of the anti-dilution provisions of said warrant. (7) Represents shares issuable upon the exercise of a warrant issued by the Company having an exercise price of $5.25625 per share. Also includes such additional shares as may be issuable as a result of the anti-dilution provisions of said warrant. (8) Represents shares issuable upon the exercise of a warrant issued by the Company having a maximum exercise price of $5.625 per share. Also includes such additional shares as may be issuable as a result of the anti-dilution provisions of said warrant. (9) Represents shares issuable upon the exercise of a warrant issued by the Company having a maximum exercise price of $6.75 per share. Also includes such additional shares as may be issuable as a result of the anti-dilution provisions of said warrant. (10) Represents shares issuable upon the exercise of a warrant issued by the Company having a maximum exercise price of $5.175 per share. Also includes such additional shares as may be issuable as a result of the anti-dilution provisions of said warrant. (11) Represents shares issuable upon the exercise of a warrant issued by the Company having a maximum exercise price of $6.255 per share. Also includes such additional shares as may be issuable as a result of the anti-dilution provisions of said warrant. (12) Represents shares issuable as dividends to the holder of the Company's 4% $100 Series C Convertible Preferred Stock. (13) In order to provide for (i) fluctuations in the market price of the Common Stock, (ii) provisions for determining the conversion price of the Series D and the Series D-2 Preferred Stock, and (iii) for shares of Common Stock which may be issued in payment of dividends of the Series D and the Series D-2 Preferred Stock, the aggregate number of shares of Common Stock registered hereby exceeds the aggregate number of such shares issuable upon conversion of shares of Series D and the Series D-2 Preferred Stock at the respective conversion prices in effect on the date hereof. See "Description of Securities."
This Registration Statement also includes an indeterminate number of shares of Common Stock that may become issuable to prevent dilution resulting from stock splits, stock dividends and conversion price or exercise price adjustments, which are included pursuant to Rule 416 under the Securities Act of 1933, as amended. ================================================================================ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ The information in this Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED DECEMBER 1, 1998 PROSPECTUS 1,264,872 SHARES BIG ENTERTAINMENT, INC. COMMON STOCK This Prospectus relates to a total of 1,264,872 shares of Common Stock of Big Entertainment, Inc., a Florida corporation ("Big Entertainment" or the "Company"), consisting of: 733,455 shares of Common Stock issuable to the holders of the outstanding shares of the Company's 7% Series D Convertible Preferred Stock (the "Series D Preferred Stock") either upon conversion of the Series D Preferred Stock or as dividends thereon; 133,333 shares of Common Stock issuable to the holder of the outstanding shares of the Company's 7% Series D-2 Convertible Preferred Stock (the "Series D-2 Preferred Stock") either upon conversion of the Series D-2 Preferred Stock or as dividends thereon; 378,084 shares of Common Stock issuable upon the exercise of warrants to purchase Common Stock; and 20,000 shares of Common Stock to be issued as stock dividends to the holder of the Company's 4% $100 Series C Convertible Preferred Stock (the "Series C Preferred Stock"). The shares covered by this Prospectus may be sold from time to time by the holders of the shares (the "Selling Shareholders"). The Company is registering these shares pursuant to its commitments with the Selling Shareholders to register them, and will pay the expenses of registering the shares. The Company will not receive any proceeds from the sales of the shares, but will receive approximately $1,896,500 from the exercise of the warrants if the cashless exercise provisions of the warrants are not used. The Selling Shareholders may from time to time sell all or a portion of the offered shares in transactions in the over-the-counter market, on the Nasdaq SmallCap Market, the Boston Stock Exchange, the Philadelphia Stock Exchange, or on any other exchange on which the Company's Common Stock may then be listed. These transactions may be privately negotiated or otherwise, at market prices prevailing at the time of sale or other prices. The Selling Shareholders may sell the shares to or through broker-dealers who may be paid through underwriting discounts, concessions or commissions from the Selling Shareholders and/or purchasers of the shares for acting as agents (and such compensation may be in excess of customary commissions). The Selling Shareholders and any participating broker-dealers may be deemed to be "underwriters" as defined in the Securities Act of 1933, as amended (the "Securities Act"). Neither the Company nor the Selling Shareholders can estimate at the present time the amount of commissions or discounts, if any, that will be paid by the Selling Shareholders on account of their sales of the shares. The Company will indemnify the Selling Shareholders against certain liabilities, including certain liabilities under the Securities Act. See "Plan of Distribution." Big Entertainment's Common Stock is quoted on the Nasdaq SmallCap Market under the symbol "BIGE" and is listed on the Boston and Philadelphia Stock Exchanges under the symbol "BIG." On November 30, 1998, the last reported sales price of Big Entertainment's Common Stock on the Nasdaq SmallCap Market was $15.00 per share. -------------------------------- YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS PROSPECTUS. -------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS COMPLETE OR ACCURATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. YOU SHOULD ONLY RELY ON THE INFORMATION INCORPORATED BY REFERENCE OR PROVIDED IN THIS PROSPECTUS OR ANY SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION. THE COMMON STOCK IS NOT BEING OFFERED IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS. -------------------- The date of this Prospectus is December ____, 1998 TABLE OF CONTENTS PAGE ---- BIG ENTERTAINMENT...........................................................1 FORWARD-LOOKING STATEMENTS..................................................3 RISK FACTORS................................................................3 USE OF PROCEEDS.............................................................9 SELLING SHAREHOLDERS.......................................................10 PLAN OF DISTRIBUTION.......................................................12 DESCRIPTION OF SECURITIES..................................................13 LEGAL MATTERS..............................................................16 EXPERTS....................................................................16 WHERE YOU CAN FIND MORE INFORMATION........................................17 BIG ENTERTAINMENT THIS IS ONLY A SUMMARY AND DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE MORE DETAILED INFORMATION CONTAINED LATER IN THIS PROSPECTUS AND ALL OTHER INFORMATION, INCLUDING THE FINANCIAL INFORMATION AND STATEMENTS WITH NOTES, INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AS DISCUSSED IN THE "WHERE YOU CAN FIND MORE INFORMATION" SECTION OF THIS PROSPECTUS. GENERAL Big Entertainment is a diversified entertainment company presently engaged in the development and licensing of intellectual properties, the development and licensing of books and the operation of entertainment-related retail stores. Big Entertainment conducts these activities through the Company and its subsidiaries, including 51%-owned Tekno Books as well as through a joint venture known as NetCo Partners, in which the Company has a 50% ownership interest. The Company has just launched "WWW.BIGE.COM," which the Company intends to be the world's largest online entertainment studio store selling licensed branded merchandise from Hollywood studios, television networks, and popular culture, although there can be no assurances that this goal will be achieved. The Company's online Internet studio store will carry merchandise from more than 150 film and television titles and from popular culture. In addition, "WWW.BIGE.COM" will be the exclusive movie merchandise store on "USATODAY.COM," one of the most frequently visited sites on the Internet, and on FILM.COM, a part of Real Networks. The new Internet studio store is owned by the Company's wholly-owned subsidiary, Big Online, Inc. The Company has agreed to contribute its intellectual properties, but not its online business, to a newly formed entity, Huge Entertainment. When this transaction is completed, the Company will have a 51.75% ownership interest in Huge Entertainment (on a pre-IPO basis). Plans are for Huge Entertainment to go public in an IPO and for shareholders of Big Entertainment to receive shares in Huge Entertainment, although there can be no assurances that these transactions will be completed as planned. All of the Company's intellectual properties activities will then be conducted through Huge Entertainment. Until the Company completes the Huge Entertainment transaction, the Company operates through three divisions: its intellectual properties division; Big Online, Inc., the owner of "WWW.BIGE.COM" which has just begun operations; and its entertainment retail division. INTERNET E-COMMERCE STORE - "WWW.BIGE.COM." The new online store, "WWW.BIGE.COM," has just been launched with a product line that includes branded licensed merchandise from Hollywood studios, television networks, and popular culture, such as Southpark, Wrestling, Rug Rats, Star Trek, and Teletubbies. The Company has entered into an agreement with USA Today Information Network to be the exclusive e-commerce movie merchandise store on the newspaper's frequently visited (estimated 6 million visitors per month) web site "WWW.USATODAY.COM." The Company's e-commerce web site will appear on usatoday.com's Homefront Page as well as the Front Pages of the Movies, Entertainment and Life sections of "WWW.USATODAY.COM." The owner of USA Today is Gannett Co., Inc., a shareholder in the Company. The Company has also entered into an agreement to become the movie merchandise store for "FILM.COM," a division of Real Networks and a leading Internet site for film reviews and presentations of trailers and short films. The Company is currently engaged in discussions to expand its e-commerce presence with other major search engines and portal companies; such discussions are presently ongoing and there can be no assurances that these discussions will result in any definitive agreements or ventures for e-commerce merchandising. THE INTELLECTUAL PROPERTIES DIVISION. The intellectual properties division owns the exclusive rights to certain original characters and concepts created by best-selling authors and media celebrities and it licenses such rights across all media, including books, films and television, multi-media software, toys and other products. The Company and NetCo Partners acquire the rights to these intellectual properties pursuant to agreements that generally grant them the exclusive rights to the intellectual properties and the right to use the creator's name in the titles of the intellectual properties (such as MICKEY SPILLANE'S MIKE DANGER and LEONARD NIMOY'S PRIMORTALS). The intellectual properties division also includes a book development and book licensing operation that develops and executes book projects, typically with best-selling authors, and then licenses the books -1- for publication with book publishers such as HarperCollins, Bantam Doubleday Dell, Random House, Simon & Schuster, Viking Press and Warner Books. THE ENTERTAINMENT RETAIL DIVISION. The entertainment retail division operates a chain of retail studio stores and "Super/bullet/Kiosks" that sell entertainment-related merchandise. In addition, the Company has an agreement with The ABC Television Network, a division of The Walt Disney Company, under which the entertainment retail division runs ABC video clips on the television monitors in the Super/bullet/Kiosks in exchange for promotional and advertising spots on ABC affiliate television stations. The Company has substantially curtailed its traditional retail operations during 1998 and is currently focusing on the operation of its new Internet-based retailing venture, "WWW.BIGE.COM." See "Mall-based Retail Stores and Kiosks" in the "Risk Factors" section of this Prospectus. The executive offices of the Company are located at 2255 Glades Road, Suite 237 West, Boca Raton, Florida 33431, and its telephone number is (561) 998-8000. -2- FORWARD-LOOKING STATEMENTS The Company cautions you that certain important factors may affect its actual results and could cause those results to differ materially from any forward-looking statements made in this Prospectus or that are otherwise made by or on behalf of the Company. "Forward-looking statements" are not based on historical facts and are typically phrased using words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate" or "continue" and similar expressions or variations. Differences in actual results can be caused by factors such as those discussed in the section captioned "Risk Factors" below as well as those discussed elsewhere in this Prospectus and in the Company's filings with the SEC. RISK FACTORS THE SHARES OFFERED ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. BEFORE INVESTING, YOU SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS. LIMITED OPERATING HISTORY. The Company began generating revenues and emerged from the development stage in the fourth quarter of 1994. Accordingly, the Company has a limited operating history from which to evaluate its prospects. You must consider the Company's prospects in light of the numerous risks, expenses, problems and difficulties typically encountered in connection with the establishment of a business, the development and introduction of new lines of business and products, and the competitive environment in which the Company operates. The Company cannot assure you that it will be able to successfully implement its current operating plan. OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company has incurred significant net losses since its inception, including net losses of $2,995,347 and $6,655,609 for the years ended December 31, 1997 and 1996, respectively, and $6,362,573 and $3,249,323 for the nine months ended September 30, 1998 and 1997, respectively. The Company had accumulated deficits of $25,223,610 and $21,992,633 at December 31, 1997 and 1996, respectively, and $31,773,334 and $25,407,639 at September 30, 1998 and 1997, respectively. The Company has made several modifications to its initial business plan in an effort to reverse these ongoing losses. During 1997, the Company stopped publishing comic books, an activity that required a substantial amount of resources and was not profitable. Essentially all of the overhead associated with comic book publishing was eliminated by the second quarter of 1997. At the same time, the Company decided to expand its retail operations and initiated this expansion with the development of three prototype in-line retail stores which opened in the fourth quarter of 1997. The Company spent substantial resources in developing the prototype in-line stores, including professional fees and expenses incurred to design the new stores, the hiring of additional field and administrative personnel, selection and acquisition of new hardware and software for a new retail accounting and merchandising system to be implemented, and other capital expenditures. During 1998, the Company further evaluated its mall-based retail business, and closed 21 of its marginal kiosk units. The Company also has curtailed its retail store expansion plans and instead plans to focus its future efforts in the retail area on the operation of its new e-commerce Internet studio store, "WWW.BIGE.COM." The Company is currently attempting to sell its -3- remaining retail mall-based business, but plans to retain its e-commerce Internet business. There can be no assurances, however, that the Company will be able to accomplish these plans. In addition, the Company continues to acquire and develop its base of intellectual properties and negotiate additional licensing agreements. These activities are not capital intensive but require a substantial amount of time from its senior executives. While the Company believes these measures will reverse operating losses, it cannot assure that the revenues generated by the intellectual property, retail stores and its new e-commerce venture will offset the associated expenses. AVAILABILITY OF CASH AND WORKING CAPITAL. The Company's cash and cash equivalents totaled $887,153 at December 31, 1997 and $1,675,852 at December 31, 1996. The Company had working capital deficit of $491,513 at December 31, 1997 compared to working capital of $1,285,093 at December 31, 1996. At September 30, 1998, the Company had cash and cash equivalents of $200,889 and a working capital deficit of $373,113. The $3 million in gross proceeds from the issuance of the Company's Series D and Series D-2 Convertible Preferred Stock were not received until after September 30, 1998. During the year ended December 31, 1997, the Company used $4,012,481 of cash to fund its operating activities and incurred a net loss of $2,995,347 during such period. Net cash used in operating activities during the nine months ended September 30, 1998 was $3,625,395, and the Company's net loss during such period was $6,362,573. The long-term financial success of the Company depends on its ability to generate enough revenue to offset operating expenses. The Company continues to seek additional financing to fund its growth plan and for working capital. This additional financing may result in dilution to the Company's shareholders. Based on the Company's currently proposed plans and assumptions relating to its operations, the Company believes that anticipated cash flows when combined with other potential sources of capital will be enough to meet its working capital requirements for approximately the next 12 months. If the Company's plans change or its assumptions prove to be inaccurate, the Company may need to seek further financing or curtail its operations. The Company cannot assure you that any additional financing will be available or if available, that it will be on favorable terms. MALL-BASED RETAIL STORES AND KIOSKS. The success of the Company's entertainment retail division depends on its ability to operate Big Entertainment studio stores and kiosks profitably. The Company has closed 21 marginal kiosk locations to date in 1998 and currently has 15 mall-based retail stores and kiosks in operation. The Company plans to close additional kiosk locations after the 1998 holiday season, as the Company plans to focus its retail activities through its new e-commerce Internet studio store, "WWW.BIGE.COM." The Company has been evaluating the results of its studio store and kiosk operations and has made modifications and curtailed operating and administrative costs where appropriate. It is uncertain whether the Company will be successful in the future operation of its mall-based studio stores and kiosks, or whether these operations will be further curtailed or eliminated in the future. The Company is currently marketing its retail operations for sale (other than the Internet studio store, which the Company plans to retain), although the Company cannot assure you that it will be able to sell the retail operation for a price and on terms that will be attractive to the Company. -4- COMPETITION. Competition is intense in the entertainment industry. In the licensing market, the Company has numerous competitors, and many of them have more financial resources than the Company. The Company's