VICTORY ENTERTAINMENT CORP - S-1/A - 20000922 - PROCEED_USE
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $21.0 million
from the sale of 2,300,000 shares of our common stock in this offering, based
upon an assumed initial public offering price of $11.00 per share, the midpoint
of the offering range shown on the cover of this prospectus, and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $24.5 million.
We intend to:
- use a portion of the net proceeds from this offering to repay in full the
$5,000,000 principal amount of, plus accrued and unpaid interest on, our
12% senior secured promissory note. We issued this promissory note on
April 3, 2000 and have been using the proceeds for working capital
purposes. Interest on the promissory note is payable quarterly at our
option and the promissory note matures on the earlier of March 28, 2001
and the consummation of this offering;
- use approximately $3,000,000 of the net proceeds to fund our
NEXTBIGSTAR.COM joint venture;
- use $1,000,000 of the net proceeds in connection with the settlement of
the CMI litigation described under "Business--Legal Proceedings;" and
- use the balance of the net proceeds for general corporate purposes,
including meeting our working capital requirements. These purposes also
include expanding our television and Internet programming and identifying
and acquiring or investing in motion picture and television libraries,
television production and distribution companies and complementary and/or
Internet-based businesses, although we have no current plans, agreements
or commitments with respect to any acquisition of this type, and we are
not currently engaged in any negotiations with respect to any transaction
of this type.
Although we do not contemplate any changes in our use of proceeds, we may
reprioritize the uses listed above, or use some proceeds for other purposes in
the event extra proceeds are available or the specified uses require less
capital than expected. Accordingly, our management will have broad discretion in
applying the net proceeds from this offering. In addition, a former Lightpoint
officer may relinquish shares of our common stock and options to purchase shares
of our common stock in connection with the settlement of the CMI litigation, and
we may use a portion of the proceeds to make a cash payment to that officer as
described under "Business--Legal Proceedings."
The amounts and timing of our actual expenditures will depend upon numerous
factors, including the status of our product development efforts, marketing and
sales activities, the amount of cash generated by our operations and
competition. Actual expenditures may vary substantially from these estimates. We
may find it necessary or advisable to use portions of the net proceeds for other
purposes.
We intend to invest the net proceeds from this offering in short-term,
investment grade securities pending the uses described above.
We have filed a shelf registration statement registering for resale 160,428
shares of common stock to be issued upon the consummation of this offering in
connection with the resolution of the CMI litigation, assuming a public offering
price of $11.00 per share, the mid-point of the range shown on the cover of this
prospectus, and up to 880,000 shares issuable upon the exercise of outstanding
warrants. We will not receive any of the proceeds from the sale of these shares,
but may receive up to a maximum of $8,932,000, assuming a public offering price
of $11.00 per share, if the holders of the warrants elect to pay the exercise
price in cash rather than on a "cashless" basis, which we will use for general
corporate purposes as described above.
18
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business and for general corporate purposes. There can be no
assurance that we will pay dividends in the future. Our future dividend policy
is within the discretion of our board of directors and will depend upon various
factors, including our results of operations, financial condition, capital
requirements and investment opportunities.
19
CAPITALIZATION
The following table shows our capitalization as of June 30, 2000:
- on an actual basis;
- on an as adjusted basis to give effect to:
- the sale of the 2,300,000 shares of our common stock in this offering
at an assumed initial public offering price of $11.00 per share, the
midpoint of the offering range shown on the cover of this prospectus,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by us;
- the repayment of our $5,000,000 promissory note and the write-off of
unamortized loan costs of $679,322 and unamortized debt discount of
$1,176,000;
- the payment of $1,000,000 in cash and the issuance of 160,428 shares of
common stock, determined by dividing $1,764,708 by the assumed public
offering price of $11.00 per share, the midpoint of the range shown on
the cover of this prospectus, in settlement of our $2,820,417 notes
payable and accrued interest in connection with the resolution of the
CMI litigation; and
- compensation expense of $2,902,500 related to the vesting of options to
purchase 270,000 shares of common stock upon the consummation of an
initial public offering at an exercise price of $0.25 per share and
interest expense of $581,600 which results primarily from an increase
in the valuation of outstanding warrants to purchase 800,000 shares of
common stock as the result of (a) an adjustment to the exercise price
of these warrants from $7.00 per share to $9.35 per share upon the
consummation of the initial public offering, assuming an initial public
offering price of $11.00, the midpoint of the offering range shown on
the cover of this prospectus, and (b) the difference between the fair
value of the common stock underlying these warrants of $8.00 per share,
the fair value determined by our management for our common stock as of
the date these warrants were issued, and $11.00 per share.
You should read this table in conjunction with our consolidated financial
statements and the notes to those financial statements included elsewhere in
this prospectus.
AS OF JUNE 30, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
Short-term debt--note payable, net of debt discount of
$1,176.................................................... $ 5,824 $ --
Shareholders' equity (capital deficit):
Preferred Stock: $.001 par value, 20,000,000 shares
authorized; none issued actual and as adjusted.......... -- --
Common Stock: $.001 par value; 50,000,000 shares
authorized; 10,031,911 shares issued and outstanding
actual; 12,492,339 shares issued and outstanding as
adjusted................................................ 10 12
Additional paid-in capital................................ 30,267 56,640
Unearned compensation..................................... (10,762) (10,762)
Accumulated deficit....................................... (23,091) (28,375)
-------- --------
Total shareholders' equity (capital deficit)............ (3,576) 17,515
-------- --------
Total capitalization.................................... $ 2,248 $ 17,515
======== ========
The table above excludes, as of June 30, 2000, 5,002,866 shares of common
stock issuable upon the exercise of outstanding warrants and 668,000 shares
issuable upon the exercise of outstanding stock options.
20
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between our tangible assets and our liabilities,
divided by the number of shares of common stock outstanding upon completion of
this offering. For purchasers of our common stock in this offering, dilution in
net tangible book value per share represents the difference between the initial
public offering price of our common stock in this offering and the net tangible
book value of our common stock immediately after completing this offering.
As of June 30, 2000, our net tangible book value (deficit) was $(6,102,600),
or $(.61) per share of our common stock. After giving effect to the sale of
2,300,000 shares of common stock in this offering and to the issuance of 160,428
shares of common stock in connection with the settlement of the CMI litigation,
assuming an initial public offering price of $11.00 per share, the midpoint of
the offering range shown on the cover of this prospectus, and after deducting
underwriting discounts and commissions and estimated offering expenses, our net
tangible book value as of June 30, 2000 would have been $17,279,557, or $1.38
per share of our common stock. This represents an immediate increase in our net
tangible book value of $1.99 per share to current shareholders and an immediate
dilution of $9.62 per share to new investors purchasing our common stock in this
offering. The following table illustrates the foregoing information as of
June 30, 2000 with respect to dilution to new investors:
Assumed initial public offering price per share............. $11.00
Net tangible book value (deficit) per share at June 30,
2000.................................................... $ (.61)
Increase in net tangible book value per share attributable
to new investors and to issuance of shares to CMI....... 1.99
------
Net tangible book value per share after this offering....... 1.38
------
Dilution per share to new investors......................... $ 9.62
======
The following table summarizes, after giving effect to this offering, as of
June 30, 2000, the differences between the total number of shares of our common
stock purchased from us, the total consideration paid and the average price per
share paid by existing shareholders and new investors purchasing shares of our
common stock in this offering based upon an assumed initial public offering
price of $11.00 per share, the midpoint of the offering range shown on the cover
of this prospectus:
The table above excludes 5,002,866 shares of common stock issuable upon the
exercise of outstanding warrants as of June 30, 2000 at a weighted average
exercise price of $6.47 per share and 668,000 shares issuable upon the exercise
of outstanding stock options as of June 30, 2000 at a weighted average price of
$3.94 per share. To the extent that any of these options or warrants with an
exercise price of less than the net tangible book value per share at the time of
exercise are exercised, there will be further dilution to new investors.
21
SELECTED HISTORICAL FINANCIAL DATA
You should read the selected historical financial data shown below together
with the financial statements and the notes to those financial statements
included elsewhere in this prospectus.
The following table summarizes:
- the statements of operations of Lightpoint Entertainment, Inc., our
predecessor, for the period from July 31, 1997 (Lightpoint's date of
inception) through June 30, 1998 and for the fiscal year ended June 30,
1999; and
- our consolidated statement of operations for the fiscal year ended
June 30, 2000.
The table below does not include our results of operations from May 27, 1999
(the date of our inception) through June 30, 1999, since that information is not
considered meaningful for purposes of this presentation as we had minimal
activity. Diluted net loss per share does not differ from basic net loss per
share since the effect of potential common shares is anti-dilutive.
LIGHTPOINT (OUR PREDECESSOR) VICTORY
------------------------------------------ ------------------
FOR THE PERIOD FROM
JULY 31, 1997 THROUGH FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 2000
--------------------- ------------------ ------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenues.................................... $ 579 $ 222 $ 310
------- ------- --------
Expenses:
Operating................................. 860 1,335 4,490
General and administrative................ 1,248 3,039 4,539
Common stock, options and warrants issued
for general and administrative
services................................ -- 2,875 3,199
Depreciation and amortization............. 137 348 404
Abandonment of software and equipment..... 150 8 8
------- ------- --------
Total expenses............................ 2,395 7,605 12,640
------- ------- --------
Loss from operations........................ (1,816) (7,383) (12,330)
Interest expense, net....................... (194) (357) (1,010)
------- ------- --------
Net loss.................................... $(2,010) $(7,740) $(13,340)
======= ======= ========
Net loss per common share--basic and
diluted................................... $(19.01) $ (5.05) $ (1.42)
======= ======= ========
Weighted average common shares outstanding--
basic and diluted......................... 106 1,534 9,382
======= ======= ========
22
The following table summarizes:
- the historical balance sheets of Lightpoint Entertainment, Inc., our
predecessor, as of June 30, 1998 and June 30, 1999;
- our historical consolidated balance sheet as of June 30, 2000; and
- our consolidated balance sheet as of June 30, 2000 on an adjusted basis to
give effect to the sale of 2,300,000 shares of common stock by us in this
offering, after deducting the underwriting discounts and commissions and
estimated offering expenses; the repayment of our $5,000,000 promissory
note from the net proceeds of this offering and the write-off of
unamortized loan costs of $679,322 and the unamortized debt discount of
$1,176,000 and the payment of $1,000,000 in cash and the issuance of
160,428 shares of common stock in settlement of our $2,820,417 notes
payable and accrued interest upon consummation of the offering in
connection with the resolution of the CMI litigation, assuming a public
offering price of $11.00, the midpoint of the range shown on the cover of
this prospectus.
The table below does not show our historical balance sheet at June 30, 1999,
since that information is not meaningful for purposes of this presentation
as we had minimal activity.
LIGHTPOINT (OUR PREDECESSOR) VICTORY
----------------------------- -------------------
AS OF JUNE 30, 2000
-------------------
AS OF AS OF AS
JUNE 30, 1998 JUNE 30, 1999 ACTUAL ADJUSTED
------------- ------------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents...................... $ 9 $ 460 $ 1,517 $ 16,928
Working capital (deficit)...................... (2,837) (3,493) (5,876) 16,329
Total assets................................... 1,133 1,607 4,015 18,312
Short-term debt, net of debt discount.......... 2,000 2,000 5,824 --
Total liabilities.............................. 2,983 3,996 7,591 797
Total stockholders' equity (deficit)........... (1,850) (2,389) (3,576) 17,515
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH THE
FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS AND THE OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD ALSO
REVIEW CAREFULLY AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US ELSEWHERE IN
THIS PROSPECTUS RELATING TO OUR BUSINESS, INCLUDING UNDER THE CAPTIONS "RISK
FACTORS" AND "BUSINESS." FOR THE PURPOSES OF THIS SECTION OF THIS PROSPECTUS,
"VICTORY" REFERS TO VICTORY ENTERTAINMENT CORP. AND NOT ITS SUBSIDIARIES.
IN THE FOLLOWING DISCUSSION AND ANALYSIS, THE RESULTS FOR THE YEAR ENDED
JUNE 30, 2000 REFLECT OUR CONSOLIDATED OPERATIONS. THE RESULTS OF OPERATIONS FOR
THE YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM JULY 31, 1997 THROUGH JUNE 30,
1998 REFLECT THE OPERATIONS OF OUR PREDECESSOR.
OVERVIEW
Victory is an early stage holding company engaged through its subsidiaries
in the development, production and worldwide distribution of television and
Internet programming, the development and production of state-of-the-art
animation and special effects and the licensing and marketing of branded
consumer merchandise.
Our animation and special effects studio provides animation and special
effects for our projects and performs work for third parties on a
project-by-project basis. Revenues for these projects are recognized as the work
is performed. Our animation and special effects projects accounted for
substantially all of our revenues from inception through March 31, 2000.
We expect to receive revenues as a producer of television programming
through domestic network and cable cash licensing fees and domestic first run
syndication fees (other than for THE DOOLEY AND PALS SHOW). Domestic first run
syndication fees are generally paid in cash or as barter based on a portion of
the national advertising revenues from a project. We expect to receive revenues
as a distributor of our television programming through international
distribution fees and domestic re-run fees. Television series initially produced
for the networks and first run syndication are generally licensed to domestic
and foreign markets concurrently. The more successful series are later
syndicated in domestic markets and in certain foreign markets. The length of the
revenue cycle for television series will vary depending on the number of seasons
a series remains in active production. Revenues arising from television license
agreements are recognized in the period that the films or television series are
available for telecast and therefore may cause fluctuation in operating results.
For the programs we produce, we will incur development and marketing costs prior
to entering into production arrangements under which a third party would cover
all or part of the production expenses of our programs. For programming that we
will distribute for other producers, we will enter into arrangements with third
parties to cover all or part of the production of those programs. For example,
we are developing VAMPS and will seek a third party producer before we incur any
significant production costs, and we plan to enter into similar arrangements for
future projects.
We expect to receive revenues from Internet advertising on our websites,
cross-promotional agreements with other websites, direct sales of our products
online, and, for our NEXTBIGSTAR.COM website, an integrated Internet and
television advertising package including Internet and television commercials,
category specific sponsorship packages, banner ads, tags and website links.
Revenues from Internet sponsorship and advertising on our websites and from
cross-promotional agreements with other websites are typically recognized
ratably over the term of the underlying contract, and revenues from direct sales
of our products online are typically recognized upon shipment of goods to the
customer. We have completed our first round of NEXTBIGSTAR.COM competition and
have begun to enter into sponsorship and advertising arrangements for
NEXTBIGSTAR.COM. We anticipate NEXTBIGSTAR.COM will be the primary source of
revenues for our Internet programming for the foreseeable future. We recognized
24
sponsorship revenues of $190,000 in connection with our NEXTBIGSTAR.COM
promotional bus tour during the fourth quarter of our fiscal year ended
June 30, 2000.
We expect to receive revenues from the licensing, marketing and distribution
of our program-related merchandise, which are expected to include toys, CDs and
interactive CD-Roms, board games, apparel and home videos. Our program-related
merchandise will be manufactured and distributed by third parties with whom we
have entered or intend to enter into licensing agreements. Generally, these
manufacturers are compensated by receiving a percentage of the profits received
from the sale of these products. For example, we have entered into agreements
relating to THE DOOLEY AND PALS SHOW for toddler and infant clothing, giant
helium parade balloons, school supplies and party products.
Since our inception, we have incurred significant operating losses. These
losses primarily result from development costs associated with building our 3-D
animation facilities, production costs for THE DOOLEY AND PALS SHOW and other
selling, general and administrative expenses. As a result, we reported a net
loss of $13,341,000 for the year ended June 30, 2000 and Lightpoint, our
predecessor, reported a net loss of $7,740,000 for the year ended June 30, 1999.
As of June 30, 2000, we had an accumulated deficit of $23,091,000. As we expand
our business, we believe that our operating expenses will increase
significantly, primarily due to additional production costs of THE DOOLEY AND
PALS SHOW, expansion costs associated with NEXTBIGSTAR.COM, development of a
significant Internet presence, related marketing, advertising and promotional
expenses, strategic partnerships and additional depreciation related to capital
expenditures. As a result, we expect to incur operating and net losses and
negative cash flow from operations for the foreseeable future.
Our recent results of operations, including the decrease in revenues from
service animation and special effects work during the years ended June 30, 2000
and 1999 described in the comparisons below, are primarily attributable to our
strategy of creating television programming and characters which we own and
control, thereby implementing a business plan based upon the creation and
ownership of assets rather than the short-term business strategy of
service-based entertainment companies. We believe that an asset-based company is
better positioned to achieve substantially higher operating revenue and cash
flow over the long term than service-based entertainment companies. It will also
enable us to retain the distribution and ancillary rights to our programming as
well as acquire distribution rights from third parties. Distribution has
historically generated substantially higher operating margins than fees
generated solely from production. However, our strategy of creating programming
and characters which we own will not prevent us from continuing to provide, when
appropriate, our traditional services, particularly in connection with animation
and special effects projects for third parties.
During the year ended June 30, 2000 and the year ended June 30, 1999, we
recorded employee and officer compensation expenses of $4,949,000 and
$1,615,000, respectively, of which $2,484,000 and $164,000 was non-cash
compensation, respectively. We anticipate that additional compensation expense
of approximately $2,903,000 will be recorded in connection with 270,000
outstanding options to purchase common stock at an exercise price of $0.25 per
share which vest upon the successful completion of this offering, based on an
assumed initial public offering price of $11.00 per share, the midpoint of the
offering range shown on the cover of this prospectus, which will be recorded in
our first fiscal quarter completed following the consummation of this offering.
On July 1, 1999, Victory acquired the capital stock of Lightpoint
Entertainment, Inc. in a merger whereby Lightpoint merged with a wholly owned
subsidiary of Victory. As part of the merger, 2,072,600 shares of common stock
and 2,239,841 warrants to purchase common stock of Lightpoint were exchanged for
an equal number of common shares and warrants to purchase common shares of
Victory and the majority stockholder of Lightpoint surrendered 1,900,000 shares
of Lightpoint common stock. The transaction was accounted for as a
recapitalization of Lightpoint and a tax-free reorganization for Federal income
tax purposes.