entertainment retail division competes for sales with specialty stores and other retail outlets offering entertainment merchandise. The Company's new e-commerce Internet studio store, "WWW.BIGE.COM," competes for sales with numerous other Internet-based retail businesses throughout the World Wide Web. The number of web sites competing for consumers' attention and spending has increased and is expected to continue to increase. The Company's e-commerce web site, like its studio stores and kiosks, also compete with conventional store-based and catalog retailers. Increased competition could result in price reductions, reduced margins or inability to obtain sufficient market share to be successful, any of which could adversely affect the Company's business. The Company cannot assure that it will be able to compete successfully in any of these markets. IMPACT OF THE YEAR 2000. The Year 2000 issue is the result of computer programs and other business systems being written using two digits rather than four to represent the year. Many of the time-sensitive applications and business systems of the Company and its vendors may recognize a date using "00" as the year 1900 rather than the Year 2000, which could result in system failure or disruption of operations. The Year 2000 problem will impact the Company. An assessment of the Year 2000 exposure has been made by the Company and the plans to resolve the related issues are being implemented. The Company believes it will be able to achieve Year 2000 compliance in a timely manner. The Company has also made inquiries of significant vendors to ensure that the Company' operations are not disrupted through these relationships and that the Year 2000 issues are resolved in a timely manner. The Company believes that it will satisfactorily resolve all significant Year 2000 problems and that the related costs will not be material. Estimates of Year 2000 related costs are based on numerous assumptions, including the continued availability of certain resources, the ability to correct all relevant applications and third party remediation plans. There is no guarantee that the estimates will be achieved and actual costs could differ materially from those anticipated. LACK OF OPERATING HISTORY, POTENTIAL FLUCTUATIONS IN OPERATING RESULTS AND UNPREDICTABILITY OF FUTURE REVENUE RELATED TO E-COMMERCE. The Company's e-commerce store division has only recently commenced operations and there is no operating history from which to evaluate its prospects. As with the Company overall, the e-commerce store division's prospects must be considered in light of the numerous risks, expenses, problems and difficulties typically encountered in establishing a new business and developing and introducing new products. The Company's e-commerce store operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. These factors include but are not limited to the level of Internet usage and traffic levels on the Company's web site, both of which can fluctuate significantly as a result of various unpredictable events. Examples of these events are the Company's ability to enter into or renew key agreements such as the Company's recent agreement with USA Today Information Network, the amount and timing of the Company's costs related to marketing efforts or other initiatives, fees paid by the Company for distribution or other costs incurred by the Company as it expands its operations, new products or services introduced by the Company or the Company's competitors, technical difficulties or system downtime affecting the Internet generally or the operation of the Company's web site, and economic conditions specific to the Internet as well as general economic conditions. Therefore, the -5- Company's operating results for any particular period may not be indicative of future operating results. SYSTEM RISKS. The Company's hardware and software used in its e-commerce system, or that of its host and/or affiliates, could be damaged by fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events. The Company's web site could also be affected by computer viruses, electronic break-ins or other similar disruptive problems. These system problems could have adverse effects on the Company's business. Insurance may not adequately compensate the Company for any losses that may occur due to any failures or interruptions in its systems. The Company does not presently have a formal system disaster recovery plan. The Company's web site must accommodate a high volume of traffic and deliver frequently updated information. The Company's web site may experience slower response times or decreased traffic for a variety of reasons. The Company's web site could experience disruptions or interruptions in service due to the failure or delay in transmissions over the Internet. In addition, the Company's customers generally depend on Internet service providers, online service providers and other web site operators for access to the Company's web site. Such operators and providers have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to the Company's systems. Moreover, the World Wide Web's infrastructure may not be able to support continued growth in its use. Any of these problems could adversely affect the Company's business. RISKS RELATING TO TECHNOLOGICAL CHANGE. E-commerce is characterized by rapidly changing technology, evolving industry standards and frequent new product announcements. To be successful, the Company must adapt to this rapidly changing market by continually improving the performance, features and reliability of its online services. The Company could also incur substantial costs if it needs to modify its services or infrastructure in order to adapt to these changes. The Company's business could be adversely affected if it incurs significant costs without adequate results or cannot adapt to these changes. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. However, laws and regulations may be adopted in the future that address issues such as user privacy, pricing, and the characteristics and quality of products and services. For example, although it was held unconstitutional, the Telecommunications Act of 1996 prohibited the transmission over the Internet of certain types of information and content. In addition, several telecommunications carriers are seeking to have telecommunications over the Internet regulated by the Federal Communications Commission ("FCC") in the same manner as other telecommunications services and some local telephone carriers have petitioned the FCC to regulate Internet service providers and online services providers in a manner similar to long distance telephone carriers. Any new laws or regulations relating to the Internet could adversely affect the Company's business. SECURITY RISKS. A significant barrier to electronic commerce and communications over the World Wide Web has been the need for secure transmission of confidential information as is necessary for transaction processing. Internet usage could decline if any well-publicized compromise of security occurred. The Company may incur additional costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. If a third person were -6- able to misappropriate the Company's users' personal information or credit card information, the Company could be subjected to claims, litigation or other potential liabilities. DEPENDENCE ON RELATIONSHIPS WITH CREATORS. The success of the Company depends in part on the Company entering into agreements with additional best-selling authors and media celebrities to create intellectual properties. The ability of the Company to do so depends in part upon personal relationships with such persons by certain members of the Company's management. The Company could be adversely affected by the loss of the services of one or more of such persons, any adverse change in these relationships or the failure to continue to develop such relationships. TRADEMARKS AND PROPRIETARY RIGHTS. The Company's intellectual properties are the principal assets of the Company's intellectual property division. The Company has filed federal trademark registration applications for its existing trademarks and files applications for trademark and copyright protection for each of its intellectual properties. Although to date the Company has approximately 30 U.S. registered trademarks and applications to register additional trademarks are pending, there can be no assurance that any such additional applications will be approved, or that the Company will have the resources necessary to enforce its proprietary rights against infringement by others. The Company could be adversely affected if it is unable to protect or enforce its proprietary rights. DEPENDENCE ON MANAGEMENT. Mitchell Rubenstein, the Company's Chairman of the Board and Chief Executive Officer, and Laurie S. Silvers, the Company's Vice Chairman and President, have been primarily responsible for the organization of the Company and the development of its business. They have both renewed their employment agreements with the Company, each for an additional five-year term. Their employment agreements provide, among other things, that the Company's termination of either of their agreements without "cause" will also constitute a termination of the other agreement without "cause" (as defined in such agreements), and that termination without cause entitles each to receive his or her salary for the remainder of the original term of employment. The Company is the beneficiary of $1,000,000 in key man insurance on the lives of each of these executives, of which $500,000 per policy has been pledged to one of the Company's senior creditors. The loss of the services of either of these individuals would adversely affect the Company. The Company's future success will also be dependent upon its ability to attract and retain other qualified and creative management, administrative and other personnel. DIVIDENDS. The Company has not paid any cash dividends on its Common Stock since its inception. Dividends on the Company's Series A Preferred Stock and Series B Preferred Stock are payable solely in shares of Common Stock. The Company's outstanding Series C Preferred Stock accrues dividends at the annual rate of 4%, payable in cash or in stock, and its outstanding Series D Preferred Stock and the Series D-2 Preferred Stock accrue dividends at the annual rate of 7%, payable in cash or in stock at the time of conversion. The Company intends to retain earnings remaining after payment of such cash dividends to finance the development and expansion of its business. TRADING MARKET FOR COMMON STOCK. The Company's Common Stock is quoted on the Nasdaq SmallCap Market and the Boston and Philadelphia Stock Exchanges. Historically there has been a relatively limited trading market for Big Entertainment's Common Stock, and it is uncertain whether a more active trading market for the Common Stock will develop or, if developed, that it would be sustained. -7- POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be subject to significant fluctuation in response to the Company's operating results and other factors, including general price fluctuations in securities markets. From time to time the stock markets have experienced extreme price and volume fluctuations. This volatility has had significant effects on the market prices of securities issued by many companies, especially smaller public companies, often for reasons unrelated to their operating performance. SHARES ELIGIBLE FOR FUTURE SALE. As of the date of this Prospectus, approximately 3,887,270 shares of Common Stock held by existing shareholders and 186,405 shares of Common Stock held in escrow constitute "restricted shares" as defined in Rule 144 under the Securities Act, and may only be sold if such shares are registered under the Securities Act or sold in accordance with Rule 144 or another exemption from registration under the Securities Act. Sales under Rule 144 are subject to the satisfaction of certain holding periods, volume limitations, manner of sale requirements, and the availability of current public information about the Company. Substantially all of the Company's restricted shares of Common Stock are either eligible for sale pursuant to Rule 144 or have been registered under the Securities Act for resale by the holders, including the Common Stock covered by this Prospectus, which will permit the sale of registered shares of Common Stock in the open market or in privately negotiated transactions without compliance with the requirements of Rule 144. The Company is unable to estimate the amount, timing or nature of future sales of outstanding Common Stock. Sales of substantial amounts of the Common Stock in the public market may have an adverse effect on the market price thereof. EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES. As of the date of this Prospectus, the Company has outstanding options and warrants to purchase an aggregate of 2,441,964 shares of Common Stock, 217,600 shares of Series A Preferred Stock and 122,846 shares of Series B Preferred Stock, each convertible into a like number of shares of Common Stock, 20,000 shares of Series C Preferred Stock convertible into 500,000 shares of Common Stock, 250 shares of Series D Preferred Stock convertible into a maximum of 708,455 shares of Common Stock and 50 shares of Series D-2 Preferred Stock convertible into a maximum of 100,000 shares of Common Stock. As long as these options, warrants and convertible securities remain unexercised or are not converted, the terms under which the Company could obtain additional capital may be adversely affected. Moreover, the holders of the options, warrants and convertible securities may be expected to exercise or convert them at a time when the Company would, in all likelihood, be able to obtain any needed capital by a new offering of its securities on terms more favorable than those provided by these securities. ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation authorize the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Company's Board of Directors. Accordingly, the Board of Directors can, without shareholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Company's Common Stock. Preferred stock could also be issued to discourage, delay or prevent a change in control of the Company, although the Company does not currently intend to issue any additional series of its preferred stock. The Company has adopted a Shareholders' Rights Plan and in September 1996 declared a dividend of one right (a "Right") for each outstanding share of Common Stock. Each holder of a -8- Right has the right to purchase from the Company one share of Common Stock at a price of $25.00 per share upon the occurrence of specific events. See "Description of Capital Stock -- Shareholders' Rights Plan." These Rights may cause substantial dilution to a person or group that attempts to acquire the Company in a manner or on terms not approved by the Board of Directors. The Shareholders' Rights Plan is intended to encourage a person interested in acquiring the Company to negotiate with, and to obtain the approval of, the Board of Directors. The Shareholders' Rights Plan, however, may discourage a future acquisition of the Company, including an acquisition in which shareholders might otherwise receive a premium for their shares. As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so. Florida has enacted legislation that may deter or frustrate takeovers of Florida corporations. The Florida Control Share Act generally provides that shares acquired in excess of certain specified thresholds will not possess any voting rights unless approved by a majority vote of a corporation's disinterested shareholders. The Florida Affiliated Transactions Act generally requires supermajority approval by disinterested shareholders of certain specified transactions between a public corporation and holders of more than 10% of the outstanding voting shares of the corporation (or their affiliates). Florida law and the Company's Articles of Incorporation also authorize the Company to indemnify the Company's directors, officers, employees and agents. The Company has entered into agreements with each of its directors and certain of its officers providing for indemnification to the fullest extent permitted by law. USE OF PROCEEDS The Company will receive no proceeds from the sale of any of or all of the shares being offered by the Selling Shareholders under this Prospectus, but it will receive approximately $1,896,500 upon the exercise of the warrants for which the underlying shares of Common Stock are being registered under this Prospectus. The Company estimates it will spend approximately $20,000 in connection with the registration of the offered shares. -9- SELLING SHAREHOLDERS The Selling Shareholders have not been employed by, held office in, or had any other material relationship with the Company or any of its affiliates within the past three years. The following table sets forth certain information with respect to the ownership of the Company's Common Stock by the Selling Shareholders as of the date of this Prospectus.
BENEFICIAL OWNERSHIP OF COMMON STOCK OWNERSHIP OF COMMON AFTER OFFERING STOCK PRIOR TO OFFERING NUMBER OF (1) ------------------------------- SHARES OFFERED ------------------------------- NAME AND ADDRESS OF SELLING SHAREHOLDERS SHARES PERCENTAGE HEREBY SHARES PERCENTAGE - ----------------------------------------- --------------- ------------ ---------------- ------------ ------------- KA Investments LDC 414,509(2) 4.999% 900,246(3) 0 * c/o Deephaven Capital Management LLC 1712 Hopkins Crossroads Minnetonka, MN 55305 Mr. Zubair Kazi 164,626(4) 2% 169,626(3) 0 * 3671 Sunswept Drive Studio City, CA 91604 Deephaven Opportunity 141,667(5) 2% 175,000(3) 0 * Master Fund L.P. c/o Deephaven Capital Management LLC 1712 Hopkins Crossroads Minnetonka, MN 55305 Auric Partners Limited 500,000(6) 6% 20,000(7) 500,000 6% 7575 East Fulton Road Ada, MI 49355 - ------------------------- * Less than 1%. (1) Assumes that all shares offered hereby are sold under this offering and that no other shares of Common Stock are acquired or disposed of by the Selling Shareholders prior to the termination of this offering. Because the Selling Shareholders may sell all, some or none of their shares or may acquire or dispose of other shares of Common Stock, no reliable estimate can be made of the aggregate number of shares that will actually be sold under this offering or the number or percentage of shares of Common Stock that the Selling Shareholders will actually own upon completion of this offering. (2) The terms of the Series D Preferred Stock restrict the ability of the holders thereof to convert shares of the Series D Preferred Stock (and receive shares of Common Stock in payment of dividends thereon) to the extent that the number of shares of Common Stock beneficially owned by them and their affiliates after such conversion exceeds 4.999% of the then issued and outstanding shares of Common Stock following such conversion. Subject to this limitation, the shares listed in this table as being beneficially owned by KA Investments LDC consist of 600,384 shares of Common Stock issuable upon conversion of 200 outstanding shares of the Company's Series D Preferred Stock at a maximum conversion price of $3.4978 per share, 167,517 shares of Common Stock issuable upon the exercise of a warrant having a maximum exercise price of $4.35 per share, and 112,345 shares of Common Stock issuable upon the exercise of a warrant having a maximum exercise price of $5.25625 per share. Because the number of shares of Common Stock issuable as a result of the foregoing is dependent in part upon the market price of the Common Stock prior to the date of issuance, the actual number of shares of Common Stock that will be issued to KA Investments LDC and, consequently, the number of shares of Common Stock that will be beneficially owned by KA Investments LDC, will fluctuate daily and cannot be determined at this time. (3) Represents shares of Common Stock issuable upon conversion in full of the Preferred Stock, as payment of dividends thereunder and exercise in full of the warrants. Because the actual number of shares of Common Stock issuable as a result of the foregoing is dependent in part upon the market price of the Common Stock prior to the date of issuance, the actual number of shares of Common Stock that will be issued and, consequently, offered for sale under this Registration Statement, cannot be determined at this time. Accordingly, the Company has contractually agreed to include herein the listed number of shares of Common Stock issuable upon conversion of the Preferred Stock, payment of dividends thereunder and upon exercise of the warrants. -10- (4) Consists of 108,071 shares of Common Stock issuable upon conversion of 50 shares of the Company's Series D Preferred Stock at a maximum conversion price of $4.6266 per share, 33,833 shares of Common Stock issuable upon the exercise of a warrant having a maximum exercise price of $5.625 per share, and 22,722 shares of Common Stock issuable upon the exercise of a warrant having a maximum exercise price of $6.75 per share. The terms of the Series D Preferred Stock restrict the ability of the holders thereof to convert shares of the Series D Preferred Stock (and receive shares of Common Stock in payment of dividends thereon) to the extent that the number of shares of Common Stock beneficially owned by them and their affiliates after such conversion exceeds 4.9999% of the then issued and outstanding shares of Common Stock following such conversion. (5) Consists of 100,000 shares of Common Stock issuable upon conversion of 50 outstanding shares of the Company's Series D-2 Preferred Stock at a maximum conversion price of $5.00 per share, 25,000 shares of Common Stock issuable upon the exercise of a warrant having a maximum exercise price of $5.175 per share, and 16,667 shares of Common Stock issuable upon the exercise of a warrant having a maximum exercise price of $6.255 per share. The terms of the Series D-2 Preferred Stock restrict the ability of the holder thereof to convert shares of the Series D-2 Preferred Stock (and receive shares of Common Stock in payment of dividends thereon) to the extent that the number of shares of Common Stock beneficially owned by it and its affiliates after such conversion exceeds 4.999% of the then issued and outstanding shares of Common Stock following such conversion. (6) Consists of shares of Common Stock issuable upon conversion of all 20,000 outstanding shares of the Company's Series C Preferred Stock. (7) Consists of shares of Common Stock issuable as quarterly dividends on the Company's Series C Preferred Stock.
-11- PLAN OF DISTRIBUTION The Selling Shareholders, their pledgees, donees, transferees or other successors-in-interest, may, from time to time, sell all or a portion of the shares of Common Stock being registered hereunder in privately negotiated transactions or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such market prices or at negotiated prices. The shares may be sold by the Selling Shareholders by one or more of the following methods, without limitation: (a) block trades in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction, (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus, (c) an exchange distribution in accordance with the rules of the applicable exchange, (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers, (e) privately negotiated transactions, (f) short sales, (g) a combination of any such methods of sale and (h) any other method permitted pursuant to applicable law. From time to time the Selling Shareholders may engage in short sales, short sales against the box, puts and calls and other transactions in securities of the Company or derivatives thereof, and may sell and deliver the shares in connection therewith or in settlement of securities loans. If the Selling Shareholders engage in such transactions, the applicable conversion price may be affected. From time to time the Selling Shareholders may pledge their shares pursuant to the margin provisions of its customer agreements with its brokers. Upon a default by the Selling Shareholders, the brokers may offer and sell the pledged shares from time to time. In effecting sales, brokers and dealers engaged by the Selling Shareholders may arrange for other brokers or dealers to participate in such sales. Brokers or dealers may receive commissions or discounts from the Selling Shareholders (or, if any such broker-dealer acts as agent for the purchaser of such shares, from such purchaser) in amounts to be negotiated which are not expected to exceed those customary in the types of transactions involved. Broker-dealers may agree with the Selling Shareholders to sell a specified number of such shares at a stipulated price per share, and to the extent such broker-dealer is unable to do so acting as agent for a Selling Shareholder, to purchase as principal any unsold shares at the price required to fulfill the broker-dealer commitment to the Selling Shareholders. Broker-dealers who acquire shares as principal may thereafter resell such shares from time to time in transactions (which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above) in the over-the-counter market or otherwise at prices and on terms then prevailing at the time of sale, at prices then related to the then-current market price or in negotiated transactions and, in connection with such resales, may pay to or receive from the purchasers of such shares commissions as described above. The Selling Shareholders may also sell the shares in accordance with Rule 144 under the Securities Act, rather than pursuant to this Prospectus. The Selling Shareholders and any broker-dealers or agents that participate with the Selling Shareholders in sales of the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. -12- Neither the Company nor the Selling Shareholders can estimate at the present time the amount of commissions or discounts, if any, that will be paid by the Selling Shareholders on account of their sales of the shares from time to time. Under the securities laws of certain states, the shares may be sold in such states only through registered or licensed broker-dealers or pursuant to available exemptions from such requirements. In addition, in certain states the shares may not be sold therein unless the shares have been registered or qualified for sale in such state or an exemption from such requirement is available and is complied with. The Company is required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the Selling Shareholders. The Company has agreed to indemnify the Selling Shareholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. Although the Company will pay certain expenses in connection with this offering, estimated to be approximately $20,000, it will not pay for any underwriting commissions and discounts, if any, or counsel fees or other expenses of the Selling Shareholders. The Selling Shareholders have also agreed to indemnify the Company, its directors, officers, agents and representatives against certain liabilities, including certain liabilities under the Securities Act. The Selling Shareholders and other persons participating in the distribution of the shares offered hereby are subject to the applicable requirements of Regulation M promulgated under the Exchange Act in connection with sales of the shares. DESCRIPTION OF SECURITIES GENERAL The Company's authorized capital stock consists of 25,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $.01 per share. As of November 20, 1998, 7,875,674 shares of Common Stock and an aggregate of 360,746 shares of Preferred Stock were outstanding, and 186,405 shares of Common Stock were issued and held in escrow. The transfer agent for the Common Stock is American Stock Transfer & Trust Company, New York, New York. COMMON STOCK Each share of Common Stock entitles the holder to one vote on all matters submitted to a vote of the shareholders. The holders of Common Stock are entitled to receive dividends, when, as and if declared by the Board of Directors, in its discretion, from funds legally available therefor. Upon liquidation or dissolution of the Company, the holders of Common Stock are entitled to share ratably in the assets of the Company, if any, legally available for distribution to shareholders after the payment of all debts and liabilities of the Company and the liquidation preference of any outstanding shares of the Company's Preferred Stock. The Common Stock has no preemptive rights and no subscription, redemption or conversion privileges. The Common Stock does not have cumulative voting rights, which means that the holders of a majority of the outstanding shares of Common Stock voting for the election of directors will be able to elect all members of the Board of -13- Directors. A majority vote will also be sufficient for other actions that require the vote or concurrence of shareholders. All of the outstanding shares of Common Stock are, and the shares to be sold in this offering will be, when issued and paid for, fully paid and nonassessable. PREFERRED STOCK GENERAL. The Board of Directors has the authority to issue up to 1,000,000 shares of Preferred Stock in one or more series and to fix the number of shares constituting any such series, the voting powers, designations, preferences and relative participation, optional or other special rights and qualifications, limitations or restrictions thereof, including the dividend rights and dividend rate, terms of redemption (including sinking fund provisions), redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series, without any further vote or action by the shareholders. The issuance of Preferred Stock by the Board of Directors could affect the rights of the holders of Common Stock. For example, an issuance could result in a class of securities outstanding that would have preferences with respect to voting rights and dividends, and in liquidation, over the Common Stock, and could (upon conversion or otherwise) enjoy all of the rights of Common Stock. SERIES A PREFERRED STOCK. The Company has designated 217,600 shares of Preferred Stock as the Company's Series A Variable Rate Convertible Preferred Stock (the "Series A Preferred Stock"), all of which are issued and outstanding. The Series A Preferred Stock has a stated value of $6.25 per share and accrues non-cash dividends, payable quarterly in shares of Common Stock based on prevailing market prices for the Common Stock. The dividends accrue on the stated value of the outstanding shares of Series A Preferred Stock at a variable rate equal to a specified bank prime rate (7.75% as of the date of this Prospectus). The Series A Preferred Stock is convertible into a like number of shares of Common Stock and it is redeemable at the Company's option for $7.1875 per share in cash. The holders of the Series A Preferred Stock will be entitled to vote together with the holders of Common Stock on all matters, with each share of Series A Preferred Stock having one vote. The Series A Preferred Stock will have a liquidation preference of $7.1825 per share over the Common Stock. The Company and certain holders of Common Stock (Mitchell Rubenstein, Laurie S. Silvers, Martin H. Greenberg and Asbury Park Press, Inc.) agreed in connection with the sale of the Series A Preferred Stock that the Company shall appoint one nominee of Tekno Simon, LLC, the holder of all outstanding shares of the Series A Preferred Stock, to the Company's Board of Directors and that these shareholders shall vote their shares for election of such nominee to the Company's Board of Directors. The current nominee is Deborah J. Simon, who was appointed to the Board in November 1996. SERIES B PREFERRED STOCK. The Company has designated 142,223 shares of Preferred Stock as its Series B Variable Rate Convertible Preferred Stock (the "Series B Preferred Stock") of which 122,846 shares are outstanding. The terms of the Series B Preferred Stock are identical to those of the Series A Preferred Stock, except that the stated value of the Series B Preferred Stock is $5.21 per share. SERIES C PREFERRED STOCK. The Company has designated 100,000 shares of its Preferred Stock as Series C Preferred Stock, 20,000 of which shares are issued and outstanding. Holders of Series C Preferred Stock are entitled to quarterly dividends, payable in cash or common stock, at the annual rate of 4%. The Series C Preferred Stock is convertible into an aggregate of 500,000 shares of Common Stock and has a liquidation preference of $100 per share over the Common Stock. The -14- Series C Preferred Stock ranks junior to the Series A Preferred Stock and Series B Preferred Stock as to payment of dividends and liquidation rights. Each share of Series C Preferred Stock is entitled to one vote per share, together with the holders of shares of the Company's Common Stock, Series A Preferred Stock and Series B Preferred Stock, as a single class on all matters presented to a vote of the Company's shareholders, except as otherwise expressly required by law. SERIES D PREFERRED STOCK. The Company has designated 1,000 shares of its Preferred Stock as Series D Preferred Stock, 250 shares of which are issued and outstanding. Holders of Series D Preferred Stock are entitled to cumulative dividends at the annual rate of 7% payable in cash or in shares of Common Stock on each conversion date. Shares of Series D Preferred Stock are convertible by the holder thereof into shares of Common Stock at a conversion price equal to 105% of the closing bid price as reported by NASDAQ for the five trading days immediately preceding the closing of the sale of the preferred shares. Shares of Series D Preferred Stock shall be automatically converted into shares of Common Stock on the earlier to occur of (i) September 30, 2001, (ii) the third trading day immediately preceding the closing of the first sale under a bona fide underwritten initial public offering of the Common Stock of Huge Entertainment, Inc. with net proceeds to Huge Entertainment, Inc. (or any successor of Huge Entertainment, Inc.) of at least $10,000,000, or (iii) the 10th trading day immediately preceding the closing of a transaction resulting in a change of control of the Company. The terms of the Series D Preferred Stock restrict the ability of the holders thereof to convert shares of the Series D Preferred Stock (and receive shares of Common Stock in payment of dividends thereon) to the extent that the number of shares of Common Stock beneficially owned by them and their affiliates after such conversion exceeds 4.999% of the then issued and outstanding shares of Common Stock following such conversion. The Company has the option to redeem all or any portion of the shares of Series D Preferred Stock that are outstanding at the time for a cash redemption price per share which is equivalent to a 20% premium over the value that the holders of the shares of said Preferred Stock would realize if the shares of Series D Preferred Stock were converted into shares of Common Stock at the time of redemption. The purchase agreements pursuant to which the outstanding shares of Series D Preferred Stock were issued also provide for the contingent issuance of shares of the Company's Common Stock to the holders of Series D Preferred Stock based on the market value of the Company's Common Stock relative to the conversion price on the 150th, 240th and 365th day following the closing. These contingently issuable shares are to be issued if the average closing bid price for the Company's Common Stock for the 10-day trading period preceding the dates noted above is less than 116% of the conversion price in effect on the dates noted above. Upon any liquidation, dissolution or winding up of the Company, holders of Series D Preferred Stock are entitled to payment of the $10,000 stated value for each such share held plus all due but unpaid dividends before any payment is made to holders of Common Stock. The Series D Preferred Stock carries no voting rights, and ranks junior to the Series A, B and C Preferred Stock. SERIES D-2 PREFERRED STOCK. The Company has designated 50 shares of its Preferred Stock as Series D-2 Preferred Stock, all 50 shares of which are issued and outstanding. Holders of Series D-2 Preferred Stock are entitled to cumulative dividends at the annual rate of 7% payable in cash or in shares of Common Stock on each conversion date. Shares of Series D-2 Preferred Stock are convertible by the holder thereof into shares of Common Stock at a conversion ratio equal to a fraction, the numerator of which is aggregate stated value of such shares of Series D-2 Preferred Stock plus accrued but unpaid dividends, and the denominator of which is the conversion price at the time of conversion. The conversion price is initially set at $5.00, based on the market price of the Common Stock as of the date the transaction was agreed to. Shares of Series D-2 Preferred -15- Stock shall be automatically converted into shares of Common Stock on the earlier to occur of (i) November 18, 2001, (ii) the third trading day immediately preceding the closing of the first sale under a bona fide underwritten initial public offering of the Common Stock of Huge Entertainment, Inc. with net proceeds to Huge Entertainment, Inc. (or any successor of Huge Entertainment, Inc.) of at least $10,000,000, or (iii) the 10th trading day immediately preceding the closing of a transaction resulting in a change of control of the Company. The terms of the Series D-2 Preferred Stock restrict the ability of the holders thereof to convert shares of the Series D-2 Preferred Stock (and receive shares of Common Stock in payment of dividends thereon) to the extent that the number of shares of Common Stock beneficially owned by them and their affiliates exceeds 4.999% of the then issued and outstanding shares of Common Stock following such conversion. The Company has the option to redeem all or any portion of the shares of Series D-2 Preferred Stock that are outstanding at the time for a cash redemption price per share which is equivalent to a 20% premium over the value that the holders of the shares of said Preferred Stock would realize if the shares of Series D-2 Preferred Stock were converted into shares of Common Stock at the time of redemption. The purchase agreements pursuant to which the outstanding shares of Series D-2 Preferred Stock were issued also provide for the contingent issuance of shares of the Company's Common Stock to the holders of Series D-2 Preferred Stock based on the market value of the Company's Common Stock relative to the conversion price on the 150th, 240th and 365th day following the closing. These contingently issuable shares are to be issued if the average closing bid price for the Company's Common Stock for the 10-day trading period preceding the dates noted above is less than 116% of the conversion price in effect on the dates noted above. Upon any liquidation, dissolution or winding up of the Company, holders of Series D Preferred Stock are entitled to payment of the $10,000 stated value for each such share held plus all due but unpaid dividends before any payment is made to holders of Common Stock. The Series D-2 Preferred Stock carries no voting rights, and ranks junior to the Series A, B, C and D Preferred Stock. LEGAL MATTERS The validity of the Shares is being passed upon for the Company by Broad and Cassel, a partnership including professional associations, 201 South Biscayne Boulevard, Suite 3000, Miami, Florida 33131. EXPERTS The financial statements of the Company incorporated by reference in this Prospectus from the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 have been audited by Arthur Andersen LLP, independent certified public accountants, as indicated in their report with respect thereto, and are incorporated herein in reliance upon the report of Arthur Andersen LLP as experts in accounting and auditing. -16- WHERE