25
Victory is a holding company which was incorporated under the laws of the
State of Florida on May 27, 1999. Victory's primary subsidiaries are:
- Victory Distribution, Inc., which oversees all distribution and
exploitation of Victory's television and Internet programming properties
and acquired distribution rights from third party producers and the sale
of branded merchandise;
- Victory Television, Inc., which develops and produces television series,
specials and made-for-television and made-for-cable movies;
- Victory Internet Productions, or VIP, which produces and distributes
Internet programming. On January 18, 2000, VIP entered into an agreement
with McMahon Communications, Inc., or MMCI, under which both VIP and MMCI
hold a 50% membership interest in Next Big Star, LLC, a joint venture,
which we include in our consolidated financial statements since VIP
maintains voting control, which developed and launched NEXTBIGSTAR.COM, an
online talent search devoted to discovering and promoting future
entertainment talent and producing specials which will be telecast on
broadcast television and the Internet;
- Victory Animation Studios, Inc., which also operates as Victory f/x, which
develops and produces animated series and long-form animated programs,
such as television movies, and produces state-of-the-art special effects
for Victory-produced programs and for third parties, including segments of
major motion pictures; and
- Lightpoint Entertainment, Inc., which produces THE DOOLEY AND PALS SHOW, a
children's television production that will be distributed by Victory
Distribution.
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2000 COMPARED WITH THE YEAR ENDED JUNE 30, 1999
REVENUES. Revenues were $310,000 for the year ended June 30, 2000, compared
to revenues of $222,000 for the year ended June 30, 1999, an increase of
$88,000, or 40%. We derived $120,000 of our revenues during the year ended
June 30, 2000 and substantially all of our revenues during the year ended
June 30, 1999 from service animation and special effects work performed for
various clients, the most significant of which was Disney i.d.e.a.s., the
commercial post-production facility located at Disney MGM Studios in Lake Buena
Vista, Florida. In addition, during the fourth quarter of our fiscal year ended
June 30, 2000, we recognized $190,000 of sponsorship revenues in connection with
our completed NEXTBIGSTAR.COM promotional bus tour. Prior to July 1999,
Lightpoint provided animation and special effect services to Disney i.d.e.a.s.
under a license agreement. Following the termination of this agreement in
July 1999, we continue to provide these services to Disney i.d.e.a.s. on a
transaction by transaction basis. Revenues from Disney i.d.e.a.s. accounted for
32% of total revenues for the year ended June 30, 2000, which followed
termination of our licensing agreement, and 76% for the year ended June 30,
1999, which was prior to the termination of the licensing agreement.
OPERATING EXPENSES. Operating expenses were $4,490,000 for the year ended
June 30, 2000, compared to $1,335,000 for the year ended June 30, 1999, an
increase of $3,155,000, or 236%. Operating expenses include all costs of
production and development, as well as the direct cost of revenues. This
increase is due primarily to expenses associated with the production of THE
DOOLEY AND PALS SHOW. Our pilot episode of THE DOOLEY AND PALS SHOW was produced
in September 1999 at a cost of $400,000 and the series began production in
December 1999 at an average cost of $100,000 per episode. We produced thirty-two
episodes of THE DOOLEY AND PALS SHOW as of June 30, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $4,539,000 for the year ended June 30, 2000, compared to $3,039,000 for the
year ended June 30, 1999, an increase of $1,500,000, or 49%. General and
administrative expenses include payroll and related expenses for
26
executive, accounting and administrative personnel. This increase was primarily
due to increased legal and consulting fees of $613,000 in connection with
financial and business advisory services and increased salaries and wages of
$646,000 due to the growth of our business. In addition, we have incurred an
increase of $168,000 in travel, lodging and entertainment costs related to the
NEXTBIGSTAR.COM bus tour, as well as an increase in marketing and promotion
costs of approximately $83,000.
COMMON STOCK, OPTIONS AND WARRANTS ISSUED FOR GENERAL AND ADMINISTRATIVE
SERVICES. Common stock, options and warrants issued for general and
administrative services were $3,199,000 for the year ended June 30, 2000 as
compared to $2,875,000 for the year ended June 30, 1999, an increase of $324,000
or 11.3%. We recorded compensation expense of $2,875,000 for the issuance of the
common stock and warrants to directors, consultants and legal advisors during
fiscal 1999. In fiscal 2000, we recorded amortization of unearned compensation
of $2,432,000 for the stock issued to a founder, officers and a director and
compensation of $767,000 for the issuance of options and warrants to a current
officer, directors and a former officer.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the year ended June 30, 2000 were $404,000, compared with $348,000
for the year ended June 30, 1999, an increase of $57,000, or 16%. This increase
was primarily due to the acquisition of property and equipment used for
animation purposes and for the development of the NEXTBIGSTAR.COM website.
INTEREST EXPENSE. Interest expense for the year ended June 30, 2000 was
$1,071,000, compared to $357,000 for the year ended June 30, 1999, an increase
of $714,000, or 200%. This increase was due to interest incurred in connection
with the issuance of a $5,000,000 note payable on April 3, 2000 which accrues
interest at 12% per annum and the amortization of related deferred loan costs
and debt discount.
INTEREST INCOME. Interest income of $61,000 for the year ended June 30,
2000 is due to the interest earned on the proceeds of the private placement of
April 3, 2000. The funds were invested in commercial paper and earned interest
through June 30, 2000.
NET LOSS. Our net loss was approximately $13,341,000 for the year ended
June 30, 2000, compared to $7,740,000 for the year ended June 30, 1999, an
increase of $5,601,000, or 72.4%. This increase was due to the factors described
above. Because of the uncertainty regarding our future profitability, the future
tax benefits of our losses have been fully reserved for and, therefore, no
benefit for the net operating loss has been recorded. Under Section 382 of the
Internal Revenue Code, this operating loss may be limited due to ownership
changes.
THE YEAR ENDED JUNE 30, 1999 COMPARED WITH THE PERIOD FROM JULY 31, 1997
(LIGHTPOINT'S DATE OF INCEPTION) THROUGH JUNE 30, 1998
REVENUES. Revenues were $222,000 for the year ended June 30, 1999, compared
to revenues of $579,000 for the period from July 31, 1997 to June 30, 1998, a
decrease of $357,000, or 62%. The decrease in revenues from service animation
and special effects work is partly attributable to our increasing pursuit of
long format television and film productions both internally, such as THE DOOLEY
AND PALS SHOW, and externally. Revenues from Disney i.d.e.a.s. accounted for 76%
and 62% of total revenues for the year ended June 30, 1999 and for the period
from July 31, 1997 to June 30, 1998, respectively.
OPERATING EXPENSES. For the year ended June 30, 1999, operating expenses
were $1,335,000, compared to $860,000 for the period from July 31, 1997 to
June 30, 1998, an increase of $475,000, or 55%. Operating expenses include all
costs of production and development, as well as the direct costs of
27
revenues. This increase was due primarily to expenses associated with the
development of THE DOOLEY AND PALS SHOW.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended June 30, 1999 were $3,039,000, compared to $1,248,000 for the
period from July 31, 1997 to June 30, 1998, an increase of $1,791,000 or 144%.
This increase was primarily due to increased consulting fees of $687,000 in
connection with financial and business advisory services and increased salaries
and wages of $1,070,000 due to the growth of our business.
COMMON STOCK, OPTIONS AND WARRANTS ISSUED FOR GENERAL AND ADMINISTRATIVE
SERVICES. Common stock, options and warrants issued for general and
administrative services was $2,875,000 for the year ended June 30, 1999 compared
to zero for the period from July 31, 1997 to June 30, 1998. During fiscal 1999,
we recorded compensation expense of $2,164,000 related to common stock issued to
some of our directors, consultants and legal advisors and $711,000 related to
warrants issued to a consultant.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the year ended June 30, 1999 were $348,000 compared to $137,000,
for the period July 31, 1997 to June 30, 1998, an increase of $211,000, or 154%.
This increase was due primarily to the acquisition of property and equipment
used for animation purposes.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1999 was
$357,000, compared to $194,000 for the period from July 31, 1997 to June 30,
1998, an increase of $163,000, or 84.0%. This increase was due to interest
attributable to interest which accrued on outstanding promissory notes which
were outstanding for the entire year ended June 30, 1999 but for only a portion
of the period from July 31, 1997 to June 30, 1998.
NET LOSS. For the year ended June 30, 1999, our net loss was $7,740,000,
compared to $2,010,000 for the period from July 31, 1997 to June 30, 1998, an
increase of $5,730,000, or 285%. This increase was due to the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception and the inception of our predecessor, Lightpoint, we
have funded our operating cash requirements primarily through sales of privately
placed common stock and warrants and a private placement of a unit that
consisted of notes and warrants. From July 1998 to July 15, 1999, Lightpoint
raised $4,486,000 in a private placement of 1,915,000 shares of common stock and
1,915,000 warrants, and, from July 28, 1999 to December 17, 1999, Victory raised
$6,863,000 in a private placement of 1,948,625 shares of common stock and
1,948,625 warrants. At June 30, 2000, we had cash available for operations of
$1,517,000.
In October and December of 1998, Lightpoint LLC, an affiliate of Lightpoint,
issued two promissory notes in the aggregate amount of $2,000,000 which were
used to fund the operations of Lightpoint. Lightpoint is currently subject to
litigation for amounts alleged to be due under those notes as discussed further
under "Business--Legal Proceedings."
On April 3, 2000, Victory issued a $5,000,000 note payable and warrants to
purchase 880,000 shares of common stock in a private placement. We incurred
approximately $703,000 in costs in connection with this private placement. The
note payable is evidenced by a promissory note due the earlier of completion of
this offering or March 28, 2001, with interest at 12% per annum. The warrants
are exercisable for 800,000 shares of common stock at an exercise price of $7.00
or, if this offering is consummated, 85% of the public offering price per share
within three years of issuance. The placement agent for this private placement
also received 80,000 warrants, exercisable at $7.00 per share or, if this
offering is consummated, 165% of the public offering price per share within five
years of issuance.
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For the year ended June 30, 2000, net cash used in operating activities of
$9,369,000 was primarily attributable to our net loss of $13,341,000. The loss
was offset by depreciation and amortization of $404,000, amortization of
deferred loan costs of $226,000, amortization of debt discount of $392,000,
amortization of unearned compensation of $2,432,000 and common stock, options
and warrants issued for compensation of $766,000. Additional uses of cash were
due to the net decrease of accounts payable, accrued expenses and other
liabilities of $179,000 and increases in accounts receivable and prepaid
expenses of $79,000.
For the year ended June 30, 1999, net cash used in operating activities of
$3,402,000 was primarily attributable to our net loss of $7,740,000, offset by
non-cash compensation in the form of warrants and shares of common stock of
$2,875,000 and an increase in accounts payable, accrued expenses and other
liabilities of $1,013,000. Additional operating sources of cash were the net
decrease in accounts receivable and prepaid expenses of $94,000.
For the period from July 31, 1997 to June 30, 1998, net cash used in
operating activities of $877,000 was primarily due to our net loss of
$2,010,000, offset by an increase in accounts payable and accrued expenses of
$983,000. Additional operating uses of cash were the increase in accounts
receivable and prepaid expenses of $137,000.
Net cash used for investing activities for the year ended June 30, 2000 of
$569,000 included primarily cash used to purchase property and equipment for
animation and the development of the NEXTBIGSTAR.COM website. Net cash used in
investing activities for the year ended June 30, 1999 and 1998 of $473,000 and
$1,274,000, respectively, was used primarily for purchases of production and
office equipment and intellectual property associated with THE DOOLEY AND PALS
SHOW.
Net cash provided by financing activities for the year ended June 30, 2000
and the years ended June 30, 1999 and June 30, 1998 were $10,996,000, $4,326,000
and $2,160,000, respectively, due primarily to our private placements of
securities and issuance of notes payable.
At June 30, 2000 and June 30, 1999, our current liabilities of $7,591,000
and $3,996,000, respectively, consisted primarily of obligations for notes
payable with applicable interest, accounts payable and accrued expenses.
We have no material commitments for capital expenditures but anticipate
future expenditures of approximately $1,500,000 for THE DOOLEY AND PALS SHOW and
$3,000,000 for NEXTBIGSTAR.COM during the next 12 months. Included in the future
expenditures for NEXTBIGSTAR.COM is the obligation to McMahon Communications,
Inc. in the amount of $500,000, payable in monthly installments of $42,000. The
on-going funding of these projects, including the monthly payments to McMahon
Communications, Inc., is expected to be provided by the proceeds of this
offering.
The report of our independent auditors on Lightpoint's financial statements
for the year ended June 30, 1999 and our financial statements for the year ended
June 30, 2000, included elsewhere in this prospectus, includes an explanatory
paragraph which states that our recurring losses, working capital deficit and
alleged defaults on our notes payable raise substantial doubt about our ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We believe our ability to continue as a going concern is dependent on the
success of THE DOOLEY AND PALS SHOW and the NEXTBIGSTAR.COM joint venture and
our ability to complete this offering. However, there can be no assurance that
THE DOOLEY AND PALS SHOW and the NEXTBIGSTAR.COM joint venture will yield
positive operating results in the future. In the event that this offering is not
consummated on a timely basis, we will need to seek additional financing from
another source, including financing for our obligations to McMahon
Communications, Inc. described above. We do not anticipate that our revenues
from operating activities during the next 12 months will be sufficient to
support our
29
operations during that period. There can be no assurance that we will be able to
find alternative financing on a timely basis, if at all.
We believe that these resources, together with the net proceeds from this
offering, will be sufficient to sustain our operations for the next 24 months.
If, however, we expand more rapidly than currently anticipated, if our working
capital needs exceed our current expectations or if we make acquisitions, we
will need to raise additional capital from equity or debt sources. Our future
liquidity and capital requirements will depend upon numerous factors, including
our ability to generate cash from advertising and distribution of our television
programming, from advertising, sponsorship and e-commerce opportunities related
to our Internet programming and our ability to generate significant licensing
and merchandising revenues. In addition, we will, from time to time consider the
acquisition of or investment in complementary businesses, services and
technologies, which might increase our liquidity requirements or cause us to
issue additional equity or debt securities.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than 2000. As the year 2000 approached, the international
business community faced uncertainty regarding potential systems failure or
miscalculation causing disruptions of operations and temporary inability to
process transactions, send invoices or engage in normal business activities. As
of the date of this discussion, Victory has experienced no effects of the "Y2K
problem" in the hardware or software of any of its automated systems, including
those used for animation, finance or administration.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 138, requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. SFAS 133, as amended by
SFAS 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Historically, we have not entered into derivative contracts and
do not expect to have any hedging activities in the future. Accordingly, the
adoption of SFAS 133 on July 1, 2000 did not affect our financial statements.
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 139, "Rescission of FASB Statement No. 53 and Amendments to FASB Statements
No. 63, 89 and 121" ("SFAS 139"). SFAS 139 requires companies that previously
were subject to the requirements of SFAS 53 to follow the guidance in AICPA
Statement of Position No. 00-2, "Accounting by Producers and Distributors of
Films," ("SOP 00-2"). SOP 00-2 is effective for financial statements for fiscal
years beginning after December 15, 2000. We have not yet evaluated the impact of
SOP 00-2 on our financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 2, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. We believe that the impact of FIN 44 will not have a material effect on
our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investments in short- or medium-term, interest bearing,
investment grade securities and commercial paper.
30
BUSINESS
We are an integrated entertainment company specializing in television and
Internet programming. In addition to developing, producing and distributing
television and Internet programming, we license and market program-related
branded merchandise. We operate a state-of-the-art 3-D computer and animation
special effects studio where we develop and produce our in-house projects and
produce programming for third parties. Our current projects include the
production and distribution of THE DOOLEY AND PALS SHOW, a children's television
series; the development of VAMPS, a sci-fi dramatic series, and EXTREME TEAM and
SK8RATZ, two animated shows for children; and the production, through a joint
venture with television personality Ed McMahon, of NEXTBIGSTAR.COM, an online
entertainment talent search. We believe that the experience of our management
and our strategic relationships will enable us to enhance our position in our
primary business areas--television programming and distribution, Internet
programming, animation and special effects and branded merchandising.
We were formed in May 1999 by our President and Chief Executive Officer,
Michael Gerber. On July 1, 1999, we acquired Lightpoint, which was founded in
July 1997 and which is now our wholly owned subsidiary. In January 2000, we
formed our NEXTBIGSTAR.COM joint venture, through our Victory Internet
Productions subsidiary, which oversees our Internet programming. We have also
established subsidiaries which are responsible for our television programming,
brand merchandising and distribution, and animation and special effects business
areas.
TELEVISION PROGRAMMING AND DISTRIBUTION
We develop, produce and distribute television series, animated series,
specials and made-for-television movies. Development involves the
conceptualization and creation of a project. Production includes overseeing all
principal creative and business aspects of each television project, including
the hiring of production personnel and obtaining studio space, budgeting,
casting, scripting and, where applicable, animation and special effects.
Distribution involves the marketing and sales of, and the licensing of rights
to, program-related materials. Our television programming focus will be on
episodic, or series programming, and made-for-television movies. Additionally,
we are currently developing a number of dramatic and animated projects which are
specifically designed to showcase our in-house talent, technology and management
expertise in developing and producing 3-D computer animation and
state-of-the-art special effects.
Recent developments in the television industry have created significant
opportunities for businesses engaged in the development, production and
distribution of television programming, both domestically and internationally.
In the United States, the proliferation of cable and satellite networks has
driven a demand for new programming and provided expanded markets for
programming targeted at specific demographic groups, such as children and
science fiction enthusiasts. According to Nielsen Media Research, the average
American watches 28 hours and 13 minutes of television per week and the average
American household watches approximately seven hours of television a day. The
international television market continues to expand as well, as advancements in
technology in existing and emerging markets provide a huge potential audience
for programming with broad cross-cultural appeal, such as animation and
action/adventure. We believe that this expanded market will provide us
opportunities to market and distribute our television-related merchandise.