YOU CAN FIND MORE INFORMATION The Company files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any report or document we file at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's regional offices located at Seven World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0880 for more information about the public reference rooms. Our SEC filings are also available from the SEC's website located at HTTP://WWW.SEC.GOV. Quotations for the prices of the Company's Common Stock appear on the Nasdaq SmallCap Market, and reports, proxy statements and other information about the Company can also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. Quotations also appear on the Boston and Philadelphia Stock Exchanges and the previously mentioned information may be inspected at One Boston Place, Boston, Massachusetts 02108, and 1900 Market Street, Philadelphia, Pennsylvania 19103, respectively. The SEC allows companies to "incorporate by reference" the information filed with it, which means that companies can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this Prospectus, and later information that the Company files with the SEC will automatically update and supersede this information. The Company incorporates by reference the following filings and any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"): the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 and the Company's Quarterly Reports on Form 10-QSB for the quarterly periods ended March 31, 1998, June 30, 1998 and September 30, 1998. We have has filed with the SEC a Registration Statement on Form S-3 under the Securities Act with respect to the Common Stock covered by this Prospectus. This Prospectus, which is a part of the Registration Statement, does not contain all the information set forth in, or annexed as exhibits to, the Registration Statement, as permitted by the SEC's rules and regulations. For further information with respect to the Company and the Common Stock offered under this Prospectus, please refer to the Registration Statement, including the exhibits. Copies of the Registration Statement, including exhibits, may be obtained from the SEC's public reference facilities listed above upon payment of the fees prescribed by the SEC, or may be examined without charge at these facilities. Statements concerning any document filed as an exhibit are not necessarily complete and, in each instance, we refer you to the copy of the document filed as an exhibit to the Registration Statement. We will provide, without charge, to each person to whom a copy of this Prospectus is delivered, upon request, a copy of any or all of the information incorporated herein by reference. Exhibits to any of the documents, however, will not be provided unless such exhibits are specifically incorporated by reference into such documents. The requests should be addressed to: Mitchell Rubenstein, Chief Executive Officer, Big Entertainment, Inc., 2255 Glades Road, Suite 237 West, Boca Raton, Florida 33431, telephone number (561) 998-8000. -17- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Company estimates that its expenses in connection with this registration statement will be as follows: Securities and Exchange Commission registration fee..... $ 1,500.17 Legal fees and expenses................................. 10,000.00 Accounting fees and expenses............................ 5,000.00 Miscellaneous........................................... 3,499.83 -------- Total.......................................... $20,000.00 ========== ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company has authority under Section 607.0850 of the Florida Business Corporation Act (the "FBCA") to indemnify its directors and officers to the extent provided for in the FBCA. The Company's Amended and Restated Articles of Incorporation provide that the Company shall indemnify and may insure its officers and directors to the fullest extent permitted by law. The Company has also entered into agreements with each of its directors and executive officers wherein it has agreed to indemnify each of them to the fullest extent permitted by law. The provisions of the FBCA that authorize indemnification do not eliminate the duty of care of a director, and in appropriate circumstances, equitable remedies such as injunctive or other forms of nonmonetary relief will remain available under Florida law. In addition, each director will continue to be subject to liability for (a) violations of criminal laws, unless the director had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful, (b) deriving an improper personal benefit from a transaction, (c) voting for or assenting to an unlawful distribution, and (d) willful misconduct or conscious disregard for the best interests of the Company in a proceeding by or in the right of the Company to procure a judgment in its favor or in a proceeding by or in the right of a shareholder. The statute does not affect a director's responsibilities under any other law, such as the federal securities laws. The effect of the foregoing is to require the Company to indemnify the officers and directors of the Company for any claim arising against such persons in their official capacities if such person acted in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. II-1 Pursuant to certain registration rights agreements, each of the Company and the Selling Shareholders has agreed to indemnify the others and their directors, officers, agents and representatives (and with respect to the indemnification by the Company, any underwriters) against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act. ITEM 16. EXHIBITS. EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.1 Articles of Incorporation of the Company, as amended.(1) 4.2 Articles of Amendment to Articles of Incorporation dated November 25, 1998. 5.1 Opinion of Broad and Cassel. 10.1 Preferred Stock Purchase Agreement dated as of September 30, 1998.(1) 10.2 Preferred Stock Purchase Agreement dated as of November 6, 1998.(1) 10.3 Preferred Stock Purchase Agreement dated as of November 18, 1998. 23.1 Consent of Broad and Cassel (included in Exhibit 5.1 hereto). 23.2 Consent of Arthur Andersen LLP. 24.1 Power of Attorney (included at Page II-4 of this Registration Statement). - ------------------------ (1) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1998. ITEM 17. UNDERTAKINGS. (a) RULE 415 OFFERING. The undersigned Registrant hereby undertakes to: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act. (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. II-2 (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial BONA FIDE offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT DOCUMENTS BY REFERENCE. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boca Raton, State of Florida, on this 1st day of December, 1998. BIG ENTERTAINMENT, INC. By: /s/ MITCHELL RUBENSTEIN ------------------------------ Mitchell Rubenstein Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mitchell Rubenstein his or her true and lawful attorney-in-fact, each acting alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments, including any post-effective amendments, to this Registration Statement, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute, acting alone, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ MITCHELL RUBENSTEIN Chairman of the Board and Chief November 25, 1998 - --------------------------------- Executive Officer (Principal MITCHELL RUBENSTEIN executive officer) /s/ LAURIE S. SILVERS Vice Chairman of the Board and November 25, 1998 - --------------------------------- President LAURIE S. SILVERS /s/ MARCI L. YUNES Chief Financial Officer November 25, 1998 - --------------------------------- (Principal financial and MARCI L. YUNES accounting officer) Director November __, 1998 - --------------------------------- LAWRENCE GOULD
II-4
SIGNATURE TITLE DATE - --------- ----- ---- /s/ MARTIN H. GREENBERG Director November 25, 1998 - --------------------------------- MARTIN H. GREENBERG /s/ HARRY T. HOFFMAN Director November 25, 1998 - --------------------------------- HARRY T. HOFFMAN Director November __, 1998 - --------------------------------- E. DONALD LASS /s/ JULES L. PLANGERE Director November 25, 1998 - --------------------------------- JULES L. PLANGERE Director November __, 1998 - --------------------------------- DEBORAH J. SIMON
II-5 EXHIBIT INDEX* EXHIBIT DESCRIPTION - ------- ----------- 4.2 Articles of Amendment to Articles of Incorporation dated November 25, 1998. 5.1 Opinion and Consent of Broad and Cassel. 10.3 Preferred Stock Purchase Agreement dated as of November 18, 1998. 23.2 Consent of Arthur Andersen LLP. - ---------- * The other exhibits listed in Part II of this Registration Statement are incorporated by reference as noted in Part II. EX-4.2 2 EXHIBIT 4.2 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF BIG ENTERTAINMENT, INC. FOR DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS OF 7% SERIES D-2 CONVERTIBLE PREFERRED STOCK Pursuant to the provisions of Sections 607.0602 and 607.1006 of the Florida Business Corporation Act, Big Entertainment, Inc. (the "Company"), a corporation organized and existing under the Florida Business Corporation Act, hereby adopts the following Articles of Amendment to its Articles of Incorporation. The amendment was adopted by unanimous written consent of the Board of Directors on September 30, 1998. FIRST: DESIGNATION OF 7% SERIES D-2 CONVERTIBLE PREFERRED STOCK Of the 1,000,000 shares of Preferred Stock, par value $.01 per share, authorized pursuant to Article III of the Company's Articles of Incorporation, 50 of such shares are hereby designated as the 7% Series D-2 Convertible Preferred Stock (the "Preferred Stock"). The powers, designations, preferences, and relative, participating, optional or other special rights of the Preferred Stock authorized hereunder and the qualifications, limitations and restrictions of such preferences and rights are as set forth on Exhibit A hereto. IN WITNESS WHEREOF, these Articles of Amendment to Articles of Incorporation have been executed by the undersigned duly authorized officer of the Company as of the 25th day of November, 1998. BIG ENTERTAINMENT, INC. By: /s/ MITCHELL RUBENSTEIN ------------------------------------ Mitchell Rubenstein, Chairman of the Board and Chief Executive Officer THIS DOCUMENT PREPARED BY: NINA S. GORDON, P.A. BROAD AND CASSEL FLORIDA BAR NO. 435309 201 S. BISCAYNE BOULEVARD SUITE 3000 MIAMI, FLORIDA 33131 (305) 373-9400 EXHIBIT A TERMS OF PREFERRED STOCK Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of preferred stock shall be designated as 7% Series D-2 Convertible Preferred Stock (the "PREFERRED STOCK") and the number of shares so designated shall be 50 (which shall not be subject to increase without the consent of the holders of the Preferred Stock (each, a "HOLDER" and collectively, the "HOLDERS")); Each share of Preferred Stock shall have a par value of $.01 and a stated value of $10,000 (the "STATED VALUE"). The Preferred Stock ranks on parity with the Company's currently issued and outstanding 7% Series D Convertible Preferred Stock with respect to dividend, voting and liquidation rights. Section 2. DIVIDENDS. (a) Holders shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, and the Company shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) equal to 7% per annum, payable on each Conversion Date (as defined in Section 5(a)(i)), in cash or shares of Common Stock (as defined in Section 9) at, subject to the terms and conditions set forth herein, the option of the Company. Dividends on the Preferred Stock shall be calculated on the basis of a 360-day year, shall accrue daily commencing on the Original Issue Date (as defined in Section 9), and shall be deemed to accrue from such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. A party that holds shares of Preferred Stock on a Conversion Date will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such Conversion Date, without regard to any sale or disposition of such Preferred Stock subsequent to the applicable record date. All overdue accrued and unpaid dividends and other amounts due herewith shall entail a late fee at the rate of 18% per annum (to accrue daily, from the date such dividend is due hereunder through and including the date of payment). Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on account of the Preferred Stock, such payment shall be distributed ratably among the Holders based upon the number of shares held by each Holder. If dividends are paid in shares of Common Stock, the number of shares of Common Stock issuable on account of such dividend shall equal the cash amount of such dividend on such Conversion Date divided by the Conversion Price (as defined below) on such date. Payment of dividends hereunder in shares of Common Stock is subject to the provisions of Section 5(a)(iii)(D). (b) Notwithstanding anything to the contrary contained herein, the Company may not issue shares of Common Stock in payment of dividends on the Preferred Stock (and must deliver cash in respect thereof) if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes is insufficient to pay such dividends in shares of Common Stock; (ii) such shares of Common Stock are not either registered for resale pursuant to an effective Underlying Securities Registration Statement (as defined in Section 9) or may not be sold without volume restrictions pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the "SECURITIES ACT"), as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company's transfer agent in the form and substance acceptable to the Holders and such transfer agent; (iii) the Common Stock is not then listed for trading on the Nasdaq SmallCap Market ("NASDAQ") or on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market (each a "SUBSEQUENT MARKET"); (iv) the Company has failed to timely satisfy its conversion obligations hereunder; or (v) the issuance of such shares of Common Stock would result in the recipient thereof beneficially owning, as determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), more than 4.999% of the then issued and outstanding shares of Common Stock. (c) Except for the Company's stock purchase program announced in September, 1998, so long as any Preferred Stock shall remain outstanding, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities, nor shall the Company directly or indirectly pay or declare any dividend or make any distribution (other than a dividend or distribution described in Section 5) upon, nor shall any distribution be made in respect of, any Junior Securities (as defined in Section 9), nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities or shares pari passu with the Preferred Stock. Section 3. VOTING RIGHTS. Except as otherwise provided herein and as otherwise required by law, the Preferred Stock shall have no voting rights. However, so long as any shares of Preferred Stock are outstanding, the Company shall not and shall cause its subsidiaries not to, without the affirmative vote of the Holders of all of the shares of the Preferred Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock, (b) alter or amend these Articles of Amendment, (c) authorize or create any class of stock ranking as to dividends or distribution of assets upon a Liquidation (as defined in Section 4) senior to or otherwise pari passu with or senior to the Preferred Stock, (d) amend its Articles of Incorporation, bylaws or other charter documents so as to affect adversely any rights of any Holders, (e) increase the authorized number of shares of Preferred Stock, or (f) enter into any agreement with respect to the foregoing. Section 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a "LIQUIDATION"), the Holders shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value plus all due but unpaid dividends per share, whether declared or not, before any distribution or payment shall be made to the holders of any 2 Junior Securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Holders shall be distributed among the Holders ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. A sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 33% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or companies shall not be treated as a Liquidation, but instead shall be subject to the provisions of Section 5. The Company shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record Holder. Section 5. CONVERSION. (a)(i) CONVERSIONS AT OPTION OF HOLDER. Each share of Preferred Stock shall be convertible into shares of Common Stock (subject to the limitations set forth in Section 5(a)(iii) hereof) at the Conversion Ratio (as defined in Section 9), at the option of the Holder, at any time and from time to time, from and after December 31, 1998 (the "INITIAL CONVERSION DATE"). Holders shall effect conversions by surrendering the certificate or certificates representing the shares of Preferred Stock to be converted to the Company, together with the form of conversion notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE"). Each Conversion Notice shall specify the number of shares of Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the date the Holder delivers such Conversion Notice by facsimile (the "CONVERSION DATE"). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that the Conversion Notice is deemed delivered hereunder. If the Holder is converting less than all shares of Preferred Stock represented by the certificate or certificates tendered by the Holder with the Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall promptly deliver to such Holder (in the manner and within the time set forth in Section 5(b)) a certificate for such number of shares as have not been converted. (ii) AUTOMATIC CONVERSION. Subject to the provisions in this paragraph, all outstanding shares of Preferred Stock for which conversion notices have not previously been received or for which redemption has not been made or required hereunder shall be automatically converted on the earlier to occur of (i) November 18, 2001, (ii) the third (3rd) Trading Day immediately preceding the closing of the first sale under a bona fide underwritten initial public offering of the common stock of Huge Entertainment, Inc. (or any successor thereto) with net proceeds to Huge Entertainment, Inc. (or any successor thereto) of at least $10,000,000 or (iii) the tenth (10th) Trading Day immediately preceding the closing of a Change of Control Transaction (such date the "AUTOMATIC CONVERSION DATE"), at the Conversion Price on the Automatic Conversion Date. The conversion contemplated by this paragraph shall not occur if (a) either (1) an Underlying Securities Registration Statement is not then effective or (2) the Holder is not permitted to resell Underlying Shares pursuant to Rule 144(k) promulgated under the Securities Act, without volume restrictions, as evidenced by an opinion letter of counsel acceptable to the Holder and the transfer agent for the Common Stock; (b) there are not sufficient shares of Common Stock authorized and reserved for issuance upon such conversion; or (c) the Company shall have defaulted on its covenants and obligations hereunder or under the Purchase Agreement or Registration Rights 3 Agreement. Notwithstanding the foregoing, the period for conversion under this Section shall be extended (on a day-for-day basis) and therefore the Automatic Conversion Date shall be deemed to be the date which is the number of Trading Days that the Purchaser is unable to resell Underlying Shares under an Underlying Securities Registration Statement due to (a) the Common Stock not being listed for trading on the NASDAQ or any Subsequent Market, (b) the failure of an Underlying Securities Registration Statement to be declared effective by the Securities and Exchange Commission (the "COMMISSION") by the Filing Date (as defined in the Registration Rights Agreement), or (c) if an Underlying Securities Registration Statement shall have been declared effective by the Commission, (x) the failure of such Underlying Securities Registration Statement to remain effective at all times thereafter as to all Underlying Shares, or (y) the suspension of the Holder's ability to resell Underlying Shares thereunder after the Automatic Conversion Date originally noted above. (iii) CERTAIN CONVERSION RESTRICTIONS. (A) The Holder agrees not to convert shares of Preferred Stock to the extent such conversion would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of the shares of Preferred Stock held by such Holder after application of this Section. To the extent that the limitation contained in this Section applies, the determination of whether shares of Preferred Stock are convertible (in relation to other securities owned by a Holder) and of which shares of Preferred Stock are convertible shall be in the sole discretion of the Holder, and the submission of shares of Preferred Stock for conversion shall be deemed to be the Holder's determination of whether such shares of Preferred Stock are convertible (in relation to other securities owned by the Holder) and of which portion of such shares of Preferred Stock are convertible, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Nothing contained herein shall be deemed to restrict the right of the Holder to convert shares of Preferred Stock at such time as such conversion will not violate the provisions of this Section. The provisions of this Section will not apply to any conversion pursuant to Section 5 (a)(ii) hereof, and may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 75 days prior notice to the Company (in which case, the Holder shall make such filings with the Commission as are required by applicable law), and the provisions of this Section shall continue to apply until such 75th day (or later, if stated in the notice of waiver). Other Holders shall be unaffected by any such waiver. (B) The Holder agrees not to convert shares of Preferred Stock to the extent such conversion would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of the shares of Preferred Stock held by such Holder after application of this Section. To the extent that the limitation contained in this Section applies, the determination of whether shares of Preferred Stock are convertible (in relation to other securities owned by a Holder) and of which shares of Preferred Stock are convertible shall be in the sole discretion of the Holder, and the submission of shares of Preferred Stock for conversion shall be deemed to be the Holder's determination of whether 4 such shares of Preferred Stock are convertible (in relation to other securities owned by the Holder) and of which portion of such shares of Preferred Stock are convertible, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Nothing contained herein shall be deemed to restrict the right of the Holder to convert shares of Preferred Stock at such time as such conversion will not violate the provisions of this Section. The provisions of this Section will not apply to any conversion pursuant to Section 5 (a)(ii) hereof, and may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 75 days prior notice to the Company (in which case, the Holder shall make such filings with the Commission as are required by applicable law), and the provisions of this Section shall continue to apply until such 75th day (or later, if stated in the notice of waiver). Other Holders shall be unaffected by any such waiver. (C) Conversions of shares of Preferred Stock shall be limited as follows: (1) from the Initial Conversion Date through the 30th day thereafter, the Holder may convert up to 50% of shares of Preferred Stock issued to it on the Original Issue Date; and (2) from and after the 30th day after the Initial Conversion Date, no restrictions under this Section 5(a)(iii)(C) shall apply to the shares of Preferred Stock which may be converted by a Holder. (D) If on any Conversion Date (A) the Common Stock is listed for trading on NASDAQ or the Nasdaq National Market, (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion in full of all then outstanding shares of Preferred Stock and as payment of dividends thereon in shares of Common Stock, together with any shares of Common Stock previously issued upon conversion of shares of Preferred Stock and as payment of dividends thereon, would equal or exceed 20% of the number of shares of Common Stock outstanding on the Original Issue Date (such number of shares as would not equal or exceed such 20% limit, the "ISSUABLE MAXIMUM"), and (C) the Company shall not have previously obtained the vote of shareholders (the "SHAREHOLDER APPROVAL"), if any, as may be required by the applicable rules and regulations of The Nasdaq Stock Market (or any successor entity) applicable to approve the issuance of shares of Common Stock in excess of the Issuable Maximum in a private placement whereby shares of Common Stock are deemed to have been issued at a price that is less than the greater of book or fair market value of the Common Stock, then the Company shall issue to the Holder so requesting a conversion a number of shares of Common Stock equals such Holder's pro rata portion of the Issuable Maximum and, with respect to the remainder of the shares of Preferred Stock then held by such Holder for which a conversion in accordance with the Conversion Price would result in an issuance of Common Stock in excess of such Holder's pro rata portion of the Issuable Maximum (the "EXCESS PRINCIPAL"), the converting Holder shall have the option to require the Company to either (1) use its best efforts to obtain the Shareholder Approval applicable to such issuance as soon as is possible, but in any event not later than the 60th day after such request, or (2)(i) issue and deliver to such Holder a number of shares of Common Stock as equals (x) the Excess Principal, plus accrued dividends on all shares of Preferred Stock being converted, divided by (y) the Conversion Price, and (ii) cash in an amount equal to the product of (x) the Per Share Market Value on the Conversion Date and (y) a number of shares of Common Stock as equals the Excess Principal divided by the Conversion Price (such amount of cash being hereinafter referred to as the "DISCOUNT EQUIVALENT"), or (3) pay cash to the converting Holder in an amount equal to the Mandatory Redemption Amount for the shares of Common Stock otherwise 5 issuable on account of the Excess Principal. If the Company fails to pay the Discount Equivalent or the Mandatory Redemption Amount, as the case may be, in full pursuant to this Section within seven (7) days after the date payable, the Company will pay interest thereon at a rate of 18% per annum to the converting Holder, accruing daily from the Conversion Date until such amount, plus all such interest thereon, is paid in full. (b) (i) Not later than three (3) Trading Days after any Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of shares of Preferred Stock (subject to the limitations set forth in Section 5(a)(iii) hereof), (ii) one or more certificates representing the number of shares of Preferred Stock not converted, (iii) a bank check in the amount of accrued and unpaid dividends (if the Company has elected to pay accrued dividends in cash), and (iv) if the Company has elected and is permitted hereunder to pay accrued dividends in shares of Common Stock, certificates, which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1 (b) of the Purchase Agreement), representing such shares of Common Stock; PROVIDED, HOWEVER, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any shares of Preferred Stock until certificates evidencing such shares of Preferred Stock are either delivered for conversion to the Company or any transfer agent for the Preferred Stock or Common Stock, or the Holder of such Preferred Stock notifies the Company that such certificates have been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates, including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, are not delivered to or as directed by the applicable Holder by the third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the shares of Preferred Stock tendered for conversion. (ii) If the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 5(b)(i), including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, by the third (3rd) Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $2,500 for each day after such third (3rd) Trading Day until such certificates are delivered. Nothing herein shall limit a Holder's right to pursue actual damages for the Company's failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders 6 from seeking to enforce damages pursuant to any other Section hereof or under applicable law. Further, if the Company shall not have delivered any cash due in respect of conversions of Preferred Stock or as payment of dividends thereon by the third (3rd) Trading Day after the Conversion Date, the Holder may, by notice to the Company, require the Company to issue Underlying Shares pursuant to Section 5(c), except that for such purpose the Conversion Price applicable thereto shall be the lesser of the Conversion Price on the Conversion Date and the Conversion Price on the date of such Holder demand. Any such Underlying Shares will be subject to the provision of this Section. (iii) In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 5(b)(i), including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, by the third (3rd) Trading Day after the Conversion Date, and if after such third (3rd) Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the aggregate stated value of the shares of Preferred Stock for which such conversion was not timely honored. For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 aggregate stated value of the shares of Preferred Stock, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. (c) (i) (A) The conversion price (the "CONVERSION PRICE") in effect on any Conversion Date shall be $5.00. (B) If: (a) an Underlying Securities Registration Statement is not filed on or prior to the Filing Date (as defined in the Registration Rights Agreement) (if the Company files such Underlying Securities Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) of the Registration Rights Agreement, the Company shall not be deemed to have satisfied this clause (a)), or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Exchange Act, within five (5) days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that an Underlying Securities Registration Statement will not be "reviewed," or not subject to further review, or (c) the Underlying Securities Registration Statement is not declared effective by the Commission on or prior to the Effectiveness Date (as defined in the Registration Rights Agreement), or (d) such Underlying Securities Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities (as defined in the Registration Rights Agreement) at any time prior to the expiration of the "Effectiveness Period" (as defined in the Registration Rights Agreement), without being succeeded within 15 days by an amendment to such Underlying Securities Registration Statement or a subsequent Underlying Securities Registration Statement filed with and declared effective by the Commission, or (e) trading in the Common Stock shall be suspended from 7 the NASDAQ or a Subsequent Market for more than three (3) Trading Days (which need not be consecutive Trading Days), (f) the conversion rights of the Holders are suspended for any reason or (g) an amendment to the Underlying Securities Registration Statement is not filed by the Company with the Commission within 15 days of the Commission's notifying the Company that such amendment is required in order for the Underlying Securities Registration Statement to be declared effective (any such failure or breach being referred to as an "EVENT," and for purposes of clauses (a), (c), (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five (5) day period is exceeded, or for purposes of clauses (d) and (g) the date which such 15 day-period is exceeded, or for purposes of clause (e) the date on which such three (3) Trading Day-period is exceeded, being referred to as "EVENT DATE"), then the Company shall, on the first day of each monthly anniversary of the Event Date and until such time as the applicable Event is cured, pay to the Holder 2.0% of the aggregate Stated Value of the shares of Preferred Stock then held by such Holder, in cash, as liquidated damages and not as a penalty. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Registration Rights Agreement. (ii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities or pari passu securities payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of Common Stock any shares of capital stock of the Company, the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (iii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall issue rights, warrants or options to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Per Share Market Value at the record date mentioned below, then the Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, warrants or options, plus the number of shares of Common Stock which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock offered for subscription or purchase. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right, warrant or option to purchase shares of Common Stock the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section 5(c)(iii), if any such right, warrant or option shall expire and shall not have been exercised, the Conversion Price shall immediately upon such 8 expiration shall be recomputed and effective immediately upon such expiration shall be increased to the price which it would have been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section 5 upon the issuance of other rights or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights, warrants, or options been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights, warrants or options actually exercised. (iv) Except as contemplated by Schedule 2.1(c) to the Purchase Agreement, if the Company or any subsidiary thereof, as applicable with respect to Common Stock Equivalents (as defined below), at any time while any shares of Preferred Stock are outstanding, shall, issue shares of Common Stock or rights, warrants, options or other securities or debt that is convertible into or exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS") entitling any Person to acquire shares of Common Stock at a price per share less than the Per Share Market Value on the Original Issue Date, then the Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of shares of Common Stock or such Common Stock Equivalents plus the number of shares of Common Stock which the offering price for such shares of Common Stock or Common Stock Equivalents would purchase at the Conversion Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock so issued or issuable, provided, that for purposes hereof, all shares of Common Stock that are issuable upon exercise or exchange of Common Stock Equivalents shall be deemed outstanding immediately after the issuance of such Common Stock Equivalents. Such adjustment shall be made whenever such shares of Common Stock or Common Stock Equivalents are issued. (v) If the Company, at any time while shares of Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 5(c)(ii)-(iv) above), then in each such case the Conversion Price at which each share of Preferred Stock shall thereafter be convertible shall be determined by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value of Common Stock determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value of the Common Stock on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; PROVIDED, HOWEVER, that in the event of a distribution exceeding ten percent (10%) of the net assets of the Company, if the Holders of a majority in interest of the Preferred Stock dispute such valuation, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "APPRAISER") selected in good faith by the Company, subject to approval by the Holders of a majority in interest of the shares of Preferred Stock then outstanding whose approval shall not be unreasonably withheld or delayed. The adjustments shall be described in a statement provided to the Holders of the portion of assets or evidences of indebtedness so 9 distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (vi) All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (vii) Whenever the Conversion Price is adjusted pursuant to Section 5(c)(ii),(iii),(iv), or (v) the Company shall promptly mail to each Holder, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (viii) In case of any reclassification of the Common Stock, or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property (other than compulsory share exchanges which constitute Change of Control Transactions), the Holders of the Preferred Stock then outstanding shall have the right thereafter to convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holders of the Preferred Stock shall be entitled upon such event to receive such amount of securities, cash or property as a holder of the number of shares of the Common Stock of the Company into which such shares of Preferred Stock could have been converted immediately prior to such reclassification or share exchange would have been entitled. This provision shall similarly apply to successive reclassifications or share exchanges. (ix) If (a) the Company shall declare a dividend (or any other distribution) on its Common Stock, (b) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock, (c) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (d) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property, or (e) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Preferred Stock, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; 10 PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert shares of Preferred Stock during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Preferred Stock and payment of dividends on Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 5(a) and Section 5(c)) upon the conversion of all outstanding shares of Preferred Stock and payment of dividends hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and freely tradeable, subject to the legend requirements of Section 3.1 (b) of the Purchase Agreement. (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder of a share of Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of Common Stock on conversion of Preferred Stock shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such shares of Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Shares of Preferred Stock converted into Common Stock shall be canceled. The Company may not reissue any shares of Preferred Stock. (h) Any and all notices or other communications or deliveries to be provided by the Holders of the Preferred Stock hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to the attention of the Chief Executive Officer of the Company at the facsimile telephone number or address of the principal place of business of the Company as set forth in the Purchase Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to each Holder at the 11 facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 8:00 p.m. (Minnetonka, Minnesota time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 8:00 p.m. (Minnetonka, Minnesota time) on any date and earlier than 11:59 p.m. (Minnetonka, Minnesota time) on such date, (iii) upon receipt, if sent by a nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Section 6. REDEMPTION UPON TRIGGERING EVENTS. (a) Upon the occurrence of a Triggering Event, each Holder shall (in addition to all other rights it may have hereunder or under applicable law), has the right, exercisable at the sole option of such Holder, to require the Company to redeem all or a portion of the Preferred Stock then held by such Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory Redemption Amount plus (ii) the product of (A) the number of Underlying Shares issued in