We expect to generate revenues from our television programming and
distribution through a combination of producer fees, international distribution
fees, domestic re-run fees and net profit sharing.
We expect to earn producer fees for the projects we produce or co-produce
through either cash licensing fees from a network or cable station or, if the
project is sold into first run syndication, through a combination of cash and
barter fees based on a portion of the national advertising revenues
31
from the project. We currently plan to co-produce VAMPS and the two animated
series in association with Fred Silverman Productions described below, as well
as other future projects.
We plan to earn international distribution fees from the first-run sale of
projects in markets outside of the United States and domestic re-run fees for
projects following their initial network, cable or syndication commitments,
which are typically three to five years after the initial broadcast. We plan to
enter into these distribution arrangements both for projects we produce, such as
THE DOOLEY AND PALS SHOW and VAMPS, and for projects produced by third parties
which we will acquire rights to distribute. In addition, we own rights to a
feature film and 22 completed episodes of SALTY THE SEA LION, a live action
children's adventure series originally produced in 1972. We plan to distribute
television programming in virtually all media, including television, home video,
DVD, music publishing and e-commerce, but excluding theatrical distribution.
Additionally, we plan to earn our share of the net profits of a successful
project that we develop, produce or distribute or for which we provide animation
and special effects. Net profits are typically profits attributable to a project
after the payment of fees and the recoupment of advances and expenses.
THE DOOLEY AND PALS SHOW
We currently produce THE DOOLEY AND PALS SHOW, a children's television
series, and we have obtained commitments from public broadcasting stations that
reach over 60% of households in the United States to air THE DOOLEY AND PALS
SHOW. The theme of THE DOOLEY AND PALS SHOW is continuous adventure blending
education and entertainment and targeting the pre-school market for children
five years of age and under. Each episode uses creative and imaginative elements
to stimulate basic motor skills, develop problem solving skills and engage the
minds of children. The objective of the show is to provide a framework to
explore fundamental educational and moral values while involving and addressing
life-lessons for pre-school audiences from the beginning to the end of each
episode. THE DOOLEY AND PALS SHOW incorporates proprietary songs, dance and
settings with vibrant colors to capture the imagination of its audience. The
lead character named "DOOLEY" is a warm, engaging creature from a star "far, far
away" who loves to sing songs, play games, dance and learn. In addition to the
costume characters, each episode will include a talented cast of children,
positive adult role models and our own 3-D animation.
The production of the pilot for THE DOOLEY AND PALS SHOW was completed in
September 1999 and we have completed the production of the 39 episodes
comprising our first broadcast season. The series was filmed at the Disney/MGM
Studios in Orlando, Florida. The show made its television debut in April 2000
and continues to premiere on local broadcasting stations on a staggered basis.
In December 1997, Lightpoint acquired the rights associated with THE DOOLEY
AND PALS SHOW from a third party. These rights include all copyrights, trademark
rights, adoption rights, licensing rights, music rights, broadcasting rights,
video rights and all rights of distribution, display and performance by any
means or methods whether now known or hereafter invented.
OUR AGREEMENT FOR DISTRIBUTION OF THE DOOLEY AND PALS SHOW WITH SOUTH CAROLINA
EDUCATIONAL TV
We have an agreement with an affiliate of South Carolina Educational TV,
which we refer to as SC ETV. Under the agreement, we have granted SC ETV
exclusive rights in the United States and Canada, as well as in Puerto Rico, the
Virgin Islands and Guam, to broadcast THE DOOLEY AND PALS SHOW on SC ETV and to
sublicense THE DOOLEY AND PALS SHOW for broadcast on public broadcasting
stations for a period ending five years after we deliver the last episode of our
first broadcast season, which we anticipate will be in September 2000.
32
Under the agreement, we have agreed to produce at least 39 and up to 52
half-hour episodes of the series. We have the right to terminate the agreement
after the third broadcast season if THE DOOLEY AND PALS SHOW is not airing or is
not committed to air on at least 80% of the Public Broadcasting System stations
in the United States, Canada, Puerto Rico, the Virgin Islands and Guam.
Under the agreement, SC ETV, our public broadcasting presenting station,
promotes and distributes THE DOOLEY AND PALS SHOW on our behalf to other public
broadcasting stations. SC ETV has provided us with non-binding guidelines
relating to its commitment as our public broadcasting presenting station,
including to support the series launch and provide ongoing support, to conduct a
series of promotional activities, educational outreach activities and conference
activities and to provide research and packaging.
We will receive no revenues from our arrangement with SC ETV and will be
required to pay up to $250,000 in expenses of SC ETV that are not covered by
third parties, such as outreach expenses covering educational materials for
daycare centers, pre-schools and elementary schools, including teachers' guides
and workbooks. In addition, we will be required to pay 5% of the net profits we
receive in connection with THE DOOLEY AND PALS SHOW in the territory, including
from merchandising. SC ETV can terminate the agreement at any time if we fail to
comply with any material terms. In addition, under a separate agreement, we are
obligated to Gary Ziedenstein, the creator of THE DOOLEY AND PALS SHOW, an
additional 8% of the gross profits, which are defined in that agreement to mean
gross profits, including profits received from the sale of merchandise we
receive from THE DOOLEY AND PALS SHOW, less fees and expenses, which include
customary production, distribution, sales and licensing and merchandising agent
fees, professional fees, taxes, and intellectual property registration and
enforcement costs.
We believe that our agreement with SC ETV will enable THE DOOLEY AND PALS
SHOW to become a popular children's television program and will create an
opportunity for us to sell our branded merchandise. We believe public
broadcasting has an excellent record in selecting children's programs, as has
been demonstrated by such comparable shows as BARNEY, THE MAGIC SCHOOL BUS,
SESAME STREET and ARTHUR. Public broadcasting also has achieved a reputation for
airing high quality children's programming, which we believe will enhance our
ability to successfully license and market THE DOOLEY AND PALS SHOW.
VAMPS
We are developing VAMPS, a sci-fi dramatic series. VAMPS centers around
three attractive female vampires who protect innocent humans from the predators
of the night. The dramatic situations these characters are involved in during
the day are carried over and resolved at night. VAMPS is currently targeted at a
wide audience, including adult men and women. In addition to utilizing live
actors, VAMPS incorporates the work of our in-house animation and special
effects studio to create effects that enhance the mystique and special powers of
the VAMPS characters, such as providing them with the ability to climb walls,
morph into animals or turn into mist and disintegrate their enemies.
We have produced a demo tape and other promotional materials related to
VAMPS. We anticipate that a portion of the production financing will be borne by
the licensee or first run syndicator of VAMPS and that we will commence
production of VAMPS upon receipt of commitment for that funding. We have entered
into a number of agreements in connection with our development of VAMPS,
including an agreement with Creative Artists Agency, or CAA, to serve as our
agent to help us market VAMPS to networks, cable stations and first run
syndicators, as well as assist us in casting and engaging other creative
personnel who may be engaged to perform services.
33
PROJECTS IN ASSOCIATION WITH FRED SILVERMAN PRODUCTIONS
We are currently developing two animated series targeted for the
six-to-twelve year-old market, EXTREME TEAM and SK8RATZ, in association with
Fred Silverman Productions. EXTREME TEAM centers around a retired mechanic who
builds hot-rod cars that have special powers, which the children in his suburban
neighborhood use to fight crime. SK8RATZ focuses on seven children in an urban
area who are dedicated to skateboarding and have transformed their skate boards
in order to use them in their battle against crime.
Mr. Silverman is currently President of Fred Silverman Productions, a
multi-faceted production entity which is involved in product development for the
entertainment industry. Over the course of his career, Mr. Silverman has
directed the television programming of all three major television networks.
Mr. Silverman was responsible for the programming of many popular weekly
television shows, including THE PERRY MASON MOVIES, ROOTS, THE LOVE BOAT, HILL
STREET BLUES, CHARLIE'S ANGELS, SCOOBY-DOO, FAT ALBERT and THE SMURFS.
Our arrangement with Fred Silverman Productions provides for a mutual
working relationship aimed at developing, producing and distributing new
television programs. This arrangement contemplates equal ownership of these
programs and all other rights derived from these programs, including music
publishing, merchandising, publications and sequels.
SALTY THE SEA LION
We own rights to and plan to distribute a feature film and 22 television
episodes for SALTY THE SEA LION, a live-action children's television program
produced in 1972. Those rights consist of the following:
- Domestic television distribution, including video, of the original film
and series, and any new live action series that may be produced during the
term of the agreement;
- Worldwide television distribution, including video, of any new animated
series that may be produced during the term of the agreement; and
- Worldwide licensing of any branded merchandise stemming from the animated
series.
INTERNET PROGRAMMING
We develop and produce Internet programming. Our Internet programming
involves the creation, design and publishing of interactive websites. As
Internet broadcast quality approaches that of the television, we expect demand
for Internet programming to continue to increase and eventually lead to the
convergence of television, the Internet and other digital media.
The Internet has emerged as a significant global communications medium,
enabling millions of people to access information and conduct commerce
electronically. According to International Data Corporation, the total number of
Internet users worldwide will increase from approximately 196 million in 1999 to
502 million by 2003. The Internet provides advertisers and merchants with an
attractive means of marketing and selling products and services either to a mass
audience or to a targeted demographic segment. International Data Corporation
estimates that the total value of products and services sold over the Internet
will increase from approximately $111.4 billion in 1999 to approximately $1.3
trillion by 2003. According to Forrester Research, advertising spending on the
Internet is projected to increase from $2.8 billion in 1999 to approximately
$17.2 billion in 2003. We intend to capitalize on this trend through the
production of Internet programming, including NEXTBIGSTAR.COM.
NEXTBIGSTAR.COM
Together with television personality Ed McMahon, we produce NEXTBIGSTAR.COM,
an online entertainment talent search, where viewers vote for contestants in a
series of competitive rounds in
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18 talent categories, including comedy, modeling, children's dancing and
singing, music and pet tricks. The online talent search will be divided into
four competitions per year, each competition consisting of preliminary rounds,
quarter final rounds, semifinal rounds and a final round of competition which
will be telecast on broadcast television and the Internet. Winners will be
chosen through online voting. We have engaged Mark Anthony Entertainment, Inc.
to assist us in selling the first run syndication for the final round telecasts
beginning in October 2000 and for other promotional services. We are
contemplating the production and distribution of NEXTBIGSTAR.COM as a weekly
television series, in addition to expanding our website operations to offer a
variety of entertainment information, including celebrity chats and quizzes. Our
first cycle of competition began on April 15, 2000 and the winners of the final
rounds were selected during the week of July 15, 2000. The first finals
competition was broadcast live on the NEXTBIGSTAR.COM website on July 22, 2000.
Our second round of competition is scheduled to end in October 2000.
We attract contestants and viewers to our website through traditional means
of advertising, cross promotional alliances with other websites and by utilizing
the name recognition of our partner, television personality Ed McMahon. In the
spring of 2000, Mr. McMahon conducted a bus tour of 40 U.S. cities in 40 days,
where we conducted live auditions. Mr. McMahon also participated in more than
160 television appearances, including such shows as LARRY KING LIVE,
ENTERTAINMENT TONIGHT and THE TONIGHT SHOW WITH JAY LENO, and over 400 radio
interviews in order to promote the website. Currently, our NEXTBIGSTAR.COM
website receives over 18,000 visitors per day.
Contestants on NEXTBIGSTAR.COM submit their entries on a videotape, many of
which are transformed by our in-house technical staff into Internet programming,
which enables our viewers to watch these performances on our website. Our
viewers then vote online for their favorite performance in each category. The
contestants receiving the most votes advance to the next round of a tournament
style competition. The winners of the final round in each talent category for
each of our four competitions per year can win up to a total of $1 million
dollars in cash and prizes.
We will receive revenues for NEXTBIGSTAR.COM through an integrated Internet
and television advertising package, including Internet and television
commercials, and through the direct sales of our products on our website. We
will offer our sponsors a package including Internet and television commercials,
banner ads, tags and links that provide a seamless transition to our sponsors'
websites and the opportunity to be the exclusive sponsor of a talent category
that is related to the sponsor's business. During the fourth quarter of our
fiscal year ended June 30, 2000, we recognized $190,000 of sponsorship revenues
in connection with our NEXTBIGSTAR.COM promotional bus tour.
OUR AGREEMENT WITH MCMAHON COMMUNICATIONS REGARDING NEXTBIGSTAR.COM
Our agreement with Ed McMahon provides that each of Victory and McMahon
Communications, Inc., which we refer to as MMCI, will have a 50% membership
interest in the NEXTBIGSTAR.COM joint venture, which is structured as a limited
liability company. These arrangements are set out in an operating agreement and
a related agreement among members, each dated January 14, 2000, between Victory
and MMCI. Michael Gerber, our founder and chief executive officer, and
Mr. McMahon are the managers of NEXTBIGSTAR.COM. Our voting arrangements with
NEXTBIGSTAR.COM provide that, while Michael Gerber is employed by Victory,
Victory will maintain voting control over the operations of NEXTBIGSTAR.COM.
Victory and MMCI have agreed that Victory will be responsible for the
day-to-day operations of the NEXTBIGSTAR.COM website and Victory and MMCI will
be jointly responsible for the content of the Internet programming on the
website. After the launch of the NEXTBIGSTAR.COM website, which occurred on
January 28, 2000, the joint venture commenced the development of television
specials, for which Victory and MMCI will serve as co-producers.
35
We will receive a management fee of 10% of the gross revenues received from
the NEXTBIGSTAR.COM website in the form of fees, advances, royalties or profit
participations. In addition, we will act as worldwide distributor for all media
related to NEXTBIGSTAR.COM, for which we will receive customary fees and
expenses. Beginning April 15, 2000, MMCI receives an annual payment of $500,000
which is paid on a monthly basis from our working capital.
Under the operating agreement, net profits of NEXTBIGSTAR.COM are allocated
to the members evenly on a pro rata basis and net losses are allocated solely to
Victory. Since Victory maintains voting control over the operations of
NEXTBIGSTAR.COM under a voting arrangement, the financial statements of
NEXTBIGSTAR.COM are included in Victory's consolidated financial statements. In
the event Mr. McMahon is unable to continue to carry out his duties, due to
death or otherwise, MMCI will sell its interests back to the joint venture
unless, under limited circumstances, an acceptable successor can be found.
STRATEGIC RELATIONSHIPS RELATING TO NEXTBIGSTAR.COM
In order to operate NEXTBIGSTAR.COM and to enhance the capabilities of and
generate traffic to the NEXTBIGSTAR.COM website, we have established strategic
relationships with:
- MICROSOFT CORPORATION--WINDOWS MEDIA PLAYER. NEXTBIGSTAR.COM has entered
into a strategic alliance with Microsoft under which NEXTBIGSTAR.COM uses
Microsoft's Media Player software in exchange for our permitting Microsoft
to advertise NEXTBIGSTAR.COM'S use of its product. Microsoft's Media
Player enables us to provide streaming video and high quality sound on our
websites.
- MICROSOFT NETWORK (MSN). NEXTBIGSTAR.COM has entered into a second
agreement with Microsoft under which MSN Entertainment Channel promotes
NEXTBIGSTAR.COM on its entertainment page and celebrity page. In addition,
the agreement provides for links between pages located on the MSN
Entertainment Channel and NEXTBIGSTAR.COM and NEXTBIGSTAR.COM'S promotion
of MSN.
- EXODUS COMMUNICATIONS, INC. Exodus has agreed to maintain and operate the
hardware to run our NEXTBIGSTAR.COM website.
- IBEAM BROADCASTING CORPORATION. iBEAM will provide us with broadcasting
and bandwidth services through its proprietary streaming audio and video
Internet delivery network.
ANIMATION AND SPECIAL EFFECTS
We produce state-of-the-art animation and special effects, including
multimedia 3-D graphics and animation, for our own programming as well as
programming for third parties. Our animation and special effects team is led by
Art David, a member of the special effects team for the feature motion picture
THE MATRIX. Many of our competitors for the development and production of
television and Internet programming do not have in-house animation and special
effects studios or staff, and are thus compelled to contract with third parties
for those services, which may result in higher production cost and lower quality
control.
Our animation and special effects team transforms a concept for an animated
program into the lively three dimensional characters that appear in our animated
programming. Our concept artists design the characters and environments that
appear in our programs. Through the use of storyboards, an episode is then
created. Our characters are then modeled into three dimensional characters. Once
the animated segments are completed, they are sent to our rendering specialist,
who adds lighting and shadows to the animated scenes, in order to produce the
finished product that will appear on a television screen. Our animation and
special effects team currently provides animation for THE DOOLEY AND PALS SHOW
and is developing EXTREME TEAM and SK8RATZ.
36
We believe that the use of special effects has become an integral component
of television and movie production. We will continue to produce state-of-the-art
special effects work for our own in-house television projects, as well as for
third party projects, including major motion pictures. Our ability to offer
in-house animation and special effects together with our television programming
and distribution and Internet programming will allow us to maximize synergies
when developing and producing our projects and projects for third parties, which
may provide us with a competitive advantage.
We receive revenues from Disney i.d.e.a.s. for animation and special effects
services which accounted for 32%, 76% and 62% of our total revenue for the year
ended June 30, 2000, the year ended June 30, 1999 and the period from July 31,
1997 through June 30, 1998, respectively. Revenues from our animation and
special effects projects accounted for substantially all of our revenues through
March 31, 2000.
BRANDED MERCHANDISE
Through public television exposure and worldwide licensing arrangements, we
intend to position DOOLEY and character-related products from THE DOOLEY AND
PALS SHOW to capitalize on the market for branded children's television
products. Successful marketing campaigns for branded children's television
characters, such as BARNEY and TELETUBBIES, have generated significant revenues
for the holders of the associated merchandising and licensing rights. We intend
to generate similar opportunities for our other television and Internet
programming projects, which we will target to the appropriate audiences.