respect of conversions or as payment of dividends hereunder and then held by the Holder and (B) the Per Share Market Value on the date such redemption is demanded or the date the redemption price hereunder is paid in full, whichever is greater. If the Company fails to pay the redemption price hereunder in full pursuant to this Section within seven (7) days after the date of a demand therefor, the Company will pay interest thereon at a rate of 18% per annum, accruing daily from such seventh day until the redemption price, plus all such interest thereon, is paid in full. For purposes of this Section, a share of Preferred Stock is outstanding until such date as the Holder shall have received Underlying Shares upon a conversion (or attempted conversion) thereof. A "Triggering Event" means any one or more of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgement, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (i) the failure of an Underlying Securities Registration Statement to be declared effective by the Commission on or prior to the 180th day after the Original Issue Date; (ii) if, during the Effectiveness Period, the effectiveness of the Underlying Securities Registration Statement lapses for any reason, or the Holder shall not be permitted to resell Registrable Securities under the Underlying Securities Registration Statement; (iii) the failure of the Common Stock to be listed for trading on the NASDAQ or on a Subsequent Market or the suspension of the Common Stock from trading on the NASDAQ or on a Subsequent Market, in either case, for more than three (3) Trading Days (which need not be consecutive Trading Days); 12 (iv) the Company shall fail for any reason to deliver certificates representing Underlying Shares issuable upon a conversion hereunder that comply with the provisions hereof prior to the 12th day after the Conversion Date or the Company shall provide notice to any Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversion of any Preferred Stock in accordance with the terms hereof; (v) an Event shall not have been cured to the satisfaction of the Holder prior to the expiration of thirty (30) days from the Event Date relating thereto (other than an Event resulting from a failure of an Underlying Securities Registration Statement to be declared effective by the Commission on or prior to the Effectiveness Date; (vi) the Company shall fail for any reason to deliver the certificate or certificates required pursuant to Section 5(b)(iii) or the cash pursuant to a Buy-In within ten (10) days after notice is deemed delivered hereunder; or (vii) subject to the provisions set forth in the Purchase Agreement, the Company shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder. Section 7. OPTIONAL REDEMPTION. (a) The Company shall have the right, exercisable at any time upon 10 Trading Days' notice (an "OPTIONAL REDEMPTION NOTICE") to the Holders of the Preferred Stock given at any time after the Original Issue Date to redeem all or any portion of the shares of Preferred Stock which have not previously been converted or redeemed, at a price equal to the Optional Redemption Price (as defined below), PROVIDED, that the Company shall not be entitled to deliver an Optional Redemption Notice to the Holders if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes is insufficient to satisfy the Company's conversion obligations of all shares of Preferred Stock then outstanding, or (ii) the Underlying Shares then outstanding are not registered for resale pursuant to an effective Underlying Securities Registration Statement and may not be sold without volume restrictions pursuant to Rule 144 promulgated under the Securities Act, as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company's transfer agent in the form and substance acceptable to the Holders and such transfer agent, or (iii) the Common Stock is not then listed for trading on the NASDAQ or a Subsequent Market. The entire Optional Redemption Price shall be paid in cash. Holders may convert (and the Company shall honor such conversions in accordance with the terms hereof) any shares of Preferred Stock, including shares subject to an Optional Redemption Notice, during the period from the date thereof through the 10th Trading Day after the receipt of an Optional Redemption Notice. (b) If any portion of the Optional Redemption Price shall not be paid by the Company by the 10th Trading Day after the delivery of an Optional Redemption Notice, interest shall accrue thereon at the rate of 18% per annum until the Optional Redemption Price plus all such interest is paid in full. In addition, if any portion of the Optional Redemption Price remains unpaid after the date due, the Holder of the Preferred Stock subject to such redemption may elect, by written 13 notice to the Company given at any time thereafter, to either (i) demand conversion of all or any portion of the shares of Preferred Stock for which such Optional Redemption Price, plus interest thereof, has not been paid in full (the "UNPAID REDEMPTION SHARES"), in which event the Per Share Market Value for such shares shall be the lower of the Per Share Market Value calculated on the date the Optional Redemption Price was originally due and the Per Share Market Value as of the Holder's written demand for conversion, or (ii) invalidate AB INITIO such redemption, notwithstanding anything herein contained to the contrary. If the Holder elects option (i) above, the Company shall within three (3) Trading Days of its receipt of such election deliver to the Holder the shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares subject to such Holder conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (ii) above, the Company shall promptly, and in any event not later than three (3) Trading Days from receipt of Holder's notice of such election, return to the Holder all of the Unpaid Redemption Shares. (c) The "OPTIONAL REDEMPTION PRICE" shall equal the sum of (i) the product of (A) the number of shares of Preferred Stock to be redeemed and (B) the product of (1) 120% of the average Per Share Market Value for the five (5) Trading Days immediately preceding (x) the date of the Optional Redemption Notice or (y) the date of payment in full by the Company of the Optional Redemption Price, whichever is greater, and (2) the Conversion Ratio calculated on the date of the Optional Redemption Notice, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such shares of Preferred Stock. SECTION 8. [INTENTIONALLY OMITTED] Section 9. DEFINITIONS. For the purposes hereof, the following terms shall have the following meanings: "CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act), other than an acquisition after the date hereof by any existing shareholder of the Company who owns more than 7% of the voting securities of the Company as of the Original Issue Date, of in excess of 33% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company's board of directors which is not approved by those individuals who are members of the board of directors on the date hereof in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions, unless following such transaction, the holders of the Company's securities continue to hold at least 66% of such securities following such transaction or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii). "COMMON STOCK" means the Company's common stock, par value $.01 per share, and stock of any other class into which such shares may hereafter have been reclassified or changed. 14 "CONVERSION RATIO" means, at any time, a fraction, the numerator of which is Stated Value plus accrued but unpaid dividends (including any accrued but unpaid late fees thereon) but only to the extent not paid in shares of Common Stock in accordance with the terms hereof, and the denominator of which is the Conversion Price at such time. "JUNIOR SECURITIES" means the Common Stock and all other equity securities of the Company which are junior in rights and liquidation preference to the Preferred Stock. "MANDATORY REDEMPTION AMOUNT" for each share of Preferred Stock means the sum of (i) the greater of (A) 115% of the Stated Value and all accrued dividends with respect to such share, and (B) the product of (a) the Per Share Market Value on the Trading Day immediately preceding (x) the date of the Triggering Event or the Conversion Date, as the case may be, or (y) the date of payment in full by the Company of the applicable redemption price, whichever is greater, and (b) the Conversion Ratio calculated on the date of the Triggering Event, or the Conversion Date, as the case may be, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such shares of Preferred Stock. "ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock. "PER SHARE MARKET VALUE" means on any particular date (a) the closing bid price per share of the Common Stock on such date on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted, or if there is no such price on such date, then the closing bid price on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted on the date nearest preceding such date, or (b) if the Common Stock is not then listed or quoted on the NASDAQ or on a Subsequent Market, the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the Holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the Holders of a majority of the shares of the Preferred Stock. "PERSON" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "PURCHASE AGREEMENT" means the Convertible Preferred Stock Purchase Agreement, dated as of November 18, 1998, between the Company and the original Holder of the Preferred Stock. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement, dated as of November 18, 1998, between the Company and the original Holder of the Preferred Stock. 15 "TRADING DAY" means (a) a day on which the Common Stock is traded on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted, or (b) if the Common Stock is not listed on the NASDAQ or on a Subsequent Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); PROVIDED, HOWEVER, that in the event that the Common Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "UNDERLYING SECURITIES REGISTRATION STATEMENT" means a registration statement that meets the requirement of the Registration Rights Agreement and registers the resale of all Underlying Shares by the recipient thereof, who shall be named as a "selling stockholder" thereunder. "UNDERLYING SHARES" means, collectively, the shares of Common Stock into which the shares of Preferred Stock are convertible and the shares of Common Stock issuable upon payment of dividends thereon in accordance with the terms hereof. 16 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to convert shares of Preferred Stock) The undersigned hereby elects to convert the number of shares of 7% Series D-2 Convertible Preferred Stock indicated below, into shares of Common Stock, par value $.01 per share (the "COMMON STOCK"), of Big Entertainment, Inc. (the "COMPANY") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the Holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ___________________________________________________ Date to Effect Conversion ___________________________________________________ Number of Shares of Preferred Stock to Be Converted ___________________________________________________ Number of Shares of Common Stock to Be Issued ___________________________________________________ Applicable Conversion Price ___________________________________________________ Signature ___________________________________________________ Name ___________________________________________________ Address EX-5.1 3 EXHIBIT 5.1 BROAD AND CASSEL ATTORNEYS AT LAW BOCA RATON . FT. LAUDERDALE . MIAMI . ORLANDO . TALLAHASSEE . TAMPA . WEST PALM BEACH SUITE 3000 MIAMI CENTER 201 SOUTH BISCAYNE BOULEVARD MIAMI, FLORIDA 33131 (305) 373-9400 FAX (305) 373-9443 December 1, 1998 Big Entertainment, Inc. 2255 Glades Road, #237W Boca Raton, Florida 33431-7383 Re: Big Entertainment, Inc. (the "Company") REGISTRATION STATEMENT ON FORM S-3 Ladies and Gentlemen: You have requested our opinion with respect to the shares of the Company's common stock, par value $.01 per share (the "Common Stock"), included in the Registration Statement on Form S-3 (the "Form S-3") filed with the U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Securities Act"). As counsel to the Company, we have examined the original or certified copies of such records of the Company, and such agreements, certificates of public officials, certificates of officers or representatives of the Company and others, and such other documents as we deem relevant and necessary for the opinions expressed in this letter. In such examination, we have assumed the genuineness of all signatures on original documents, and the conformity to original documents of all copies submitted to us as conformed or photostatic copies. As to various questions of fact material to such opinions, we have relied upon statements or certificates of officials and representatives of the Company and others. Based on, and subject to the foregoing, we are of the opinion that the shares of Common Stock being registered in the Form S-3 that are (i) issuable upon conversion of shares of the Company's 7% Series D and 7% Series D-2 Convertible Preferred Stock (together, the "Preferred Stock") or as "Adjustment Shares" as defined in the Convertible Preferred Stock Purchase Agreements by and between the Company and the respective holders of the Preferred Stock, (ii) issuable as share dividends to holders of the Preferred Stock, or (iii) issuable upon exercise of certain warrants to purchase shares of Common Stock, as the case may be, shall, upon such issuance as described in the Form S-3, be duly and validly issued and fully paid and nonassessable. Big Entertainment, Inc. Page 2 In rendering this opinion, we advise you that members of this Firm are members of the Bar of the State of Florida, and we express no opinion herein concerning the applicability or effect of any laws of any other jurisdiction, except the securities laws of the United States of America referred to herein. This opinion has been prepared and is to be construed in accordance with the Report on Standards for Florida Opinions, dated April 8, 1991, as amended and supplemented, issued by the Business Law Section of The Florida Bar (the "Report"). The Report is incorporated by reference into this opinion. We hereby consent to the filing of this opinion as an exhibit to the Form S-3. We also consent to the use of our name under the caption "Legal Matters" in the Prospectus constituting part of the Form S-3. In giving such consent, we do not thereby admit that we are included within the category of persons whose consent is required under Section 7 of the Securities Act, or the rules and regulations promulgated thereunder. Very truly yours, /s/ BROAD AND CASSEL -------------------- BROAD AND CASSEL EX-10.3 4 EXHIBIT 10.3 =============================================================================== CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT Between BIG ENTERTAINMENT, INC. and DEEPHAVEN OPPORTUNITY MASTER FUND L.P. Dated as of November 18, 1998 =============================================================================== CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT"), dated as of November 18, 1998, between Big Entertainment, Inc., a Florida corporation (the "COMPANY"), and Deephaven Opportunity Master Fund L.P., a British Virgin Islands limited partnership (the "PURCHASER"). WHEREAS, subject to the terms and conditions set forth in this Agreement, the Company desires to issue and sell to the Purchaser and the Purchaser desires to purchase from the Company shares of the Company's Series D-2 Convertible Preferred Stock, par value $.01 per share (the "PREFERRED STOCK"), which are convertible into shares of the Company's common stock, $.01 par value per share (the "COMMON STOCK"). IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy are hereby acknowledged, the Company and Purchaser agree as follows: ARTICLE I PURCHASE AND SALE OF PREFERRED STOCK 1.1 THE CLOSING. (a) THE CLOSING. (i) Subject to the terms and conditions set forth in this Agreement, the Company shall issue and sell to the Purchaser and the Purchaser shall purchase 50 shares of Preferred Stock (the "SHARES") for an aggregate purchase price of $500,000. The purchase price per Share shall be $10,000. The closing of the purchase and sale of the Preferred Stock (the "CLOSING") shall take place at the offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("ROBINSON SILVERMAN"), 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof or such later date as the parties shall agree. The date of the Closing is hereinafter referred to as the "CLOSING DATE." (ii) At the Closing, the parties shall deliver or shall cause to be delivered to the following: (A) the Company shall deliver (1) stock certificates representing the Shares, registered in the name of the Purchaser, (2) a common stock purchase warrant, in the form of EXHIBIT D-1, registered in the name of the Purchaser, pursuant to which the Purchaser shall have the right at any time and from time to time thereafter through the fifth anniversary date of the issuance thereof to acquire 25,000 shares of Common Stock at an exercise price per share of $5.175, subject to adjustment (the "FIRST WARRANT"), (3) a common stock purchase warrant, in the form of EXHIBIT D-2, registered in the name of the Purchaser, pursuant to which the Purchaser shall have the right at any time and from time to time thereafter through the fifth anniversary date of the issuance thereof to acquire 16,667 shares of Common Stock at an exercise price per share of $6.255, subject to adjustment (the "SECOND WARRANT" and, together with the First Warrant, the "WARRANTS"), (4) the legal opinion of Broad & Cassel, outside counsel to the Company, substantially in the form of EXHIBIT C, and (5) all other documents, instruments and writings required to have been delivered at or prior to the Closing by the Company pursuant to this Agreement, including an executed Registration Rights Agreement, dated the date hereof, between the Company and the Purchaser, in the form of EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT"), and the Irrevocable Transfer Agent Instructions, in the form of EXHIBIT E, delivered to and acknowledged by the Company's transfer agent (the "TRANSFER AGENT INSTRUCTIONS"); and (B) the Purchaser shall deliver (1) $500,000 in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose, and (2) all documents, instruments and writings required to have been delivered at or prior to the Closing by the Purchaser pursuant to this Agreement, including, without limitation, an executed Registration Rights Agreement. 1.2 TERMS OF PREFERRED STOCK. The Preferred Stock shall have the rights preferences and privileges set forth in EXHIBIT A, and shall be incorporated into the Articles of Amendment ("ARTICLES OF AMENDMENT") which shall be filed on or prior to the Closing Date by the Company with the Department of State of Florida, in form and substance mutually agreed to by the parties. 1.3 CERTAIN DEFINED TERMS. For purposes of this Agreement, CONVERSION PRICE," "INITIAL CONVERSION DATE," "ORIGINAL ISSUE DATE," "STATED VALUE" and "TRADING DAY" shall have the meanings set forth in Exhibit A; "BUSINESS DAY" shall mean any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States of America or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the following representations and warranties to the Purchaser: (a) ORGANIZATION AND QUALIFICATION. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Florida, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in SCHEDULE 2.1(A) (collectively the "SUBSIDIARIES"). Each of the Subsidiaries is an entity, duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the full power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of the Securities (as defined below) or any of this Agreement, the Articles of Amendment, the Registration Rights Agreement or the Warrants (collectively, the "TRANSACTION DOCUMENTS"), (y) have or result in a material adverse effect on the results of operations, assets, prospects, or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to perform fully on a -2- timely basis its obligations under any of the Transaction Documents (any of (x), (y) or (z), a "MATERIAL ADVERSE EFFECT"). (b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents, and otherwise to carry out its obligations thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, except for any of the Required Approvals (as hereinafter defined). Each of the Transaction Documents has been duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective articles of incorporation, by-laws or other charter documents. (c) CAPITALIZATION. The number of authorized, issued and outstanding capital stock of the Company is set forth in SCHEDULE 2.1(C). No shares of Common Stock are entitled to preemptive or similar rights, nor is any holder of the Common Stock entitled to statutory preemptive or similar rights arising out of any agreement or understanding with the Company by virtue of any of the Transaction Documents. Except as disclosed in SCHEDULE 2.1(C) or as a result of the purchase and sale of the Shares and the Warrants and the issuance of Adjustment Shares (as defined in Section 3.16), if any, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. To the knowledge of the Company, except as specifically disclosed in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997, Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1998 and June 30, 1998 and Proxy Statement for the July 1998 Annual Meeting of Shareholders (collectively, the "Current SEC Reports") or SCHEDULE 2.1(C), no Person or group of related Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) or has the right to acquire by agreement with or by obligation binding upon the Company beneficial ownership of in excess of 5% of the Common Stock. A "PERSON" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. (d) ISSUANCE OF THE SHARES, THE WARRANTS AND THE ADJUSTMENT SHARES. The Shares and the Warrants are duly authorized, and, when issued and paid for in accordance with the terms hereof, shall have been duly and validly issued, and, in the case of the Shares, fully paid and nonassessable, free and clear of all liens, encumbrances and rights of first refusal of any kind (collectively, "LIENS"). The Company has on the date hereof an adequate reserve of duly authorized shares of Common Stock, reserved for issuance to the Purchaser and the holders of the Shares and the Warrants, to enable it to perform its conversion, exercise and other obligations under this -3- Agreement, the Articles of Amendment and the Warrants. Such initial number of reserved and available shares of Common Stock is not less than the sum of the number of shares of Common Stock which would be issuable on the Closing Date (i) upon conversion in full of the Shares and payment of dividends thereunder, assuming the Shares are outstanding for three years, all dividends for such three year period is paid in shares of Common Stock and that such conversion occurred at the lowest possible Conversion Price pursuant to Section 5(c)(i) of the Articles of Amendment, (ii) upon exercise of the Warrants, assuming the Warrants are exercised at the lowest possible Exercise Price (as defined in the Warrants), and (iii) as Adjustment Shares, assuming that the Adjustment Price (as defined in Section 3.16) is equal to one half of the lowest possible Conversion Price pursuant to Section 5(c)(i) of the Articles of Amendment (such number of shares of Common Stock, the "INITIAL MINIMUM"). All such authorized shares of Common Stock have been duly reserved for issuance to the Purchaser and the holders of such Shares and Warrants. The Adjustment Shares and the shares of Common Stock issuable upon conversion of the Shares, as payment of dividends thereon and upon exercise of the Warrants are collectively referred to herein as the "UNDERLYING SHARES." The Shares, the Warrants and the Underlying Shares are, collectively, the "SECURITIES." When issued in accordance with this Agreement, the Articles of Amendment and the Warrants, in accordance with their respective terms, the Underlying Shares will be duly authorized, validly issued, fully paid and nonassessable, free and clear of all Liens. (e) NO CONFLICTS. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of its articles of incorporation, bylaws or other charter documents (each as amended through the date hereof), or (ii) subject to obtaining the Required Approvals (as defined below), conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, indenture or instrument (evidencing a Company debt or otherwise) to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected, except in the case of each of clauses (ii) and (iii), as could not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, could reasonably be expected to not have or result in a Material Adverse Effect. (f) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other Federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filing of the Articles of Amendment with the Secretary of State of Florida, (ii) the filings required pursuant to Section 3.12, (iii) the filing of the Underlying Securities Registration Statement with the Securities and Exchange Commission (the "COMMISSION") -4- meeting the requirements set forth in the Registration Rights Agreement and covering the resale of the Underlying Shares by the Purchaser, (iv) the application(s) to the Nasdaq Stock Market, Inc for the listing of the Underlying Shares for trading on the Nasdaq SmallCap Market ("NASDAQ") (and with any other national securities exchange or market on which the Common Stock is then listed), (v) applicable Blue Sky filings as required by the Registration Rights Agreement and, and (vi) in all other cases where the failure to obtain such consent, waiver, authorization or order, or to give such notice or make such filing or registration could not reasonably be expected to have or result in, individually or in the aggregate, a Material Adverse Effect (the consents, waivers, authorizations, orders, notices and filings referred to in (i)-(vi) of this Section are collectively, the "REQUIRED APPROVALS"). (g) LITIGATION; PROCEEDINGS. Except as specifically disclosed in the SEC Documents, there is no action, suit, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties before or by any court, governmental or administrative agency or regulatory authority (Federal, state, county, local or foreign) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect. (h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred which has not been waived which, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any governmental authority, except as could not individually or in the aggregate, have or result in a Material Adverse Effect. (i) PRIVATE OFFERING. Assuming the accuracy of the representations and warranties of the Purchaser set forth in Sections 2.2(b)-(g), the offer, issuance and sale of the Securities to the Purchaser as contemplated hereby are exempt from the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"). Neither the Company nor any Person acting on its behalf has taken any action that could subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act. (j) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the three years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the "SEC DOCUMENTS" and, together with the Schedules to this Agreement the "DISCLOSURE MATERIALS") on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act -5- and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. All material agreements to which the Company is a party or to which the property or assets of the Company are subject and which were required to have been filed as exhibits to the SEC Documents have been so filed. The financial statements of the Company included in the SEC Documents comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis ("GAAP") during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. Since December 31, 1997 except as specifically disclosed in the Current SEC Reports or as set forth on Schedule 2.1(j), (a) there has been no event, occurrence or development that has had or that could have or result in a Material Adverse Effect, (b) the Company has not incurred any liabilities (contingent or otherwise) other than (x) liabilities incurred in the ordinary course of business consistent with past practice and (y) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (c) the Company has not altered its method of accounting or the identity of its auditors and (d) the Company has not declared or made any payment or distribution of cash or other property to its stockholders or officers or directors (other than in compliance with existing Company stock option plans or salary paid in accordance with existing employment agreements or otherwise made in the ordinary course consistent with prior practice) with respect to its capital stock, or purchased, redeemed (or made any agreements to purchase or redeem) any shares of its capital stock. The Company last filed audited financial statements with the Commission for the year ended December 31, 1997, and has not received any comments from the Commission in respect thereof. (k) INVESTMENT COMPANY. The Company is not, and is not an Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (l) CERTAIN FEES. Except for certain fees payable by the Company to the parties set forth on Schedule 2.1(l), no fees or commissions will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, or bank with respect to the transactions contemplated by this Agreement. The Purchaser shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless the Purchaser, its employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as such fees and expenses are incurred. -6- (m) SOLICITATION MATERIALS. Neither the Company nor any Person acting on the Company's behalf has solicited any offer to buy or sell the Securities by means of any form of general solicitation or advertising. (n) FORM S-3 ELIGIBILITY. The Company is eligible to register securities for resale with the Commission under Form S-3 promulgated under the Securities Act. (o) EXCLUSIVITY. The Company shall not issue and sell the Shares to any Person other than the Purchaser other than with the specific prior written consent of the Purchaser. (p) SENIORITY. Except as set forth on Schedule 2.1(p), no class of equity securities of the Company is senior to the Shares in right of payment, whether upon liquidation, dissolution, or otherwise. (q) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. The Company has not, in the two years preceding the date hereof, received notice (written or oral) from the NASDAQ or any other stock exchange, market or trading facility on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the listing or maintenance requirements of such exchange or market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such maintenance requirements. (r) PATENTS AND TRADEMARKS. The Company has, or has rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and rights (collectively, the "INTELLECTUAL PROPERTY RIGHTS") which are necessary or material for use in connection with its business, and which the failure to so have could reasonably be expected to have a Material Adverse Effect. To the best knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. (s) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as set forth on SCHEDULE 6(B) to the Registration Rights Agreement, (i) the Company has not granted or agreed to grant to any Person any rights (including "piggy-back" registration rights) to have any securities of the Company registered with the Commission or any other governmental authority which has not been satisfied and (ii) no Person, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. (t) REGULATORY PERMITS. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate Federal, state or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Documents, except where the failure to possess such permits, individually or in the aggregate could reasonably be expected to have or result in a Material Adverse Effect ("MATERIAL PERMITS"), and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. -7- (u) TITLE. Neither the Company nor any of its Subsidiaries own any real property. The Company and the Subsidiaries have good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all Liens, except for liens, claims or encumbrances as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. (v) DISCLOSURE. The Company confirms that it has not provided the Purchaser or its agents or counsel with any information that constitutes or might constitute material non-public information. The Company understands and confirms that the Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Purchaser regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. 2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows: (a) ORGANIZATION; AUTHORITY. The Purchaser is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with the requisite corporate power and authority, to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations thereunder. The purchase by the Purchaser of the Securities hereunder has been duly authorized by all necessary action on the part of the Purchaser. Each of this Agreement and the Registration Rights Agreement has been duly executed and delivered by the Purchaser and constitutes the valid and legally binding obligation of the Purchaser, enforceable against it in accordance with its terms. (b) INVESTMENT INTENT. The Purchaser is acquiring the Securities for its own account for investment purposes only and not with a view to or for distributing or reselling such Securities or any part thereof or interest therein, without prejudice, however, to the Purchaser's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Securities pursuant to an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration. (c) PURCHASER STATUS. At the time the Purchaser was offered the Shares, the Warrants and the Adjustment Shares, it was, and at the date hereof it is, and at each exercise date under the Warrants, it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. -8- (d) EXPERIENCE OF THE PURCHASER. The Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. (e) ABILITY OF THE PURCHASER TO BEAR RISK OF INVESTMENT. The Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment. (f) ACCESS TO INFORMATION. The Purchaser acknowledges receipt of the Disclosure Materials and further acknowledges that it has reviewed the Disclosure Materials and has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or counsel shall modify, amend or affect such Purchaser's right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company's representations and warranties contained in the Transaction Documents. (g) GENERAL SOLICITATION. The Purchaser is not purchasing the Shares as a result of or subsequent to any advertisement, article, notice or other communication regarding the Shares published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar. (h) RELIANCE. The Purchaser understands and acknowledges that (i) the Securities are being offered and sold to it without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption, depends in part on, and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and the Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchaser makes no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 2.2. ARTICLE III OTHER AGREEMENTS OF THE PARTIES 3.1 TRANSFER RESTRICTIONS. (a) Securities may only be disposed of pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available -9- exemption from or in a transaction not subject to the registration requirements of the Securities Act. In connection with any transfer of Securities other than pursuant to an effective registration statement or to the Company, except as otherwise set forth herein, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act. Notwithstanding the foregoing, the Company hereby consents to and agrees to register on the books of the Company and with any transfer agent for the securities of the Company any transfer of Securities by the Purchaser to an Affiliate of the Purchaser or to a fund under common management with the Purchaser, and any transfer among any such Affiliates or funds, provided that transferee certifies to the Company that it is an "accredited investor" as defined in Rule 501(a) under the Securities Act and that it is acquiring the Securities solely for investment purposes. Any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of the Purchaser under this Agreement and the Registration Rights Agreement. (b) The Purchaser agrees to the imprinting, so long as is required by this Section 3.1(b), of the following legend on the Securities: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THE PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE ARE SET FORTH IN A DESIGNATION OF PREFERENCES, RIGHTS AND LIMITATIONS FILED WITH THE FLORIDA DEPARTMENT OF STATE, A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION. Underlying Shares shall not contain the legend set forth above nor any other legend if the conversion of Shares, the payment of dividends thereon, the exercise of Warrants, the issuance of Adjustment Shares or other issuances of Underlying Shares as contemplated hereby, by the Articles of Amendment or the Warrants occurs at any time while an Underlying Securities Registration Statement is effective under the Securities Act or, in the event there is not an effective Underlying Securities Registration Statement at such time, if in the opinion of counsel to the Company such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company shall cause its counsel to issue the legal opinion included in the Transfer Agent Instructions to the -10- Company's transfer agent on the day that the Underlying Securities Registration Statement is declared effective by the Commission. The Company agrees that, in the event any Underlying Shares are issued with a legend in accordance with this Section 3.1(b), it will provide the Purchaser, upon request, with a certificate or certificates representing such Underlying Shares, free from such legend at such time as such legend would not have been required under this Section 3.1(b) had such issuance occurred on the date of such request. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in this Section. 3.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the issuance of the Adjustment Shares and the Underlying Shares issuable upon conversion of the Shares and payment of dividends thereon in accordance with the terms of the Articles of Amendment, and upon exercise of the Warrants in accordance with their terms, may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligation to issue Underlying Shares pursuant to Section 3.16 and upon (x) conversion of the Shares and payment of dividends thereon in accordance with the terms of the Articles of Amendment, and (y) exercise of the Warrants in accordance with their terms, is unconditional and absolute, subject to the limitations set forth herein, in the Articles of Amendment or pursuant to the Warrants, regardless of the effect of any such dilution. 3.3 FURNISHING OF INFORMATION. As long as the Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act. As long as the Purchaser owns Securities, if the Company is not required to file reports pursuant to such sections, it will prepare and furnish to the Purchaser and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act such information as is required for the Purchaser to sell the Securities under Rule 144 promulgated under the Securities Act. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including the legal opinion referenced above in this Section. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with such requirements. 