We will offer a wide variety of branded, retail merchandise through both a
domestic and international licensing program and a direct sales effort. We and
our licensees will market our merchandise worldwide through a variety of
distribution channels, including mass market and specialty retailers, our
television programs and Internet sites.
We intend to build a video library containing programming from our
television shows as well as programs specifically designed for home video use.
Our original music for our programming includes theme songs for our performers.
Music is an integral part of the entertainment experience in our television
programs. Additional revenue may also be generated from the home video market
and from music publishing, songbooks and records.
We will receive revenues from the licensing, marketing and distribution and
direct sales of our program-related merchandise, including toys, CDs and
interactive CD-Roms, board games, apparel and home videos.
LICENSING AND MARKETING RELATIONSHIPS
Images of our characters will appear on numbers of retail products,
including various types of apparel, toys and video games, and a wide assortment
of other items. We intend to retain creative approval over all licensed
products.
Under a five year agreement with Stalwart Productions, which extends through
June 2004, we have granted Stalwart an exclusive worldwide license, except in
Asia, to procure licensing agreements with third parties for the manufacture,
advertising, distribution and sale of products and merchandise based on the
names, characters and visual representations used in THE DOOLEY AND PALS SHOW.
Under this agreement, we retain the right to pre-approve the type, quality and
style of any product to be distributed.
37
Our licensing agreements for DOOLEY-related products include agreements
with:
- Allison Manufacturing Co. for the manufacturing, distribution, sale and
advertising in the U.S. for toddler and infant clothing in mid-tier and
mass market distribution channels and an agreement with Starbound
Entertainment to manufacture giant helium parade balloons;
- Pyramid Accessories for the manufacture, sale and distribution of
DOOLEY-related products including backpacks, lunch kits, rain coats and
paper notebooks;
- Unique Industries for the manufacture, sale and distribution of
DOOLEY-related paper plates and party products;
- High Point Knitting, Inc. for the manufacture, sale and distribution of
DOOLEY-related socks and underwear;
- S. Goldberg & Co. for the manufacture, sale and distribution of
DOOLEY-related children's footwear;
- Franco Manufacturing for the manufacture, sale and distribution of
DOOLEY-related sheets and towels; and
- Drew Pearson Marketing for the manufacture, sale and distribution of
various types of DOOLEY-related hats.
COMPETITION
The areas in which we operate are highly competitive, and many of the
companies with which we compete are substantially larger, have better name
recognition and have more substantial and lengthy operating histories,
backgrounds, experience, and records of successful operations. They also have
significantly greater financial, technical, marketing, production, distribution
and other resources than we now have, or that we will have in the foreseeable
future.
TELEVISION PROGRAMMING AND DISTRIBUTION. Our projects will compete for air
time, time slots and ratings against current shows that have established viewer
loyalty and against new shows that may have significantly greater financial
resources than we do. In addition, we will compete on the basis of relationships
and pricing for access to a limited supply of facilities and talented creative
personnel to produce our projects. Competitors include television producers and
distributors such as PARAMOUNT TELEVISION, PEARSON ALL AMERICAN, SABAN
ENTERTAINMENT, NELVANA ENTERPRISES, NEW LINE TELEVISION, TWENTIETH CENTURY
TELEVISION, MGM TELEVISION, WARNER BROS. TELEVISION, CBS BROADCAST
INTERNATIONAL, COLUMBIA TRISTAR TELEVISION, BUENA VISTA TELEVISION and UNIVERSAL
TELEVISION GROUP.
INTERNET PROGRAMMING. With respect to our Internet programming, we compete
with:
- other online talent search websites, such as Dick Clark's
YOURBIGBREAK.COM, and other general entertainment websites, such as
MTV.COM and LAUNCH.COM, to attract viewers; and
- online content providers as well as traditional media such as television,
radio and print, for a share of advertisers' total advertising budgets.
ANIMATION AND SPECIAL EFFECTS. We compete with specialty animation and
special effects boutiques, such as Pixar and Industrial Light and Magic.
BRANDED MERCHANDISE. We compete with the holders of rights to marketable
shows and characters, such as BARNEY, BLUES CLUES and TELETUBBIES.
There can be no assurance that we will be able to compete successfully, or
that the competitive pressures faced by us will not harm our business.
38
INTELLECTUAL PROPERTY
To protect our intellectual property, we rely on a combination of copyright,
trademark and service mark law, trade secret protections and confidentiality and
non-disclosure agreements and other contractual arrangements with our employees
and third parties. We file for copyright protection for our programming and
characters. In addition, "DOOLEY" is our registered trademark, and we have
applied for federal registration of the marks "DOOLEY AND PALS," "THE DOOLEY AND
PALS SHOW," "NEXTBIGSTAR.COM," "NEXTBIGSTAR.COM" design and
"THENEXTBIGSTAR.COM." We cannot assure you that the steps we have taken to
protect our intellectual property rights will be adequate or that third parties
will not infringe or misappropriate our proprietary rights. Effective trademark,
copyright and trade secret protection may not be available in every country in
which we operate to the extent available in the United States.
We believe that intellectual property protection is most applicable in the
entertainment industry for characters like DOOLEY and shows like THE DOOLEY AND
PALS SHOW that generate marketing and licensing opportunities. While we intend
to vigilantly police and protect our intellectual property against
misappropriation by others, we may be unable to detect this unauthorized use or
take appropriate steps to enforce our intellectual property rights. Defending
our intellectual property rights could also result in the expenditure of
significant financial and managerial resources, which could harm our business.
We may license some of our proprietary rights, such as our trademarked or
copyrighted material, to third parties. Some of our licensees may take actions
or fail to take actions, which actions or failure to act may adversely affect
the value of our proprietary rights or reputation, which could harm our
business.
Although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert claims against
us that we have misappropriated a trade secret or infringed a patent, copyright,
trademark or other proprietary right belonging to them.
LEGAL PROCEEDINGS
On May 12, 1999, Lightpoint was sued by CMI International Holdings Ltd., or
CMI, in the Circuit Court of the Ninth Judicial Circuit in the State of Florida
for its alleged failure to pay $2,000,000 principal plus accrued interest on two
outstanding promissory notes. Following dismissal of the suit on July 16, 1999,
CMI filed an amended complaint naming Lightpoint, LLC, an entity which was under
common control with Lightpoint prior to our acquisition, as well as the two
former Lightpoint officers who executed the promissory notes, as parties to the
suit. The amended complaint also included additional charges, including a charge
of unjust enrichment. Lightpoint filed a motion to dismiss the amended complaint
on July 23, 1999 on the grounds of failure to provide evidence that the
requisite documentary stamp taxes were paid. We show a liability of $2,820,417
for notes payable and accrued interest relating to these promissory notes on our
balance sheet as of June 30, 2000.
On September 6, 2000, we entered into a stipulation to settle this
litigation upon consummation of this offering through the payment to CMI of
$1,000,000 in cash and the issuance to CMI's affiliate, CMC Magnetics
Corporation, or CMC, of the number of shares of our common stock determined by
dividing $1,500,000 by 85% of the public offering price per share of our common
stock, or 160,428 shares assuming a public offering price of $11.00 per share,
the midpoint of the range shown on the cover of this prospectus. In connection
with the settlement, CMI and CMC will also relinquish any rights they may have
under a distribution agreement with Lightpoint relating to Asia. The settlement
is contingent upon the successful completion of this offering. We have filed a
shelf registration statement with respect to resales by CMC of the 160,428
shares described above. If this registration statement is not effective on the
181st day following the closing date of this offering, we are obligated to pay
CMC an additional $500,000.
39
In connection with the settlement of the CMI litigation, we and CMI and CMC
may enter into mutual releases with the former Lightpoint officers referred to
above. Under this arrangement, we anticipate that one of these former officers
will relinquish 25,000 shares of our common stock and that the other former
officer will relinquish 75,000 shares of our common stock and options to
purchase 50,000 shares of our common stock at an exercise price of $0.25 per
share and receive a cash payment from us of approximately $400,000, which we
would pay out of the proceeds of this offering. The information in this
prospectus has not been adjusted to reflect the retirement of these shares and
options or the related cash payment.
From time to time, we are subject to other claims and suits arising in the
course of our business, none of which we believe is likely to materially harm
our business.
EMPLOYEES
As of June 30, 2000, we had 30 full-time employees, including six employees
of NEXTBIGSTAR.COM. We consider our relationships with our employees to be good.
None of our employees are covered by collective bargaining agreements. We have
never experienced an employment-related work stoppage. We intend to recruit and
employ additional staff as we implement our growth plan and as working capital
permits. We also retain various consultants on a contractual basis as needed for
management, legal, accounting, development, distribution and production
services.
FACILITIES
Our corporate offices are located in approximately 12,000 square feet of
office space at Universal Studios in Orlando, Florida 32819. This lease expires
on December 31, 2000.
In order to accommodate our expansion plans for our animation and special
effects studios, we have rented a 5,000 square foot facility in Orlando,
Florida. This lease expires on September 30, 2003. Our animation and special
effects studios are now strategically located within an entertainment-based
complex which includes post-production facilities and commercial production and
graphic design companies.
We have entered into a productions facilities agreement with Disney
Production Services for the production of THE DOOLEY AND PALS SHOW at Disney's
production facilities in Orlando, Florida, which provides for facilities,
equipment and staffing. The agreement has been extended through the end of our
post-production for our first broadcast season for THE DOOLEY AND PALS SHOW,
which we anticipate will be in September 2000.
We occupy additional space of approximately 1,500 square feet to house our
NEXTBIGSTAR.COM operations in Orlando, Florida under a six month arrangement.
40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers are as follows.
NAME AGE POSITION
---- -------- --------------------------------------------------
Michael H. Gerber...................... 56 Chairman of the Board, President and Chief
Executive Officer and President of Victory
Internet Productions
Edgar N. Millington, Jr................ 36 Chief Financial Officer, Vice President, Treasurer
and Secretary and Interim President and Secretary
of Lightpoint
Art David.............................. 41 President of Victory Animation Studios
Jacob (Kobi) Jaeger.................... 61 President of Victory Television, Inc.
Michael Collyer........................ 58 Director
Paul Henderson......................... 41 Director
Michael Jay Solomon.................... 62 Director
Charles Wilner......................... 34 Director
MICHAEL H. GERBER is our founder and has served as our Chairman of the
Board, Chief Executive Officer and President since our inception in May 1999.
Mr. Gerber has also served as the President of Victory Internet Productions
since January 2000 and served as President of Victory Television, Inc., from
June 1999 through July 2000.
From September 1992 through January 1999, Mr. Gerber operated Gerber
Entertainment Group, which he formed to develop and package television programs
and feature films. Projects include the special THE MYSTERY OF THE SPHINX (NBC)
and THE MYSTERIOUS ORIGINS OF MAN (NBC), both hosted by Charlton Heston;
LIBERATION OF THE NAZI CONCENTRATION CAMPS for The Discovery Channel; THE NEWZ,
a late night sketch comedy for Columbia Tristar Television; programming and
marketing consultant to numerous production and financial companies, including:
Simitar Entertainment, Seventeen Magazine, The Kentucky Derby, The Epic
Adventures of Tarzan, Grosso-Jacobson Entertainment, The Salkind/ Chaplin
Company, Towers of London, Small Business 2000 (PBS), New Networks, Inc., and
The Lewis Horwitz Organization, a division of Imperial Bank. Mr. Gerber is the
producer of the documentary entitled STORIES OF THE HOLOCAUST IN ASSOCIATION
WITH THE ANTI-DEFAMATION LEAGUE, hosted by Hector Elizondo.
Between 1980 and 1992, Mr. Gerber held a variety of senior level positions
with Viacom Enterprises, rising from Vice President-Business Affairs in 1980 to
President of the television division in 1988, with primary responsibility over
first run development, production, marketing and sales, all international
distribution activities and all program acquisitions. At Viacom, Mr. Gerber was
responsible for the acquisition of more than 750 feature films, including:
AMADEUS; THE AFRICAN QUEEN; DEATH WISH II, III and IV; THE DELTA FORCE; HELTER
SKELTER; PETER THE GREAT; SUPERMAN III AND IV; CONAN; KENNY ROGERS AS THE
GAMBLER; and SANTA CLAUS: THE MOVIE. In the off-network area, Mr. Gerber was
responsible for such acquisitions as: ROSEANNE from Carsey-Werner, THE
HONEYMOONERS, LOST EPISODES from Jackie Gleason and THE GARY SHANDLING SHOW. In
the first-run area, Mr. Gerber oversaw the launch and marketing of such series
as THE MONTEL WILLIAMS SHOW, MTV VIDEO MUSIC AWARDS, DOUBLE DARE (NICKELODEON)
and the ADVENTURES OF SUPERBOY. During Mr. Gerber's tenure at Viacom, the
company acquired over $250 million of programming and generated over $2 billion
in sales, including the launch of THE COSBY SHOW for more than $1 billion in
syndicated sales.
Between 1973 and 1979, Mr. Gerber held various senior level positions with
Allied Artists Pictures Corporation, with primary responsibility for the
negotiation and structure of production, financing and distribution agreements
for such motion pictures as CABARET, PAPILLON and THE MAN WHO WOULD BE KING.
From 1971 to 1973, Mr. Gerber served as assistant general counsel of Columbia
Pictures Industries, the
41
parent of Columbia Pictures Television. From 1969 to 1971, Mr. Gerber was in the
law department of Columbia Pictures Television. Mr. Gerber has a B.A. in
Economics from St. John's University and a J.D. from St. John's University
School of Law.
EDGAR N. MILLINGTON, JR. has served as our Vice President, Treasurer and
Secretary since July 1999 and as Chief Financial Officer since February 2000.
Mr. Millington has also served as the Interim President and Secretary of
Lightpoint since July 1999. From September 1998 to June 1999, Mr. Millington
served as Controller of Lightpoint. From July 1996 to September 1998,
Mr. Millington served as a finance manager and assistant controller for the
American Security Insurance Company. From June 1992 to July 1996,
Mr. Millington ran a private accounting practice. Mr. Millington has a B.A. from
the Georgia Institute of Technology, College of Management. Mr. Millington is a
certified public accountant licensed in the state of Georgia since 1988.
ART DAVID has served as President of Victory Animation Studios, Inc., one of
our subsidiaries, since June 1999. From January 1995 to June 1999, Mr. David
formed and operated Wavelight Digital Images, a special effects studio, which
created the special effects for such films as DIE HARD 3, JUDGE DREDD, CONTACT,
STARSHIP TROOPERS and THE MATRIX. From November 1989 to January 1995, he was at
Disney/Post Group designing and executing visual effects and graphic production.
From November 1984 to November 1989, Mr. David was an editor at Turner
Broadcasting System. Mr. David has a B.A. in television and radio production
from Florida State University.
JACOB (KOBI) JAEGER has served as President of Victory Television, Inc., one
of our subsidiaries, since June 2000. From February 1999 through June 2000,
Mr. Jaeger worked as an independent consultant. From June 1994 through January
1999, Mr. Jaeger served as General Manager and co-chairman of Declare Holdings,
Inc., a developer of television and motion pictures, through its audiovisual
production center in St. Maarten. From January 1989 through May 1994,
Mr. Jaeger served as President of Santa Anna Productions and EuroPanda S.R.L. in
Milan, Italy. From February 1986 to June 1990, Mr. Jaeger served in various
international co-production partnerships through his releasing company Franklin
Media and his own production company, Kobi Jaeger, Inc. From November 1980 to
January, 1986, Mr. Jaeger served as President of News Group Productions, a
subsidiary of News Ltd. Group, a Rupert Murdoch company. Mr. Jaeger's production
credits include Kafka's THE TRIAL starring Anthony Hopkins and Kyle MacLachlan
and written by Harold Pinter, FRANKENSTEIN UNBOUND starring Joan Hurt and Raul
Julia and the TV series TV STAR, the precursor of the long-running CURRENT
AFFAIRS TV program. Mr. Jaeger also produced the feature film SALTY for
Twentieth Century Fox and the ensuing TV series SALTY THE SEA LION for ABC.
MICHAEL COLLYER has served as a director since July 1999. Mr. Collyer is a
partner at the law firm Kay Collyer & Boose LLP, where he practices in the
entertainment area. From 1966 to 1969, Mr. Collyer taught business law at
Columbia University. Mr. Collyer is on the board and serves as the National
Chairman of the National Academy of Television Arts and Sciences. He is the
author of MOTION PICTURES AND TELEVISION UNDER THE NEW COPYRIGHT STATUTE and is
the author of chapters on Television and Television Program Development for the
New York State Bar Association's book ENTERTAINMENT LAW. Mr. Collyer is also a
member of the Committee on Entertainment Law of the Association of the Bar of
the City of New York and a member of the New York City Mayor's Advisory Council
on Film and Broadcasting. He is a frequent lecturer and/or panelist at N.Y.U.
Film School, Brooklyn Law School, NAPTE, MIP-TV, MIPCOM and Banff Television
Film Festival. Mr. Collyer has a B.A. from Williams College and a LL.B. from
Columbia University.
PAUL HENDERSON has served as a director since January 2000. Mr. Henderson
has been the Chairman and Chief Executive Officer of Interbanc Mortgage
Services, Inc., a mortgage banking firm located in Orlando, since April 1991.
Mr. Henderson attended the University of Rhode Island and studied business
administration.
42
MICHAEL JAY SOLOMON has served as a director since August 2000. Since
November 1999, Mr. Solomon has been the Chairman and Chief Executive Officer of
MAXX International Inc., a full service rights management company. Since
September 1994, Mr. Solomon has served as chairman of his own companies, Solomon
International Enterprises and Solomon Broadcasting International. Mr. Solomon
also has interests in Latin American television networks and production
companies in Latin America and Europe. From 1989 to 1994, Mr. Solomon was the
President of Warner Bros. International Television. From 1985 to 1989,
Mr. Solomon served as President of Lorimar Pictures. From 1978 to 1985,
Mr. Solomon served as Chairman and CEO of Tele-pictures Corporation, which he
co-founded. Mr. Solomon serves on the Board of Directors of the International
Council of the National Academy of Television Arts and Sciences and New York
University's Stern School of Business. He also currently serves on the board of
directors of Team Communications. Mr. Solomon was educated at Emerson College
and New York University Stern School of Business. He holds an honorary Doctor of
Law degree from Emerson College.