3.4 BLUE SKY LAWS. In accordance with the Registration Rights Agreement, the Company shall qualify or exempt the issuance and sale of the Underlying Shares under the securities or Blue Sky laws of such jurisdictions as the Purchaser may reasonably request and shall continue such qualification or exemption at all times until the Purchaser notifies the Company in writing that it no longer owns Securities; PROVIDED, HOWEVER, that neither the Company nor its Subsidiaries shall be required in connection therewith to qualify as a foreign corporation where they are not now so qualified or to take any action that would subject the Company to general service of process in any such jurisdiction where it is not then subject. -11- 3.5 INTEGRATION. The Company shall not, and shall use its best efforts to ensure that, no Affiliate shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchaser. 3.6 INCREASE IN AUTHORIZED SHARES. If on any date the Company would be precluded from issuing the full number of Underlying Shares as would then be issuable (a) upon a conversion in full of the then outstanding Shares and as payment of all accrued and then unpaid dividends thereon in shares of Common Stock, (b) upon exercise in full of the then unexercised portion of the Warrants, and (c) as Adjustment Shares, assuming that the applicable Adjustment Price is one half of the lowest possible Conversion Price pursuant to Section 5(c)(i) of the Articles of Amendment (the "CURRENT REQUIRED MINIMUM"), due to the unavailability of a sufficient number of authorized but unissued or reserved shares of Common Stock, then the Board of Directors of the Company shall promptly (and in any case, subject to clearance of the Company's proxy materials by the Commission, within 30 Business Days from such date) prepare and mail to the stockholders of the Company proxy materials requesting authorization to amend the Company's Articles of Incorporation to increase the number of shares of Common Stock which the Company is authorized to issue to at least such number of shares as reasonably requested by the Purchaser in order to provide for such number of authorized and unissued shares of Common Stock to enable the Company to comply with its issuance, conversion, exercise and reservation of shares obligations as set forth in this Agreement, the Articles of Amendment and the Warrants (the sum of (x) the number of shares of Common Stock then authorized, (y) the number of shares of Common Stock then outstanding plus all shares of Common Stock issuable upon exercise of all outstanding options, warrants and convertible instruments, and (z) the Current Required Minimum (provided that, for purposes of such calculation, the number of Adjustment Shares to be issued shall equal the greater of the number provided in clause (c) above in this Section and the number of Adjustment Shares as would be issuable based upon the formula set forth in Section 3.16 assuming that such issuance would occur on each determination date), shall be a reasonable number). In connection therewith, the Board of Directors shall (a) adopt proper resolutions authorizing such increase, (b) recommend to and otherwise use its best efforts to promptly and duly obtain stockholder approval to carry out such resolutions (and hold a special meeting of the stockholders no later than the 60th day after mailing of the proxy materials relating to such meeting) and (c) within five (5) Business Days of obtaining such stockholder authorization, file an appropriate amendment to the Company's Articles of Incorporation to evidence such increase. 3.7 LISTING AND RESERVATION OF UNDERLYING SHARES. (a) The Company shall (i) not later than the fifth Business Day following the Original Issue Date prepare and file with the NASDAQ (and such other national securities exchange or market or trading or quotation facility on which the Common Stock is then listed) an additional shares listing application covering a number of shares of Common Stock which is not less than the Initial Minimum, (ii) take all steps necessary to cause such shares to be approved for listing in the NASDAQ (as well as on any such other national securities exchange or market or trading or quotation facility on which the Common Stock is then listed) as soon as possible thereafter, and (iii) provide to the Purchaser evidence of such listing, and the Company shall maintain the listing of its Common Stock thereon. The parties hereto agree that -12- as of the date hereof the Initial Minimum shall be 200,000 shares of Common Stock, provided however that at any time the Per Share Market Value of the Common Stock falls below $3.50 per share, then the Company shall take all necessary actions to immediately list an additional 75,000 Underlying Shares. (b) The Company shall maintain a reserve of Common Stock for issuance pursuant to Section 3.16, and upon conversion of the Shares and for payment of dividends thereupon in shares of Common Stock and upon exercise of the Warrants in accordance with this Agreement, the Articles of Amendment and the Warrants, respectively, in such amount as may be required to fulfill its obligations in full under the Transaction Documents, which reserve shall equal no less than the Current Required Minimum (provided that, for purposes of such calculation, the number of Adjustment Shares to be issued shall equal the greater of the number provided in clause (c) of Section 3.6 and the number of Adjustment Shares as would be issuable based upon the formula set forth in Section 3.16 assuming that such issuance would occur on each determination date). 3.8 CONVERSION AND EXERCISE PROCEDURES. The Transfer Agent Instructions, Conversion Notice (as defined in EXHIBIT A) and Notice of Exercise under the Warrants set forth the totality of the procedures with respect to the conversion of the Shares and exercise of the Warrants, including the form of legal opinion, if necessary, that shall be rendered to the Company's transfer agent and such other information and instructions as may be necessary to enable the Purchaser to convert its Shares and exercise the Warrants as contemplated in the Articles of Amendment and the Warrants (as applicable). 3.9 NOTICE OF BREACHES. (a) Each of the Company and the Purchaser shall give prompt written notice to the other of any breach by it of any representation, warranty or other agreement contained in any Transaction Document, as well as any events or occurrences arising after the date hereof which would reasonably be likely to cause any representation or warranty or other agreement of such party, as the case may be, contained therein to be incorrect or breached as of the Closing Date. However, no disclosure by either party pursuant to this Section shall be deemed to cure any breach of any representation, warranty or other agreement contained in any Transaction Document. (b) Notwithstanding the generality of Section 3.9(a), the Company shall promptly notify the Purchaser of any notice or claim (written or oral) that it receives from any lender of the Company to the effect that the consummation of the transactions contemplated by the Transaction Documents violates or would violate any written agreement or understanding between such lender and the Company, and the Company shall promptly furnish by facsimile to the holders of the Securities a copy of any written statement in support of or relating to such claim or notice. 3.10 CONVERSION AND EXERCISE OBLIGATIONS OF THE COMPANY. The Company shall honor conversions of the Shares and exercises of the Warrants and shall deliver Underlying Shares in accordance with the respective terms, conditions and time periods set forth in the Articles of Amendment and the Warrants, respectively. 3.11 [INTENTIONALLY OMITTED] -13- 3.12 [INTENTIONALLY OMITTED] 3.13 USE OF PROCEEDS. The Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes. Pending application of the proceeds of this placement in the manner permitted hereby, the Company will invest such proceeds in interest-bearing accounts and/or short-term, investment grade interest bearing securities. 3.14 [INTENTIONALLY OMITTED] 3.15 REIMBURSEMENT. If the Purchaser, other than by reason of its gross negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by or against any Person, including stockholders of the Company, in connection with or as a result of the consummation of the transactions contemplated by Transaction Documents, the Company will reimburse the Purchaser for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. In addition, other than with respect to any matter in which the Purchaser is a named party, the Company will pay the Purchaser the charges, as reasonably determined by the Purchaser, for the time of any officers or employees of the Purchaser devoted to appearing and preparing to appear as witnesses, assisting in preparation for hearings, trials or pretrial matters, or otherwise with respect to inquiries, hearings, trials, and other proceedings relating to the subject matter of this Agreement. The reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchaser who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchaser and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchaser and any such Affiliate and any such Person. The Company also agrees that neither the Purchaser nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any person asserting claims on behalf of or in right of the Company in connection with or as a result of the consummation of the Transaction Documents except to the extent that any losses, claims, damages, liabilities or expenses incurred by the Company result from the gross negligence or willful misconduct of the Purchaser or entity in connection with the transactions contemplated by this Agreement. 3.16 ISSUANCE OF ADJUSTMENT SHARES. (a) If the average Per Share Market Value for the ten (10) Trading Days commencing the 150th day after the Closing Date (the "FIRST ADJUSTMENT PRICE") is less than 116% of the Conversion Price then in effect (the "FIRST ADJUSTED CONVERSION PRICE"), then the Company shall, within thirteen (13) Trading Days following such 150th day, issue to the Purchaser for no additional consideration such number of shares of Common Stock (the "FIRST ADJUSTMENT SHARES") as equals the quotient obtained by dividing (i) the product of (A) the First Adjusted Conversion Price, minus the First Adjustment Price and (B) an amount equal to (x) the quotient obtained by dividing (1) the lesser of (I) 1/3 of the number of Shares acquired by the Purchaser on the Closing Date multiplied by the Stated Value or (II) the aggregate number of Shares held by the Purchaser on the 150th day after the Closing Date multiplied by the Stated Value (such lesser value shall be referred to herein as the "FIRST REPRICED SHARE VALUE") by (2) the Conversion -14- Price then in effect, less (y) the number of shares of Common Stock held by the Purchaser in a short position on the 150th day after the Closing Date and (ii) the First Adjustment Price. (b) If the average Per Share Market Value for the ten (10) Trading Days commencing the 240th day after the Closing Date (the "SECOND ADJUSTMENT PRICE") is less than 116% of the Conversion Price then i effect (the "SECOND ADJUSTED CONVERSION PRICE"), then the Company shall, within thirteen (13) Trading Days following such 240th day, issue to the Purchaser for no additional consideration such number of shares of Common Stock (the "SECOND ADJUSTMENT SHARES") as equals the quotient obtained by dividing (i) th product of (A) the Second Adjusted Conversion Price, minus the Second Adjustment Price and (B) an amount equal to (x) the quotient obtained by dividing (1) the lesser of (I) 1/3 of the number of Shares acquired by the Purchaser on the Closing Date multiplied by the Stated Value or (II) the aggregate number of Shares held by the Purchaser on the 150th day after the Closing Date multiplied by the Stated Value less the First Repriced Share Value referred to in Section 3.16(a) above (such lesser value shall be referred to herein as the "SECOND REPRICED SHARE VALUE"), provided, however that in the event that the Second Repriced Share Value is greater than the aggregate number of Shares held by the Purchaser on the 240th day after the Closing Date multiplied by the Stated Value, the Second Repriced Share Value shall equal the aggregate number of Shares held by the Purchaser on the 240th day after the Closing Date multiplied by the Stated Value, by (2) the Conversion Price then in effect, less (y) the number of shares of Common Stock held by the Purchaser in a short position on the 240th day after the Closing Date and (ii) the Second Adjustment Price. (c) If the average Per Share Market Value for the ten (10) Trading Days commencing the 365th day after the Closing Date (the "THIRD ADJUSTMENT PRICE," and together with the First Adjustment Price and the Second Adjustment Price, the "ADJUSTMENT PRICE") is less than 116% of the Conversion Price then in effect (the "THIRD ADJUSTED CONVERSION PRICE"), then the Company shall, within thirteen (13) Trading Days following such 365th day, issue to the Purchaser for no additional consideration such number of shares of Common Stock (the "THIRD ADJUSTMENT SHARES," and together with the First Adjustment Shares and the Second Adjustment Shares, the "ADJUSTMENT SHARES") as equals the quotient obtained by dividing (i) the product of (A) the Third Adjusted Conversion Price, minus the Third Adjustment Price and (B) an amount equal to (x) the quotient obtained by dividing (1) the lesser of (I) 1/3 of the number of Shares acquired by the Purchaser on the Closing Date multiplied by the Stated Value or (II) the aggregate number of Shares held by the Purchaser on the 240th day after the Closing Date multiplied by the Stated Value less the Second Repriced Share Value referred to in Section 3.16(b) above (such lesser value shall be referred to herein as the "THIRD REPRICED SHARE VALUE"), provided, however that in the event that the Third Repriced Share Value is greater than the aggregate number of Shares held by the Purchaser on the 365th day after the Closing Date multiplied by the Stated Value, the Third Repriced Share Value shall equal the aggregate number of Shares held by the Purchaser on the 365th day after the Closing Date multiplied by the Stated Value, by (2) the Conversion Price then in effect, less (y) the number of shares of Common Stock held by the Purchaser in a short position on the 365th day after the Closing Date and (ii) the Third Adjustment Price. 3.17 TRADING RESTRICTIONS. The Purchaser shall not establish a short position in the Common Stock and the Company shall not purchase any shares of Common Stock during the ten -15- (10) Trading Days in which an Adjustment Price is determined pursuant to Section 3.16. Nothing herein shall preclude the Purchaser from maintaining short positions in the securities of the Company established prior to or after the expiration of any such periods. ARTICLE IV MISCELLANEOUS 4.1. FEES AND EXPENSES. At the Closing, the Company shall pay $10,000 to Robinson Silverman in connection with the preparation and negotiation of the Transaction Documents. Other than the amount contemplated in the immediately preceding sentence, and except as otherwise set forth in the Registration Rights Agreement, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Securities. 4.1. ENTIRE AGREEMENT; AMENDMENTS. The Transaction Documents together with the Exhibits and Schedules thereto, and the Transfer Agent Instructions contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. 4.2. NOTICES. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile with a receipt of confirmation at the facsimile telephone number specified in this Section prior to 7:00 p.m. (Minnetonka, Minnesota time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement later than 7:00 p.m. (Minnetonka, Minnesota time) on any date and earlier than 10:59 p.m. (Minnetonka, Minnesota time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Big Entertainment, Inc. 2255 Glades Road, Suite 237 West Boca Raton, Florida, 33431 Facsimile No.: (561) 998-2974 Attn: Chief Executive Officer -16- With copies to: Broad and Cassel 201 S. Biscayne Boulevard Miami, Florida 33131 Facsimile No.: (305) 373-9493 Attn: Dale S. Bergman, Esq. If to the Purchaser: Deephaven Opportunity Master Fund L.P. c/o Deephaven Capital Management LLC 1712 Hopkins Crossroads Minnetonka, MN 55305 Facsimile No.: (612) 542-4244 Attn: Bruce Lieberman With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Kenneth L. Henderson, Esq. or such other address as may be designated in writing hereafter, in the same manner, by such Person. 4.3. AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Purchaser; or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 4.4. HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 4.5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchaser. Except as set forth in Section 3.1(a), the Purchaser may not assign this Agreement or any of the rights or obligations hereunder (other than to an Affiliate of the Purchaser) without the consent of the Company, except that the Purchaser may assign its rights hereunder and under the Transaction Documents without the consent of the Company as long as such assignee demonstrates to the reasonable satisfaction of the Company its satisfaction of the representations and warranties set forth in Section 2.2. This provision shall not limit the Purchaser's right to transfer securities or transfer or assign rights hereunder or under the Registration Rights Agreement. -17- 4.6. NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. 4.7. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. 4.8. SURVIVAL. The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery and conversion or exercise (as the case may be) of the Adjustment Shares, the Shares and the Warrants. 4.9. EXECUTION. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. 4.10. PUBLICITY. The Company and the Purchaser shall consult with each other in issuing any press releases or otherwise making public statements or filings and other communications with the Commission or any regulatory agency or stock market or trading facility with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement, filings or other communications without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement, filing or other communication. Notwithstanding the foregoing, the Company shall not publicly disclose or include the name of the Purchaser in any filing with the Commission, or any regulatory agency, trading facility or stock market without the prior written consent of the Purchaser, except to the extent such disclosure (but not any disclosure as to the controlling Persons thereof) is required by law, in which case the Company shall provide the Purchaser with prior notice of such disclosure. -18- 4.11. SEVERABILITY. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affecting or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 4.12. REMEDIES. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Purchaser will be entitled to specific performance of the obligations of the Company under the Transaction Documents. Each of the Company and the Purchaser agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] -19- IN WITNESS WHEREOF, the parties hereto have caused this Convertible Preferred Stock Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. BIG ENTERTAINMENT, INC. By: /s/ MITCHELL RUBENSTEIN ------------------------------- Name: Mitchell Rubenstein Title: Chief Executive Officer DEEPHAVEN OPPORTUNITY MASTER FUND L.P. By: KAE Investment Advisers LLC, its Managing General Partner By: /s/ --------------------------------------- Name: Title: EX-23.2 5 EXHIBIT 23.2 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our report dated March 20, 1998 included in Big Entertainment, Inc.'s Form 10-K for the year ended December 31, 1997 and to all references to our Firm included in this registration statement. /s/ ARTHUR ANDERSEN LLP - ----------------------- ARTHUR ANDERSEN LLP Miami, Florida, December 1, 1998. -----END PRIVACY-ENHANCED MESSAGE-----