CHARLES WILNER has served as a director since July 1999. Mr. Wilner has been
the General Manager and Compliance Officer for Galleon Merchant Banking, Inc.
since March 1999. From April 1998 to December 1999, Mr. Wilner served as the
Manager of Merit Advisors Group, Inc., a financial consulting firm. From
September 1997 to April 1998, Mr. Wilner served as an independent financial
consultant. From September 1995 to September 1997, Mr. Wilner was an operations
manager for Borders & Accents, Inc. Mr. Wilner is also an adjunct professor at
Barry University, where he teaches undergraduate business courses. Mr. Wilner
received a B.A. in Economics from the University of Connecticut and an M.B.A.
from Barry University.
BOARD OF DIRECTORS
Our board of directors currently consists of five individuals. Our directors
are elected at our annual shareholders meeting. The term of each director ends
at the next annual meeting of shareholders. Our articles of incorporation and
bylaws provide that directors can be removed with or without cause by a majority
of the shareholders. Our arrangement with Weatherly Securities Corp., the lead
underwriter of this offering, provides Weatherly with the right to designate one
nominee to our board of directors for a period of three years. Officers are
chosen by and serve at the discretion of the board of directors.
COMMITTEES OF THE BOARD OF DIRECTORS. We have two standing committees, an
audit committee and a compensation committee. Messrs. Collyer, Wilner and
Henderson have been appointed as the members of the audit committee and
Messrs. Collyer and Wilner have been appointed as the members of our
compensation committee. As additional persons join our board of directors
following this offering, the membership of these committees may be modified.
AUDIT COMMITTEE. The audit committee reviews our auditing, accounting,
financial reporting and internal control functions and makes recommendations to
the board for the selection of independent accountants. In addition, the
committee monitors the quality of our accounting principles and financial
reporting, as well as the independence of our independent accountants. Upon the
consummation of this offering, our audit committee will be comprised of three
independent directors in accordance with requirements of the Nasdaq National
Market. In discharging its duties, the audit committee:
- reviews and approves the scope of the annual audit and the independent
accountant's fees;
- meets independently with our internal auditing staff, our independent
accountants and our senior management; and
- reviews the general scope of our accounting, financial reporting, annual
audit and internal audit program, matters relating to our internal control
systems and the results of the annual audit.
COMPENSATION COMMITTEE. The compensation committee determines the
compensation for employee directors and, after receiving and considering the
recommendations of our President, all of
43
our officers and any other employee that the committee may designate from time
to time. In addition, the committee approves and administers employee benefit
plans.
OTHER COMMITTEES. Our board of directors may establish other committees
from time to time to facilitate the management of our business and affairs.
DIRECTOR COMPENSATION. Directors do not receive any cash compensation for
their service as members of the board of directors, but they are reimbursed for
reasonable out-of-pocket expenses incurred in connection with their attendance
at meetings of the board of directors and committee meetings. Directors are
eligible to receive options to purchase common stock under our stock option
plan. On January 10, 2000, we issued warrants to purchase 50,000 shares of our
common stock to Mr. Henderson at an exercise price of $.001 per share and
granted options to purchase 100,000 shares of our common stock to him at an
exercise price of $.001 per share for services as director, 50,000 of which
vested immediately and 50,000 of which will vest after one year if
Mr. Henderson remains on our board of directors. On April 18, 2000, we granted
to Messrs. Collyer and Wilner options to purchase 35,000 and 10,000 shares of
our common stock, respectively, at an exercise price of $3.50 per share, for
services as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Our
compensation committee currently consists of Messrs. Collyer and Wilner. None of
our executive officers has served as a director or member of the compensation
committee of any other entity whose executive officers served on our board of
directors or compensation committee.
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION
The table below shows information regarding the annual and long-term
compensation for our chief executive officer for our fiscal years ended
June 30, 1999 and 2000 and for each of our other executive officers, who joined
Victory after June 30, 1999, for our fiscal year ended June 30, 2000.
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ------------------------ ----------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARD(S)($) SARS(#) PAYOUTS($)
--------------------------- -------- --------- -------- --------------- ----------- ---------- ----------
Michael H. Gerber........ 2000 $208,333) -- -- -- -- --
Chief Executive Officer, 1999 (1 -- -- -- -- --
President and Chairman of
the Board
Edgar N. Millington, Jr... 2000 $ 90,500 -- -- -- 10,000 --
Chief Financial Officer,
Treasurer and Secretary
Art David................ 2000 $150,000 -- -- -- 25,000 --
President of Victory
Animation Studios, Inc.
Jacob (Kobi) Jaeger...... 2000 (3) -- -- -- 25,000 --
President of Victory
Television, Inc.
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION($)
--------------------------- ---------------
Michael H. Gerber........ $30,600(2)
Chief Executive Officer, $ 2,550(2)
President and Chairman of
the Board
Edgar N. Millington, Jr... --
Chief Financial Officer,
Treasurer and Secretary
Art David................ --
President of Victory
Animation Studios, Inc.
Jacob (Kobi) Jaeger...... --
President of Victory
Television, Inc.
(1) Mr. Gerber commenced his employment on May 27, 1999. Mr. Gerber's annualized
salary for the fiscal year ended June 30, 1999 was $225,000.
(2) Consists of car rental and residence lease payments. The amount provided for
the fiscal year ended June 30, 1999 does not include 5,000,000 founder
shares of our common stock purchased by
44
Mr. Gerber at par value on May 27, 1999. The value of these shares at a
price per share of $11.00, the midpoint of the range shown on the cover of
this prospectus, is $55,000,000.
(3) Mr. Jaeger commenced employment on June 18, 2000. Mr. Jaeger's annualized
salary for the fiscal year ended June 30, 2000 was $150,000.
OPTION/SAR GRANTS IN FISCAL 2000
The table below shows information regarding stock options and freestanding
stock appreciation rights, or SARS, granted to our chief executive officer and
our other executive officers during the fiscal year ended June 30, 2000. The
assumed rates of appreciation of 5% and 10% are hypothetical rates of stock
price appreciation selected by the SEC and are not intended to, and do not,
forecast or assume actual future stock prices. We believe that stock price
appreciation, if any, is unpredictable, and we are not aware of any formula that
will determine with any reasonable accuracy the present value of stock options.
No gain to optionees is possible without an appreciation in stock prices, and
any increase will benefit all shareholders commensurately. We cannot assure you
that the amounts reflected in this table will be achieved.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (2)
-------------------------------------------------------------------------------------- ---------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------ ------------ ----------- ---------- ------------ ------------
Michael H. Gerber............. -- -- -- -- -- --
Edgar N. Millington, Jr....... 10,000 4.9% (1) 5/19/03 $127,300 $146,400
Art David..................... 25,000 12.3% (1) 5/19/03 $318,250 $366,000
Jacob (Kobi) Jaeger........... 25,000 12.3% (1) 6/19/03 $318,250 $366,000
(1) Exercisable at the initial public offering price and vest upon consummation
of this offering over a three-year period.
(2) Based on an assumed initial public offering price of $11.00.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR VALUES
The table below shows information concerning the exercise of stock options
and freestanding SARs during the fiscal year ended June 30, 2000 by our chief
executive officer and our other executive officers and the value of unexercised
stock options and freestanding SARs held as of June 30, 2000. The value of
unexercised in the money options/SARS at fiscal year end is determined by
subtracting the exercise price from the fair market value of the common stock
based on an assumed initial public offering price of $11.00 per share, the
midpoint of the range shown on the cover of this prospectus, multiplied by the
number of shares underlying the options.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS OPTIONS/SARS
SHARES AT FISCAL YEAR END (#) AT FISCAL YEAR END ($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
Michael H. Gerber.................. -- -- -- -- -- --
Edgar N. Millington, Jr............ -- -- -- 30,000 -- $215,000
Art David.......................... -- -- -- 75,000 -- $537,500
Jacob (Kobi) Jaeger................ -- -- -- 25,000 -- $ 0
45
EMPLOYMENT CONTRACTS
MICHAEL H. GERBER. We have entered into an amended and restated five year
employment agreement with Michael H. Gerber, our Chief Executive Officer and
President, which commenced July 1, 2000. Upon its expiration, the agreement will
automatically renew for successive one year terms unless we or Mr. Gerber decide
not to renew and provide a written notice to the other party at least 90 days
prior to the scheduled expiration date.
The agreement provides that Mr. Gerber will be the most senior executive
reporting to our board of directors and requires Mr. Gerber to devote his full
time and attention to us. Mr. Gerber's initial annual base salary of $250,000 is
subject to a minimum increase of 15% per year in base salary and a 25% increase
in base salary in the first year that we achieve a positive cash flow from
operations. Mr. Gerber will also receive an annual bonus based on his and
Victory's performance as determined by our board of directors. The agreement
also provides for customary benefits, perquisites, expense reimbursement and
indemnification.
Mr. Gerber's employment agreement provides that if he is terminated by us
without cause or if he terminates his agreement for good reason, he is entitled
to severance benefits of two times his base salary plus additional compensation
of $5,000,000 in cash or shares of common stock at his option. Mr. Gerber can
terminate his agreement for good reason if his position, duties or
responsibilities are diminished, if he is removed from the board of directors,
if his salary is reduced, if he is relocated, if Victory is in breach of the
agreement or upon a change of control. Mr. Gerber's agreement provides that we
will be responsible for any excise tax imposed under Section 4999 of the
Internal Revenue Code upon Mr. Gerber's termination.
The agreement also contains a non-competition provision that precludes
Mr. Gerber from competing with us during the period of his employment and for
six months after the termination of his employment unless he is terminated
without cause or he terminates for good reason. The agreement also contains
customary confidentiality provisions.
ART DAVID. We have entered into an employment agreement with Art David,
President of Victory Animation Studios, Inc., which commenced on July 12, 1999
and which is currently scheduled to expire on July 12, 2001. The agreement can
be automatically renewed by us for an additional one year period by written
notice to Mr. David at least 60 days prior to its scheduled expiration.
Under his employment agreement, as amended, Mr. David's annual salary will
be $150,000 during the first year, $175,000 during the second year and as
amended $200,000 during the third year of his employment. Mr. David's employment
agreement also provides for the issuance of 50,000 shares of common stock and
the grant of options to purchase 50,000 shares of our common stock at an
exercise price of $0.25 per share, which can be exercised 60 days after the
consummation of this offering for a period of one year.
The agreement also contains a non-competition provision that precludes
Mr. David from competing with us during the period of his employment or during
the twelve months following our last payment of compensation to Mr. David and
non-disclosure and confidentiality provisions providing that Mr. David not
disclose any confidential information owned by us made known to Mr. David during
the term of his employment by us.
JACOB (KOBI) JAEGER. We have entered into an employment agreement with
Jacob (Kobi) Jaeger, President of Victory Television, Inc., which commenced on
June 19, 2000 and which is currently scheduled to expire on June 18, 2001. The
agreement can be automatically renewed by us for two additional one year periods
by written notice to Mr. Jaeger at least 60 days prior to its scheduled
expiration.
46
Under his employment agreement, Mr. Jaeger's annual salary will be $150,000
during the first year, $175,000 during the second year and $200,000 during the
third year of his employment. Mr. Jaeger's employment agreement also provides
for the grant of options to purchase 25,000 shares of our common stock under and
in accordance with our 2000 Long Term Incentive and Share Award Plan.
The agreement also contains a non-competition provision that precludes
Mr. Jaeger from competing with us during the period of his employment or during
the twelve months following our last payment of compensation to Mr. Jaeger and
non-disclosure and confidentiality provisions providing that Mr. Jaeger not
disclose any confidential information owned by us made known to Mr. Jaeger
during the term of his employment by us.
2000 LONG TERM INCENTIVE AND SHARE AWARD PLAN
Our 2000 Long Term Incentive and Share Award Plan, which we refer to as our
stock option plan, was adopted by our board of directors in April 2000 and
approved by written consent of our shareholders in June 2000. The stock option
plan provides for the grant of stock options, stock appreciation rights and
other share-based awards to employees, officers, directors, consultants and
independent contractors of Victory or any of its affiliates.
The stock option plan authorizes the granting of up to 500,000 shares of our
common stock. The stock option plan may be administered by our board of
directors or by a committee of the board of directors. The stock option plan
provides that the administrator has the authority to determine from time to time
the eligible participants to whom stock options are to be granted, the number of
shares of common stock for which options are exercisable and the purchase price
of the shares, and all other terms and conditions of the options or other
share-based awards.
Options granted under the stock option plan may be incentive stock options,
or ISOs, that are intended to meet all of the requirements of an incentive stock
option as defined in Section 422 of the Internal Revenue Code or nonqualified
stock options, NQSOs, that are not intended to so qualify.
The price at which shares may be purchased upon exercise of an option shall
be fixed by the administrator, in its sole discretion. The option price of an
NQSO may be greater than, equal to or less than the fair market value of the
underlying shares of common stock on the date of grant. The option price of any
ISO will not be less than the fair market value of the underlying shares of
common stock on the date of grant. The administrator will also determine the
term of each option, provided that the exercise period may not exceed ten years
from the date of grant. An optionee may pay the exercise price in cash, by
delivering shares of common stock already owned by the optionee and having a
fair market value on the date of exercise equal to the option price, or by any
other method as the committee may approve. The optionee must pay applicable
withholding taxes upon exercise of the option as a condition to receiving the
shares. The administrator may impose vesting and other conditions on grants of
options. Options may be exercised while the optionee is an employee, officer,
director, consultant or advisor or within a specified period after termination
of the optionee's employment or services.
47
PRINCIPAL SHAREHOLDERS
The following table shows information as of June 30, 2000 with respect to
the beneficial ownership of our common stock by:
- each person known by us to beneficially own more than 5% of our common
stock;
- each of our directors;
- our chief executive officer and our two other most highly compensated
executive officers; and
- all of our directors and executive officers as a group.
The amounts and percentages of common stock beneficially owned are reported
on the basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a
beneficial owner of a security if that person has or shares voting power, which
includes the power to vote or to direct the voting of the security, or
investment power, which includes the power to dispose of or to direct the
disposition of the security. Unless otherwise indicated below, each beneficial
owner named in the table below has sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of common stock
subject to options or warrants held by that person that are currently
exercisable or that are or may become exercisable within 60 days of June 30,
2000 are deemed outstanding. These shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of any other person.
Subject to the two preceding sentences, percentage of beneficial ownership of
common stock is based on 10,031,911 shares of common stock outstanding before
this offering and 12,492,339 shares outstanding following this offering. The
information shown in the following table excludes any shares which may be
purchased in this offering by the respective beneficial owner. Unless otherwise
stated, the address for each person listed below is 1000 Universal Studios
Plaza, Building 22A, Orlando, Florida 32819.
PERCENT BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------
NAME BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
---- ------------------ --------------- --------------
5% OR GREATER SHAREHOLDERS, EXECUTIVE OFFICERS AND
DIRECTORS:
Wardley Investments Limited (1)................... 800,000 7.4% 6.0%
Michael H. Gerber................................. 5,000,000 49.8 40.0
Edgar Millington.................................. 20,000 * *
Art David......................................... 50,000 * *
Michael Collyer (2)............................... 35,000 * *
Paul Henderson (3)................................ 592,000 5.7 4.6
Charles Wilner (4)................................ 10,000 * *
All directors and executive officers as a group
(eight persons)................................. 5,707,000 55.0 44.5
* Represents beneficial ownership of less than 1%.
(1) Consists of warrants to purchase 800,000 shares of common stock at an
exercise price of $7.00 per share or, in the event that this offering is
consummated, 85% of the initial public offering price. We have filed a shelf
registration statement registering the underlying shares for resale. The
address for Wardley Investments Limited is Havilland Hall, Vaciquiedor,
Saint Andrew Guernsey, Channel Islands GY68TP.
(2) Consists of options to purchase 35,000 shares of common stock exercisable
within 60 days of June 30, 2000 at an exercise price of $3.50 per share.
48
(3) Includes warrants to purchase 50,000 shares of common stock exercisable
within 60 days at an exercise price of $.001 per share, options to purchase
50,000 shares of common stock exercisable within 60 days of June 30, 2000 at
an exercise price of $.001 per share, 298,500 shares of common stock held in
the name of Interbanc Mortgage Services, Inc. and warrants to purchase
193,500 shares of common stock at an exercise price of $7.00 per share held
in the name of Interbanc Mortgage Services, Inc.
(4) Consists of options to purchase 10,000 shares of common stock exercisable
within 60 days of June 30, 2000 at an exercise price of $3.50 per share.
RELATED PARTY TRANSACTIONS
In our private placement of common stock completed on December 17, 1999,
Paul M. Henderson, a member of our board of directors, purchased 143,500 shares
of our common stock at a purchase price of $3.50 per share and warrants to
purchase 143,500 shares of our common stock at an exercise price of $7.00 per
share. Mr. Henderson funded this purchase with an interest free promissory note
for $502,250. Mr. Henderson has since repaid the promissory note in full.
Michael Collyer, a member of our board of directors, is a partner at the law
firm of Kay, Collyer & Boose LLP, which provides various legal services for
Victory. During the year ended June 30, 2000, we paid Mr. Collyer's firm
approximately $54,000 for legal services, a substantial portion of which is
attributable to litigation relating to NEXTBIGSTAR.COM described under
"Business--Legal Proceedings."
Until December 31, 1999, Charles M. Wilner, a member of our board of
directors, was a manager of Merit Advisers Group, Inc., a financial advisory
firm. For the years ended June 30, 2000 and 1999, Victory paid approximately
$1,417,000 and $968,000, respectively, to Merit Advisors Group, Inc. and its
affiliates for business consulting and advisory services. In addition, during
the year ended June 30, 1999, Lightpoint issued warrants to purchase 341,241
shares of common stock to Merit Advisors Group, Inc. at an exercise price of
$0.25 per share.
Prior to the consummation of this offering, we anticipate entering into a
one year consulting agreement, extendable for two additional one year periods at
our option, with Michael Jay Solomon, one of our directors. Under this
agreement, following the consummation of this offering, Mr. Solomon will receive
a consulting fee of $300,000 per year and a grant of options to purchase 50,000
shares of our common stock under our stock option plan, exercisable at the
initial public offering price. Under his consulting agreement, Mr. Solomon will
assist us in the marketing and distribution of our television properties and in
identifying potential library acquisitions, strategic partners and related
e-commerce businesses, both domestically and internationally.
As a holder of warrants to purchase 800,000 shares of our common stock as
described under "Principal Shareholders," Wardley Investments Limited, or
Wardley, is the beneficial owner of 7.4% of our common stock prior to this
offering. We issued these warrants to Wardley on April 3, 2000 in connection
with our private placement with Wardley of a $5,000,000 principal amount 12%
senior secured promissory note, which we plan to repay, together with accrued
interest, with the proceeds of this offering. We have filed a registration
statement registering the shares of common stock underlying these warrants for
resale.
49
DESCRIPTION OF CAPITAL STOCK
Our articles of incorporation authorize the issuance of up to 50,000,000
shares of common stock and 20,000,000 shares of preferred stock, the rights and
preferences of which may be established from time to time by our board of
directors. As of June 30, 2000, 10,031,911 shares of our common stock were
issued and outstanding and no shares of preferred stock were issued and
outstanding. As of August 31, 2000, we had 474 shareholders.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Thus, holders of a majority of the shares of our common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of our common stock are entitled to receive
ratably any dividends that may be declared by the board of directors out of
funds legally available, subject to any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of our common stock are entitled to receive ratably the net assets
available after the payment of all debts and other liabilities, subject to the
prior rights of any outstanding preferred stock. Holders of our common stock
have no preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
Under our articles of incorporation, our board of directors is authorized,
subject to limitations prescribed by law, without further shareholder approval,
from time to time to issue up to an aggregate of 20,000,000 shares of preferred
stock in one or more series and to fix or alter the designations, preferences
and rights, and any qualifications, limitations or restrictions, of the shares
of each of these series, including the number of shares constituting any of
these series and dividend rights, dividend rates, conversion rights, voting
rights, terms of reduction, including sinking fund provisions, if any,
redemption price or prices and liquidation preferences. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control. We have no present plans to issue any shares of preferred
stock.
WARRANTS
SUBSCRIPTION WARRANTS. As of June 30, 2000, we had subscription warrants
outstanding to purchase an aggregate of 3,621,625 shares of our common stock at
an exercise price of $7.00 per share and subscription warrants outstanding to
purchase 110,000 shares of our common stock at an exercise price of $4.00 per
share. Of these warrants, warrants to purchase 1,818,000 shares of our common
stock expire on July 1, 2001 and warrants to purchase 1,913,625 shares of our
common stock expire on December 17, 2001. These warrants are exercisable by the
holders at any time, and we have the right to call these warrants for redemption
at any time at a redemption price of $0.10 for each underlying share. As of
June 30, 2000, we redeemed 122,000 of these warrants for an aggregate redemption
price of $12,200.
INVESTOR WARRANTS. On April 3, 2000, in connection with the issuance of a
$5,000,000 senior secured promissory note, we issued to the investor warrants to
purchase 800,000 shares of our common stock at an exercise price of $7.00 or, in
the event this offering is consummated, 85% of the initial public offering
price. These warrants are exercisable at any time, expire on March 28, 2003 and
may be exercised on a "cashless" basis.
PLACEMENT AGENT WARRANTS. On April 3, 2000, we issued to Weatherly
Securities Corp., the placement agent in connection with the issuance of our
$5,000,000 senior secured promissory note and the lead underwriter of this
offering, warrants to purchase 80,000 shares of our common stock at an exercise
price $7.00 or, in the event this offering is consummated, 165% of the initial
public offering
50
price per share, in a private offering of our securities. These warrants are
exercisable at any time, expire on March 28, 2005 and may be exercised on a
"cashless" basis.
CONSULTANT WARRANTS. On November 30, 1998, Lightpoint issued to Merit
Advisors Group, Inc., for consulting services to Lightpoint, warrants to
purchase 341,241 shares of common stock of Lightpoint at an exercise price of
$0.25 per share, which were exchanged for warrants to purchase 341,241 shares of
our common stock at the same exercise price upon our acquisition of Lightpoint.
DIRECTOR WARRANTS. On January 10, 2000, we issued Paul Henderson, one of
our directors, warrants to purchase 50,000 shares of common stock at an exercise
price of $.001 per share.
OPTIONS. In addition, other than options issued under our stock option
plan, as of June 30, 2000, we had issued options to purchase 500,000 shares of
our common stock, comprised of options to purchase 150,000 shares of common
stock granted as of July 1, 1999 at an exercise price of $0.25 per share to
former officers of Lightpoint, which vest upon consummation of this offering;
options to purchase 120,000 shares of common stock granted as of June 9, 1999 to
individuals designated to become officers of Victory at an exercise price of
$0.25 per share, which vest upon consummation of this offering; options to
purchase 100,000 shares to a director granted as of January 10, 2000 at an
exercise price of $.001 per share, 50% of which vested upon issuance and 50% of
which vest in one year if the grantee remains on our board of directors; options
to purchase 35,000 shares of common stock granted as of February 8, 2000 to an
officer of Next Big Star LLC at an exercise price of $3.50 per share, which vest
upon consummation of this offering; options to purchase 45,000 shares to two
directors granted as of April 18, 2000 at an exercise price of $3.50 per share,
which vested upon issuance; and options to purchase 50,000 shares of common
stock to Ed McMahon on April 18, 2000 at an exercise price of $3.50 per share,
which vested upon issuance.
REGISTRATION RIGHTS. The holder of the investor warrants and the holder of
the placement agent warrants described above each have registration rights with
respect to their underlying shares of common stock, and the holders of the
consultant warrants described above also have the right to have their shares
included in any registration statement that we file with the SEC after the
consummation of this offering, subject to limited and customary exceptions. Both
the holder of the investor warrants and the holder of the private placement
warrants have agreed not to sell or otherwise dispose of their warrants or the
shares underlying their warrants for a period of 180 days after the effective
date of the registration statement of which this prospectus is a part, subject
to limited early release if our stock price reaches certain levels as described
further under the heading "Shares Eligible for Future Sales--Lock-ups," and the
holders of the other warrants described above have agreed not to sell or
otherwise dispose of their warrants for a period of one year after the date of
this prospectus, subject to limited exceptions.
We have filed a shelf registration statement registering the shares
underlying the investor warrants and the placement agent warrants for resale
upon the expiration of the applicable "lock-up" period referred to in the
previous paragraph.
LIMITATION OF DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Our articles of incorporation and bylaws provide for the indemnification of
our directors and officers to the fullest extent authorized by Florida law,
except that we will indemnify a director or officer in connection with an action
initiated by that person only if the action initiated by that person was
authorized by our board of directors. The indemnification provided under our
articles of incorporation and bylaws includes the right to be paid expenses in
advance of any proceeding for which indemnification may be had, PROVIDED that
the payment of these expenses incurred by a director or officer in advance of
the final disposition of a proceeding may be made only upon delivery to us of an
51
undertaking by or on behalf of the director or officer to repay all amounts paid
in advance if it is ultimately determined that the director or officer is not
entitled to be indemnified.
As permitted by Florida law, our directors shall not be personally liable to
us or our shareholders for monetary damages for any statement, vote, decision,
or failure to act, regarding corporate management or policy, unless the director
breached or failed to perform his or her duties as a director:
- in violation of criminal law or in conscious disregard for our best
interests or with willful misconduct;
- in a transaction where he or she derived an improper personal benefit; or
- for unlawful distributions and in limited other circumstances.
Under Florida law, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is it was serving at our request as a director, officer, employee,
partner or agent of another corporation or of a partnership, joint venture,
limited liability company, trust or other enterprise, against any liability
asserted against the person or incurred by the person in any of these
capacities, or arising out of the person's fulfilling one of these capacities.
We maintain insurance on behalf of all our officers and directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Florida Atlantic
Stock Transfer, Inc.
ARTICLES OF INCORPORATION AND BYLAWS
Under the Florida Business Corporation Act, our board of directors may
propose amendments to our articles of incorporation which, other than for
enumerated ministerial amendments, then require shareholder approval for
adoption. Our bylaws provide that both our shareholders and our board of
directors have the power to amend or repeal the provisions in our bylaws. Our
bylaws also entitle our shareholders to remove directors with or without cause.
In addition, our articles of incorporation and bylaws provide that special
meetings of our shareholders may only be called by our board of directors or our
officers or a majority of our shareholders.
52
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 12,492,339 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding warrants and options. Of these shares, the
2,300,000 shares sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except for any
shares held by any of our "affiliates," as that term is defined in Rule 144
under the Securities Act. For purposes of Rule 144, an affiliate of ours is a
person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with us. Any shares
held by one of our affiliates will be subject to the resale limitations
described below on "restricted" securities, as that term is defined in
Rule 144.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares of our common stock for at least one year is entitled to sell, within any
three-month period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 124,923 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice the sale on
Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 701
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 under the Securities Act may be relied upon regarding
the resale of securities originally purchased from us by our employees,
directors, officers, consultants or advisors before the date we become subject
to the reporting requirements of the Exchange Act, under written compensatory
benefit plans or written contracts relating to compensation of those persons. In
addition, the SEC has indicated that Rule 701 will apply to the typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of these options, including exercises after the date of this prospectus.
Securities described above, beginning 90 days after the date of this prospectus,
may be sold (1) by persons other than affiliates, subject only to the manner of
sale provisions of Rule 144, and (2) by affiliates under Rule 144 without
compliance with its one-year holding period requirement.
Beginning 90 days after the date of this prospectus, and without
consideration of the contractual restrictions described below, 10,007,625 shares
of our common stock will become eligible for sale in reliance upon Rule 144 and
Rule 701.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Upon consummation of this offering, no shares of
our common stock will be eligible for immediate sale in the public market
without restriction pursuant to Rule 144(k).
53
LOCK-UPS
Our officers, directors and shareholders who hold in the aggregate 9,800,625
of the 10,031,911 shares of our common stock outstanding on June 30, 2000 have
agreed not to sell any shares of common stock for one year after the date of
this prospectus without our prior written consent and the prior written consent
of Weatherly Securities Corp., subject to various limited exceptions. As a
result of these contractual restrictions and subject to the provisions to
Rules 144 and 701, all of these shares will be eligible for sale upon expiration
of these agreements.
In addition, as of June 30, 2000 we had issued options and warrants to
purchase 5,670,866 shares of our common stock. Holders of 4,640,866 of these
options and warrants have agreed not to sell their options or warrants or the
underlying shares of common stock for a period of one year without our prior
written consent and the prior written consent of Weatherly Securities Corp.,
subject to limited exceptions, and holders of 880,000 warrants and the holders
of 160,428 shares of common stock to be issued upon the consummation of this
offering in connection with the resolution of the CMI litigation have agreed not
to sell those securities, and in the case of the warrants, the underlying
shares, for a period of 180 days without our prior written consent, except, in
the event the average closing price for our common stock during the last 20
trading days of the two months following the consummation of this offering is at
least 150% of the initial public offering price, then the holders of the 880,000
warrants may sell up to 30% of the common stock underlying those warrants and,
in the event that the average closing price for our common stock during the last
20 trading days of the four months following the consummation of this offering
is at least 150% of the initial public offering price, then the holders of the
880,000 warrants may sell up to 60% of the common stock underlying those
warrants. However, 80,000 of these warrants, and the underlying shares, are
subject to additional restrictions on transfer for a period of one year from the
date of this prospectus in order to comply with the underwriting compensation
rules of the National Association of Securities Dealers, Inc.
We have agreed not to offer, sell or dispose of any shares of common stock
or any securities convertible into or exercisable or exchangeable for common
stock or any rights to acquire common stock for a period of one year after the
date of this prospectus without the prior written consent of Weatherly
Securities Corp., subject to various limited exceptions.
REGISTRATION RIGHTS
The holders of warrants to purchase 880,000 shares of our common stock are
parties to agreements that provide these holders with the right to require us to
register the sale of shares underlying those warrants concurrent with this
offering. If we fail keep the registration statement relating to the resale of
these shares effective, we could be subject to cash penalties equal to the
greater of 10% of the holder's aggregate exercise price of the warrants or 10%
of the then current fair market value of the underlying shares. The holder of
the 160,428 shares to be issued in the settlement of the CMI litigation also
will have registration rights. Registration of these shares of our common stock
will permit the sale of these shares without regard to the restrictions of
Rule 144. We have filed a shelf registration statement registering the shares
underlying these warrants and the 160,428 shares for resale. We cannot predict
the timing of these sales or the effect these sales may have on the market price
of our common stock.
SHARES ISSUABLE UPON EXERCISE OF OPTIONS UNDER OUR STOCK OPTION PLAN
We intend to file one or more registration statements under the Securities
Act to register all shares of common stock issued, issuable or reserved for
issuance under our stock option plan. These registration statements are expected
to be filed as soon as practicable after the date of this prospectus and will
automatically become effective upon filing. Following this filing, shares
registered under these registration statements will, subject to the 180-day
lock-up agreements described above and Rule 144 volume limitations applicable to
affiliates, be available for sale in the open market.
54
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, which is filed as an exhibit to the registration statement relating
to this prospectus, the underwriters of the offering named below, for whom
Weatherly Securities Corp. and M.R. Beal & Company are acting as
representatives, have each agreed to purchase from us the respective number of
shares of common stock shown opposing its name below:
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Weatherly Securities Corp...................................
M.R. Beal & Company.........................................
---------
Total....................................................... 2,300,000
=========
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock that the underwriters have agreed to purchase
under the underwriting agreement must be purchased. The conditions contained in
the underwriting agreement include the requirement that the representations and
warranties made by us to the underwriters are true, that there is no material
change in the financial markets and that we deliver to the underwriters
customary closing documents.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 345,000 additional shares described below.
PAID BY US NO EXERCISE FULL EXERCISE
---------- ----------- -------------
Per share............................................ $ $
Total................................................ $ $
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the initial public offering
price shown on the cover page of this prospectus, and to dealers, who may
include the underwriters, at the initial public offering prices less a selling
concession not in excess of $ per share. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $ per share to brokers and
dealers. After the offering, the underwriters may change the offering price and
other selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of 345,000 additional shares of common stock, exercisable solely to cover
over-allotments, if any, at the initial public offering price less the
underwriting discounts and commissions shown on the cover of this prospectus.
The underwriters may exercise this option at any time until 45 days after the
date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated in the
preceding table, and we will be obligated under the over-allotment option to
sell the shares of common stock to the underwriters.
We, our executive officers and directors and persons who hold more than
9,800,625 shares of our outstanding common stock and 4,640,836 shares issuable
upon the exercise of outstanding options and warrants have agreed not to
directly or indirectly, subject to limited exceptions, do any of the following,
whether any transaction described below is to be settled by delivery of common
stock or other securities, in cash or otherwise, in each case without our prior
written consent and the consent of
55
Weatherly Securities Corp. on behalf of the underwriters, for a period of one
year after the date of this prospectus, subject to limited exceptions:
- offer, sell or otherwise dispose of, or enter into any transaction or
arrangement that is designed or could be expected to, result in the
disposition or purchase by any person at any time in the future of, any
shares of common stock or securities convertible into or exchangeable for
common stock or substantially similar securities;
- enter into any swap or other agreement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the common
stock; or
- sell or grant options, rights or warrants with respect to any shares of
our common stock or securities convertible into or exchangeable for our
common stock or substantially similar securities, other than the grant of
options under the option plan existing on the date hereof.
The restrictions described in the previous paragraph do not apply to:
- the common stock sold under this prospectus or acquired in the open market
following the commencement of this offering;
- shares of common stock issued in connection with the settlement of the CMI
litigation; or
- shares of common stock we issue under employee benefit plans, our stock
option plan or other employee compensation plans existing on the date of
this prospectus or under currently outstanding options, warrants or
rights.
In addition, holders of an additional 880,000 shares underlying warrants and
the holder of 160,428 shares of common stock to be issued upon consummation of
this offering in connection with the resolution of the CMI litigation have
agreed, except in limited circumstances, not to sell those securities, and in
the case of the warrants, the underlying shares, for a period of 180 days after
the effective date of the registration statement of which this prospectus is a
part without our consent, subject to limited exceptions further described under
"Shares Eligible for Future Sale--Lock-ups." We have filed a shelf registration
statement registering for resale up to 880,000 shares underlying warrants and
the 160,428 shares. Each of these holders, acting as a principal for its own
account or in brokerage transactions at prevailing market prices or in
transactions at negotiated prices, may offer the shares for sale. It is not
possible at the present time to determine the price to the public in any sale of
the shares by these holders.
Prior to the offering, there has been no public market for the shares of our
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions:
- our historical performance and capital structure;
- estimates of our business potential and earnings prospectus;
- an overall assessment of our management;
- our lack of historical results of operations; and
- the consideration of the above factors in relation to market valuation of
companies in related businesses.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol VICT.
56
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, or to contribute to payments that the
underwriters may be required to make for these liabilities.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $2,150,000.
Until the distribution of the common stock is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase shares of common stock. As an exception to these rules,
the representatives are permitted to engage in transactions that stabilize the
price of the common stock. These transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they sell more shares than are
shown on the cover of this prospectus. If the underwriters create a short
position, then the representatives may reduce that short position by purchasing
common stock in the open market. The representatives also may elect to reduce
any short position by exercising all or part of the over-allotment option.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed five percent of the total number of shares
of common stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it was to discourage resales of the security by purchasers in an
offering.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters make any representation that the representatives will engage
in these transactions or that these transactions, once commenced, will not be
discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
It is expected that delivery of the shares will be made to investors on or
about , 2000.
The representatives and their affiliates may in the future provide
investment banking, financial advisory and other services to us or our
affiliates for which these representatives may receive customary fees and
commissions. Additionally, Weatherly Securities Corp. acted as private placement
agent in connection with an offering of ours which was completed on April 3,
2000, for which it received warrants exercisable for 80,000 shares of our common
stock at an exercise price equal to $7.00 or, in the event this offering is
consummated, 165% of the initial offering price per share to the public of our
common stock under this prospectus following the consummation of this offering.
In connection with this offering, we have agreed to grant the underwriters
warrants exercisable for 10% of the total number of shares of our common stock
sold in this offering, against which the warrants to purchase 80,000 shares
referred to in the immediately preceding paragraph will be credited, at an
exercise price equal to 165% of the initial offering price per share to the
public of our common
57
stock under this prospectus. In addition, we have agreed to reimburse the
underwriters for some of the out-of-pocket expenses incurred by them in
connection with this offering and to pay the underwriters a non-accountable
expense allowance equal to 3% of the gross proceeds from the sale of our common
stock in this offering.
To comply with the provisions of Rule 2710 of the Conduct Rules of the
National Association of Securities Dealers, Inc. regarding underwriting
compensation, the warrants to purchase shares of common stock to be received by
the underwriters in connection with this offering referred to above and the
warrants to purchase 80,000 shares referred to above, together with the
underlying shares, will be restricted from sale, transfer, pledge, assignment or
hypothecation for a period of one year from the date of this prospectus, subject
to limited exceptions.
LEGAL MATTERS
The valid issuance of our common shares offered in this offering will be
passed upon for us by Lowndes, Drosdick, Doster, Kantor & Reed, P.A., Orlando,
Florida. Cahill Gordon & Reindel, New York, New York, is acting as counsel for
Victory and Ruskin, Moscou, Evans & Faltischeck, P.C., Mineola, New York, is
acting as counsel to the underwriters in connection with legal matters relating
to this offering.
EXPERTS
The financial statements included in this prospectus and in the registration
statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods shown in their report (which
contains an explanatory paragraph regarding our ability to continue as a going
concern) appearing elsewhere in this prospectus and in the registration
statement, and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC under the Securities Act a registration statement
on Form S-1 with respect to shares of the common stock offered hereby. This
prospectus, which constitutes part of the registration statement, does not
contain all the information shown in the registration statement or the exhibits
and schedules which are part of the registration statement, portions of which
are omitted as permitted by the rules and regulations of the SEC. Statements
made in this prospectus regarding the contents of any contract or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. For further information pertaining to us and the common stock
offered hereby, reference is made to the registration statement, including the
exhibits and schedule thereto, copies of which may be inspected without charge
at the public reference facilities of the SEC at 450 Fifth Street, N.W.,
Washington, DC, 20549 and at the regional offices of the SEC located at 75 Park
Place, New York, New York 10007, and Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661. Copies of all or any portion of
the registration statement may be obtained from the SEC at prescribed rates.
Information on the public reference facilities may be obtained by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website that contains
reports and other information that is filed through the SEC's EDGAR System. The
website can be accessed at HTTP://WWW.SEC.GOV.
We intend to furnish our shareholders with annual reports containing audited
financial statements and quarterly reports containing unaudited interim
financial information for the first three fiscal quarters of each fiscal year.
58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets............................................ F-3
Statements of operations.................................. F-4
Statements of capital deficit............................. F-5
Statements of cash flows.................................. F-6
Notes to consolidated financial statements................ F-7 - F-20
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Victory Entertainment Corp.
We have audited the accompanying balance sheets of the predecessor
corporation, LightPoint Entertainment, Inc., as of June 30, 1998 and 1999, and
Victory Entertainment Corp. and subsidiaries as of June 30, 2000 and the related
statements of operations, capital deficit, and cash flows of LightPoint
Entertainment, Inc. for the period from inception (July 31, 1997) through
June 30, 1998 and for the year ended June 30, 1999 and of Victory Entertainment
Corp. and subsidiaries for the year ended June 30, 2000. These financial
statements are the responsibility of Victory Entertainment Corp.'s (the
"Company") management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the predecessor corporation,
LightPoint Entertainment, Inc., as of June 30, 1998 and 1999 and Victory
Entertainment Corp. and subsidiaries as of June 30, 2000, and the results of
operations and cash flows of LightPoint Entertainment, Inc. for the period from
inception (July 31, 1997) through June 30, 1998 and for the year ended June 30,
1999 and of Victory Entertainment Corp. and subsidiaries for the year ended
June 30, 2000 in conformity with generally accepted accounting principles.
As discussed in Note 2, effective July 1, 1999, the predecessor corporation,
LightPoint Entertainment, Inc., entered into an Agreement and Plan of Merger
with Premium Entertainment Corp., a wholly-owned subsidiary of the Company. Upon
consummation of the merger, 2,072,600 shares of the Predecessor's common stock
were exchanged for an equal number of common shares of the Company, and the
Predecessor's founding shareholder surrendered 1,900,000 shares of the
Predecessor's common stock.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 3 to the
financial statements, the Company's recurring losses from operations, negative
working capital, capital deficit and a default under its notes payable raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
August 4, 2000, except for Note 6, as to
which the date is September 6, 2000, and
Note 11, as to which the date is August 22, 2000
F-2
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30,
-----------------------------------------
1998 1999 2000
----------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,661 $ 459,846 $ 1,517,202
Short-term investments.................................... -- -- 75,000
Accounts receivable....................................... 33,858 25,798 56,278
Prepaid expenses.......................................... -- 17,583 66,264
Prepaid license fee (Note 4).............................. 103,571 -- --
----------- ------------ ------------
TOTAL CURRENT ASSETS.................................. 146,090 503,227 1,714,744
----------- ------------ ------------
PROPERTY AND EQUIPMENT:
Production equipment...................................... 436,602 718,762 972,881
Software.................................................. 389,895 510,834 765,113
Furniture and equipment................................... 33,116 38,483 29,563
Leasehold improvements.................................... 14,227 20,489 --
----------- ------------ ------------
873,840 1,288,568 1,767,557
Less accumulated depreciation and amortization.............. 137,246 467,552 817,864
----------- ------------ ------------
NET PROPERTY AND EQUIPMENT............................ 736,594 821,016 949,693
----------- ------------ ------------
DEFERRED OFFERING COSTS (Note 3)............................ -- -- 435,740
DEFERRED LOAN COSTS (Note 6)................................ -- -- 679,322
INTELLECTUAL PROPERTY, net (Note 5)......................... 250,000 275,003 235,717
DEPOSITS.................................................... -- 7,500 --
----------- ------------ ------------
$ 1,132,684 $ 1,606,746 $ 4,015,216
=========== ============ ============
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Notes payable (Note 6).................................... $ 2,000,000 $ 2,000,000 $ 5,824,000
Accounts payable.......................................... 578,703 732,059 578,579
License fee payable (Note 4).............................. -- 317,050 --
Accrued payroll and related taxes......................... 218,936 376,695 40,541
Accrued interest (Note 6)................................. 185,417 520,417 970,417
Unearned revenue (Note 11)................................ -- -- 140,000
Settlement payable (Note 7)............................... -- 50,000 37,500
----------- ------------ ------------
TOTAL CURRENT LIABILITIES............................. 2,983,056 3,996,221 7,591,037
----------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, and 11)..........
CAPITAL DEFICIT (Note 8):
Preferred stock $.001 par value, authorized 20,000,000
shares; none issued..................................... -- -- --
Common stock $.001 par value, authorized 50,000,000
shares; issued and outstanding 163,800, 7,992,600 and
10,031,911 shares....................................... 164 7,993 10,032
Additional paid-in capital................................ 159,336 20,311,184 30,267,133
Common stock notes receivable............................. -- (213,750) --
Unearned compensation..................................... -- (12,744,900) (10,762,450)
Accumulated deficit....................................... (2,009,872) (9,750,002) (23,090,536)
----------- ------------ ------------
TOTAL CAPITAL DEFICIT................................. (1,850,372) (2,389,475) (3,575,821)
----------- ------------ ------------
$ 1,132,684 $ 1,606,746 $ 4,015,216
=========== ============ ============
See accompanying notes to consolidated financial statements.
F-3
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
INCEPTION
(JULY 31, 1997) YEAR ENDED JUNE 30,
THROUGH --------------------------
JUNE 30, 1998 1999 2000
--------------- ----------- ------------
REVENUES.............................................. $ 579,170 $ 221,905 $ 310,026
----------- ----------- ------------
EXPENSES:
Operating........................................... 860,060 1,335,451 4,489,536
General and administrative (Note 12)................ 1,247,653 3,038,832 4,539,511
Common stock, options and warrants issued for
general and administrative services............... -- 2,874,563 3,198,950
Depreciation and amortization....................... 137,246 347,516 404,484
Abandonment of software and equipment............... 150,000 8,490 7,971
----------- ----------- ------------
Total expenses.................................. 2,394,959 7,604,852 12,640,452
----------- ----------- ------------
LOSS FROM OPERATIONS.................................. (1,815,789) (7,382,947) (12,330,426)
INTEREST EXPENSE, NET:
Interest expense.................................... (194,083) (357,183) (1,071,443)
Interest income..................................... -- -- 61,335
----------- ----------- ------------
Interest Expense, net........................... (194,083) (357,183) (1,010,108)
----------- ----------- ------------
NET LOSS.............................................. $(2,009,872) $(7,740,130) $(13,340,534)
=========== =========== ============
NET LOSS PER COMMON SHARE--BASIC AND DILUTED.......... $ (19.01) $ (5.05) $ (1.42)
=========== =========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING--
BASIC AND DILUTED................................... 105,731 1,533,650 9,381,538
=========== =========== ============
See accompanying notes to consolidated financial statements.
F-4
VICTORY ENTERTAINTMENT CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
------------------------ --------------------- PAID-IN STOCK NOTES UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ----------- ---------- -------- ----------- ----------- -------------
Issuance of common to
LightPoint founders
on
July 31, 1997........ -- -- 100,000 $ 100 $ (100) $ -- $ --
Sale of common stock
and warrants......... -- -- 63,800 64 159,436 -- --
Net loss............... -- -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- --------- ------------
BALANCE, JUNE 30,
1998................. -- -- 163,800 164 159,336 -- --
Sale of common stock
and warrants......... -- -- 1,858,800 1,859 4,533,355 (208,750) --
Issuance of common
stock warrants for
consulting
services............. -- -- -- -- 710,463 -- --
Issuance of common
stock for
compensation......... -- -- 50,000 50 113,950 -- --
Issuance of common
stock to Victory
founder on May 27,
1999................. -- -- 5,000,000 5,000 12,495,000 (5,000) (12,495,000)
Issuance of common
stock to Victory
officers and
consultants on
June 9, 1999......... -- -- 920,000 920 2,299,080 -- (249,900)
Net loss............... -- -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- --------- ------------
BALANCE, JUNE 30,
1999................. -- -- 7,992,600 $ 7,993 $20,311,184 $(213,750) $(12,744,900)
Issuance of common
stock for
compensation......... -- -- 50,000 50 113,950 -- --
Sale of common stock
and warrants......... -- -- 1,965,025 1,965 6,861,323 -- --
Issuance of common
stock options and
warrants to an
officer and directors
at less than deemed
fair market value.... -- -- -- -- 1,102,500 -- (450,000)
Amortization of
unearned
compensation......... -- -- -- -- -- -- 2,432,450
Exercise of common
stock warrants....... -- -- 10,000 10 69,990 -- --
Proceeds from common
stock notes
receivable........... -- -- -- -- -- 213,750 --
Issuance of common
stock in settlement
of accounts
payable.............. -- -- 14,286 14 49,986 -- --
Issuance of warrants in
connection with note
payable.............. -- -- -- -- 1,770,400 -- --
Redemption of common
stock warrants....... -- -- -- -- (12,200) -- --
Net loss............... -- -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- --------- ------------
BALANCE, JUNE 30,
2000................. -- $ -- 10,031,911 $10,032 $30,267,133 $ -- $(10,762,450)
========== =========== ========== ======= =========== ========= ============
TOTAL
ACCUMULATED CAPITAL
DEFICIT DEFICIT
------------ ------------
Issuance of common to
LightPoint founders
on
July 31, 1997........ $ -- $ --
Sale of common stock
and warrants......... -- 159,500
Net loss............... (2,009,872) (2,009,872)
------------ ------------
BALANCE, JUNE 30,
1998................. (2,009,872) (1,850,372)
Sale of common stock
and warrants......... -- 4,326,464
Issuance of common
stock warrants for
consulting
services............. -- 710,463
Issuance of common
stock for
compensation......... -- 114,000
Issuance of common
stock to Victory
founder on May 27,
1999................. -- --
Issuance of common
stock to Victory
officers and
consultants on
June 9, 1999......... 2,050,100
Net loss............... (7,740,130) (7,740,130)
------------ ------------
BALANCE, JUNE 30,
1999................. $(9,750,002) $ (2,389,475)
Issuance of common
stock for
compensation......... -- 114,000
Sale of common stock
and warrants......... -- 6,863,288
Issuance of common
stock options and
warrants to an
officer and directors
at less than deemed
fair market value.... -- 652,500
Amortization of
unearned
compensation......... -- 2,432,450
Exercise of common
stock warrants....... -- 70,000
Proceeds from common
stock notes
receivable........... -- 213,750
Issuance of common
stock in settlement
of accounts
payable.............. -- 50,000
Issuance of warrants in
connection with note
payable.............. -- 1,770,400
Redemption of common
stock warrants....... -- (12,200)
Net loss............... (13,340,534) (13,340,534)
------------ ------------
BALANCE, JUNE 30,
2000................. $(23,090,536) $ (3,575,821)
============ ============
See accompanying notes to consolidated financial statements.
F-5
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
INCEPTION (JULY 31, YEAR ENDED JUNE 30,
1997) THROUGH --------------------------
JUNE 30, 1998 1999 2000
------------------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,009,872) $(7,740,130) $(13,340,534)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 137,246 347,516 404,484
Amortization of deferred loan costs..................... -- -- 226,441
Amortization of debt discount........................... -- -- 392,000
Abandonment of software and equipment................... 150,000 8,490 7,971
Common stock, options and warrants issued for
compensation and consulting services.................. -- 2,874,563 766,500
Amortization of unearned compensation................... -- -- 2,432,450
Net increase (decrease) in cash flows from changes in:
Accounts receivable................................... (33,858) 8,060 (30,480)
Prepaid expenses...................................... -- (17,583) (48,681)
Prepaid license fee................................... (103,571) 103,571 --
Accounts payable...................................... 578,703 153,356 (103,480)
License fee payable................................... -- 317,050 (317,050)
Accrued payroll and related taxes..................... 218,936 157,759 (336,154)
Accrued interest...................................... 185,417 335,000 450,000
Unearned revenue...................................... -- -- 140,000
Settlement payable.................................... -- 50,000 (12,500)
----------- ----------- ------------
Net cash used for operating activities...................... (876,999) (3,402,348) (9,369,033)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,023,840) (440,428) (501,846)
Purchase of intellectual property......................... (250,000) (25,003) --
Purchase of short-term investments........................ -- -- (75,000)
Change in deposits........................................ -- (7,500) 7,500
----------- ----------- ------------
Net cash used for investing activities...................... (1,273,840) (472,931) (569,346)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred offering costs........................ -- -- (435,740)
Payment of deferred loan costs............................ -- -- (703,363)
Proceeds from issuance of notes payable................... 2,000,000 -- 5,000,000
Proceeds from sale of common stock and warrants........... 159,500 4,326,464 6,863,288
Exercise of common stock warrants......................... -- -- 70,000
Redemption of common stock warrants....................... -- -- (12,200)
Proceeds from common stock notes receivable............... -- -- 213,750
----------- ----------- ------------
Net cash provided by financing activities................... 2,159,500 4,326,464 10,995,735
----------- ----------- ------------
Net increase in cash and cash equivalents................... 8,661 451,185 1,057,356
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- 8,661 459,846
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 8,661 $ 459,846 $ 1,517,202
=========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 8,666 $ 57,460 $ 2,537
=========== =========== ============
Non-cash financing activities:
Issuance of common stock and warrants in exchange for
common stock notes receivable........................... $ -- $ 213,750 $ --
Issuance of common stock in settlement of accounts
payable................................................. -- -- 50,000
Issuance of common stock and options for unearned
compensation............................................ -- 12,744,900 450,000
Issuance of warrants in connection with note payable...... -- -- 1,770,400
See accompanying notes to consolidated financial statements.
F-6
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Victory Entertainment Corp. ("Victory" or the "Company") was organized on
May 27, 1999 in the State of Florida and had no significant operations or assets
until it acquired LightPoint Entertainment, Inc. ("LightPoint" or the
"predecessor corporation") in a merger on July 1, 1999 (see Note 2). Victory is
an integrated entertainment company specializing in developing, producing and
distributing television and internet programming through its wholly-owned
subsidiaries Victory Television, Inc.; Victory Animation Studios, Inc.; Victory
Internet Productions, Inc.; Vamps Productions, Inc.; Victory Distribution, Inc.
and LightPoint Entertainment, Inc. The financial statements of Victory from
May 27, 1999 (the date of inception) through June 30, 1999 are not included in
these financial statements since that information is not considered meaningful
as Victory had minimal activity.
LightPoint, was organized on July 31, 1997 in the State of Florida for the
purpose of providing full-service production services specializing in
multi-media 3D graphics and animation and producing children's television
programs, specifically THE DOOLEY AND PALS SHOW. As discussed in Note 2,
LightPoint entered into a merger agreement effective July 1, 1999, whereby it
became a wholly-owned subsidiary of Victory Entertainment Corp.
The financial statements for the period from inception of LightPoint
(July 31, 1997) through June 30, 1998 and the year ended June 30, 1999 are those
of LightPoint. The financial statements for the year ended June 30, 2000 are
those of the Company and its wholly-owned subsidiaries, which includes
LightPoint.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of June 30, 2000 and for the year
then ended include the accounts of Victory, its wholly-owned subsidiaries and
the NEXTBIGSTAR.COM joint venture (see Note 10). All significant intercompany
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
DEFERRED OFFERING COSTS
Fees, costs and expenses related to the proposed public offering are
capitalized and will be charged against the proceeds therefrom. If the proposed
offering is not consummated, the deferred costs will be expensed. (See Note 3).
F-7
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED LOAN COSTS
Deferred loan costs were incurred in connection with a note payable (See
Note 6) and are being amortized over the term of the loan of one year unless an
initial public offering ("IPO") occurs prior to March 28, 2001, at which time
the unamortized balance will be expensed.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives:
Production equipment........................................ 3--10 years
Software.................................................... 3--5 years
Furniture and equipment..................................... 3--7 years
Leasehold improvements...................................... Life of lease
IMPAIRMENT
Assets are evaluated for impairment when events change or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. When any such impairment exists, the related assets are written
down to fair value.
INTELLECTUAL PROPERTY
Intellectual property represents the costs of acquired rights to certain
intellectual properties associated with THE DOOLEY AND PALS SHOW. Intellectual
property is amortized on a straight-line basis over the estimated useful life of
THE DOOLEY AND PALS SHOW of seven years. Amortization began on July 1, 1999 when
the merger became effective (see Notes 2 and 5).
LOSS PER SHARE
Loss per share is based upon the weighted average number of common shares
outstanding during each period. Diluted loss per share does not differ from
basic loss per share since the effect of potential common shares is
anti-dilutive. Potential common shares as of June 30, 2000 include 668,000
common stock options and 5,002,866 common stock warrants.
REVENUE RECOGNITION
Revenues for all periods include fees for animation graphics services
performed by the Company and are recorded as the work is performed. During the
year ended June 30, 2000, the Company began recognizing sponsorship revenue in
connection with NEXTBIGSTAR.COM over the sponsorship period, which ranged from
30 to 45 days.
CONCENTRATION OF CREDIT RISK
The Company's revenues were generated from animation graphic services
performed for third parties. Revenues from one customer represented 62%, 76% and
32% of total revenues for the period
F-8
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from inception (July 31, 1997) to June 30, 1998 and the years ended June 30,
1999 and 2000, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As permitted by SFAS 123, the Company has elected to
continue to follow Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock-based compensation to employees. Stock options and warrants
granted to nonemployees are valued using a Black-Scholes option pricing model
with appropriate assumptions for risk-free investment rates, expected lives,
dividend yields and volatility factors. The value of options and warrants
granted or issued to nonemployees is charged to appropriate asset or expense
accounts when the options and warrants are granted or issued.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as of June 30,
2000. The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments include
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and notes payable. Fair values were assumed to approximate carrying
values for these financial instruments since they are short term in nature or
they are receivable or payable on demand.
SEGMENT INFORMATION
The Company currently does not identify separate operating segments for
management reporting purposes. Separate and discrete financial information of
the various operating subsidiaries is currently not being evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The consolidated results of operations are currently the
basis on which management evaluates operations and makes business decisions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 138, requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. SFAS 133, as amended by
SFAS 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Historically, the Company has not entered into derivative
contracts and does not expect to have any hedging activities in the future.
Accordingly, the adoption of SFAS 133 on July 1, 2000 did not affect the
Company's financial statements.
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 139, "Rescission of FASB Statement No. 53 and Amendments to FASB Statements
No. 63, 89 and 121" ("SFAS 139"). SFAS 139 requires companies that previously
were subject to the requirements of SFAS 53 to follow the guidance in AICPA
Statement of Position No. 00-2, "Accounting by Producers and Distributors of
F-9
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Films" ("SOP 00-2"), SOP 00-2 is effective for financial statements for fiscal
years beginning after December 15, 2000. The Company has not yet evaluated the
impact of SOP 00-2 on its financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 2, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. The Company believes that the impact of FIN 44 will not have a material
effect on the Company's financial position or results of operations.
2. MERGER AGREEMENT
Effective July 1, 1999, Premium Entertainment Corp. ("Premium"), a
wholly-owned subsidiary of Victory entered into an Agreement and Plan of Merger
("Merger Agreement") with LightPoint. The Merger Agreement provided for a
business combination whereby LightPoint and Premium were merged into a single
corporation, in which LightPoint was the surviving corporation and replaced
Premium as a wholly-owned subsidiary of Victory. As part of this Merger
Agreement, 2,072,600 shares of common stock of LightPoint were exchanged for an
equal number of common shares of Victory and the majority shareholder of
LightPoint surrendered 1,900,000 shares of LightPoint common stock. Furthermore,
warrants to purchase 2,239,841 shares of LightPoint common stock were exchanged
for an equal number of warrants to purchase shares of common stock of Victory.
The transaction was accounted for as a recapitalization of LightPoint.
Accordingly, the 1,900,000 shares surrendered by Lightpoint's majority
shareholder was recorded retroactively to Lightpoint's date of inception.
3. GOING CONCERN
The Company and the Predecessor have experienced recurring losses from
operations, have negative working capital and a capital deficit. In addition,
LightPoint is currently in litigation in connection with a default under notes
payable amounting to $2,000,000 (see Note 6). These matters raise substantial
doubt about the Company's ability to continue as a going concern.
The Company's current projects include the production and distribution of
THE DOOLEY AND PALS SHOW and the production of NEXTBIGSTAR.COM, an online
entertainment talent search hosted by television personality Ed McMahon. The
Company raised $6.9 million from July 28, 1999 through December 17, 1999 in a
private offering which enabled it to commence production of THE DOOLEY AND PALS
SHOW and launch the NEXTBIGSTAR.COM project. In April 2000, the Company received
net proceeds of $4.3 million in a private placement of a note payable and
warrants (see Note 6). The Company determined there is a need for public
financing in order to provide for the continued funding of these and additional
projects. Accordingly, the Company is in the process of an IPO to sell 2,300,000
shares of common stock at a price of $11 per share. The Company estimates they
will receive net proceeds of approximately $21 million in this offering. As of
June 30, 2000, the Company incurred $435,740 in deferred offering costs.
F-10
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. GOING CONCERN (CONTINUED)
The Company's ability to continue as a going concern remains dependent upon
the success of THE DOOLEY AND PALS SHOW, the NEXTBIGSTAR.COM project and the
ability to complete the proposed IPO. However, there can be no assurances that
this offering will occur or that THE DOOLEY AND PALS SHOW and the
NEXTBIGSTAR.COM project will yield positive operating results in the future. In
the event that the proposed IPO is not consummated on a timely basis, the
Company will need to seek additional financing from other sources. The Company
believes that revenues from operating activities during the next 12 months will
not be sufficient to support operations during that period. There can be no
assurance that the Company will be able to find alternate financing on a timely
basis, if at all.
4. LICENSE AGREEMENT
In August 1997, LightPoint entered into an agreement with Walt Disney World
Co. ("Disney") to operate a 3D graphics department at Disney-MGM Studios for a
term of five years terminating in October 2002. LightPoint agreed to pay Disney
a total of $1,000,000 over the term to operate the graphics department, and
Disney agreed to utilize LightPoint's graphics department for its 3D graphic
production needs and to provide LightPoint with facility space and other office
support on Disney premises. Pursuant to the agreement, a letter of credit in the
amount of $650,000 was required to be posted by the Company and certain property
and equipment was pledged as security. Furthermore, LightPoint agreed to pay
royalties to Disney representing the greater of $150,000 in the first year and
$200,000 annually thereafter, or a percentage of gross revenue derived from
production work generated by the department, as defined in the agreement.
In July 1999, the agreement was effectively terminated, and the original
agreement amount of LightPoint's obligation was reduced to $575,000, of which
$246,429 and $328,571 is included in general and administrative expenses for the
periods ended June 30, 1998 and 1999, respectively. Royalty fees related to this
agreement amounted to $112,500 and $187,500 for the periods ended June 30, 1998
and 1999, respectively. LightPoint prepaid $103,571 of these license and royalty
fees as of June 30, 1998 and accrued $317,050 of these fees as of June 30, 1999.
Furthermore, LightPoint paid Disney a total of $49,500 during a 90-day
period commencing July 9, 1999 for the option to discuss possible restructuring
of the original agreement. A restructuring had not been negotiated as of the end
of the 90-day period, at which time the option was terminated and the Company
had no further obligations to Disney under this agreement.
5. INTELLECTUAL PROPERTY
Intellectual property represents the costs of acquired rights to certain
intellectual properties associated with the production of THE DOOLEY AND PALS
SHOW. In December 1997, LightPoint acquired the rights in and to the
intellectual property entitled Dooley and ancillary tangible items for $250,000
from a third party. These rights include all copyrights, trademark rights,
adoption rights, licensing rights, music rights, broadcasting rights, video
rights and all rights of distribution, display and performance by any means or
methods whether now known or hereafter invented. Accumulated amortization as of
June 30, 2000 and amortization expense for the year then ended was $39,636.
After the merger, Lightpoint produced a pilot episode of THE DOOLEY AND PALS
SHOW and is currently producing numerous episodes, which are currently airing on
various public broadcasting stations. Although Lightpoint will receive no
revenue from the production of THE DOOLEY AND PALS
F-11
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTELLECTUAL PROPERTY (CONTINUED)
SHOW, it anticipates significant revenue from the licensing and sales of
merchandise related to the characters of THE DOOLEY AND PALS SHOW. Lightpoint is
contingently liable to the original seller of the Dooley rights for royalties
equal to 8% of gross profits, as defined in the agreement, generated from the
exploitation of such rights. There have been no royalty expenses incurred
pursuant to this agreement through June 30, 2000.
6. NOTES PAYABLE
CMI NOTES
LightPoint Entertainment, LLC, an entity which was under common control with
LightPoint Entertainment, Inc., borrowed $1,000,000 on October 23, 1997 and
$1,000,000 on December 16, 1997 from CMI International Holdings, Ltd. ("CMI"), a
company organized under the laws of Taiwan, ROC. The funds borrowed by
LightPoint Entertainment, LLC were transferred by the lender to the account of
LightPoint Entertainment, Inc. The notes subject to litigation, as described
below, accrue interest at 15% annually. The notes became due on March 25, 1998
and are currently in default. Accrued interest as of June 30, 2000 was $820,417.
On May 12, 1999, LightPoint Entertainment, Inc. was sued by CMI in Florida
state court for its alleged failure to pay the $2.0 million principal plus
accrued interest on the above notes payable. Following dismissal of the suit on
July 16, 1999, CMI filed an amended complaint naming LightPoint Entertainment,
LLC, as well as the two former LightPoint officers who executed the promissory
notes, as parties to the suit.
On September 6, 2000, the Company entered into a stipulation to settle this
litigation upon consummation of an IPO through payment to CMI of $1,000,000 in
cash from the net proceeds of the offering and the issuance of 160,428 shares of
common stock to CMI's affiliate CMC Magnetics Corporation ("CMC"), determined by
dividing $1,500,000 by 85% of the assumed public offering price of $11 per
share. As part of the settlement, the Company has agreed to register the 160,428
shares for public resale. If the registration statement relating to these shares
is not effective on the 181st day following the closing date of the IPO, the
Company is obligated to pay CMC an additional $500,000. In connection with this
settlement, CMI will also relinquish any rights it may have under a distribution
agreement entered into between CMI and Lightpoint relating to merchandising in
Asia.
NOTE PAYABLE PRIVATE PLACEMENT
On April 3, 2000, Victory issued a $5,000,000 note payable and warrants to
purchase 880,000 shares of common stock in a private placement. The note payable
is due the earlier of the completion of the proposed IPO, or March 28, 2001,
with interest at 12% per annum. There was $703,363 of costs incurred in
connection with this private placement, which include legal fees and
underwriters' fees and commissions and are being amortized over one year, the
term of the note. For the year ended June 30, 2000, $175,841 of these costs were
amortized and included in interest expense. If the IPO occurs before one year,
the remaining unamortized loan costs will be expensed at the time of the IPO
when the loan is repaid. Accrued interest as of June 30, 2000 was $150,000.
In connection with this private placement, the investor was issued 800,000
warrants, which are exercisable at $7.00 per share or, if the Company's
registration statement becomes effective, 85% of the per share offering price
and which expire March 28, 2003. The placement agent for the offering was
F-12
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE (CONTINUED)
issued 80,000 warrants which are exercisable at a price $7.00 per share or, if
the Company's registration statement becomes effective, 165% of the per share
offering price and which expire March 28, 2005. The fair value of the 880,000
warrants at the date of issuance was $1,770,400 using the Black-Scholes option
pricing model with the following weighted-average assumptions: an $8.00 fair
value of the Company's common stock as of April 3, 2000, as determined by
management, no dividend yield, expected volatility of .01%, risk-free interest
rate of 5% and an expected life of the investor warrants of three years and the
placement agent warrant of five years. The fair value of the 800,000 warrants of
$1,568,000 was recorded as a debt discount and is being amortized to interest
expense over the term of the note payable of one year. During the year ended
June 30, 2000, $392,000 was amortized to interest expense and as of June 30,
2000, the unamortized debt discount was $1,176,000. The fair value of the 80,000
warrants of $202,400 was recorded as deferred loan costs and is being amortized
over one year. During the year ended June 30, 2000, $50,600 was amortized to
interest expense. If the proposed IPO occurs, the fair value of these warrants
using the Black-Scholes option pricing model and an assumed IPO price of $11 per
share, would increase by $581,600 and would be recorded as interest expense upon
consummation of the IPO since the related note payable will be paid off from the
proceeds of this offering.
The holders of the 880,000 warrants to purchase shares of the Company's
common stock described above are parties to agreements that provide the right to
require the Company to register the sale of shares underlying those warrants
concurrent with the IPO. If the Company fails to keep the registration statement
relating to the resale of these shares effective, the Company could be subject
to cash penalties equal to the greater of 10% of the holders' aggregate exercise
price of the warrants or 10% of the then current fair market value of the
underlying shares.
7. SETTLEMENT PAYABLE
On July 7, 1998, a settlement agreement was entered into between LightPoint
and its two shareholders, whereby one shareholder agreed to sell all of his
shares to the other shareholder, to resign as a director and officer of
LightPoint, and to relinquish all rights he had in LightPoint. Pursuant to the
settlement agreement, LightPoint agreed to pay the former shareholder a total of
$225,000. As outlined in the settlement agreement, the payment of the $225,000
was contingent upon certain conditions, including LightPoint's satisfaction of
certain obligations and the achievement of certain financial operating results.
Prior to June 30, 1999, the former shareholder filed suit against LightPoint
and the shareholder to whom the shares were sold for payment of the full
$225,000. On March 20, 2000, a settlement was reached between this shareholder
and the Company for $50,000, which was recorded as compensation expense in 1999
and as a settlement payable as of June 30, 1999. The Company is required to pay
the former shareholder $4,167 per month for a period of 12 months. As of
June 30, 2000, $12,500 had been paid to the former shareholder.
F-13
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL STOCK
On July 31, 1997, LightPoint was organized by two founding shareholders, who
each received 1,000,000 shares of common stock. On July 7, 1998, one of the
founding shareholders sold all of his shares to the other founding shareholder
(see Note 7).
On July 10, 1998, the sole shareholder of LightPoint approved a change in
the par value of LightPoint's common stock from $1 to $.001 per share and
approved an increase in the number of authorized common shares from 7,500 to
50,000,000 shares. All share information included in the accompanying financial
statements and notes has been retroactively adjusted to give effect to the
change in par value.
In July 1998, LightPoint's board of directors, by resolution, authorized
LightPoint to offer its securities through a private placement memorandum,
pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended.
On July 13, 1998, a private placement memorandum was issued by LightPoint,
whereby LightPoint offered to sell 480 units for $12,500 per unit, each unit
consisting of 5,000 shares of common stock and 5,000 warrants. Each warrant
entitled the registered holder to purchase, at any time for a two-year period
from the date of issuance, one share of common stock for $7 as to 1,788,600
warrants and $4 as to 110,000 warrants. The warrants are subject to redemption
by the Company at $.10 per share of which 87,000 were redeemed as of June 30,
2000. The private placement closed on July 15, 1999 and, as of that date,
1,915,000 shares of common stock and 1,915,000 warrants had been sold.
Pursuant to subscription warrant agreements dated November 30, 1998,
LightPoint issued 341,241 warrants for consulting services at an exercise price
of $.25 per share. These warrants are exercisable on various dates from November
2003 through March 2004. The fair value of LightPoint's stock over the exercise
price of $710,463 was recorded as consulting expense in 1999 and was based upon
the Black-Scholes option pricing model with the following weighted average
assumptions: no dividend yield, expected volitility of .01% risk free interest
rate of 5% and expected life of five years.
On May 27, 1999, Victory was organized by one founding shareholder who
received 5,000,000 shares of common stock. In addition, on June 9, 1999, Victory
issued 750,000 shares of common stock to non-employee consultants, 120,000
shares of common stock to individuals designated as officers of the Company and
50,000 shares of common stock to its legal counsel. All of these shares were
valued at $2.50 per share, representing the purchase price of the common stock
sold in Lightpoint's private placement in process during the period these shares
were issued. Unearned compensation of $12,495,000 and $249,900 was recorded on
May 27, 1999 and June 9, 1999, respectively, related to employment agreements
with the founding shareholder and two officers which will be amortized over the
life of the agreements of six and two years, respectively. Compensation and
consulting expense of $2,050,100 was recorded on June 9, 1999 relating to the
value of the other issuances to the remaining officers, consultants and legal
counsel. Amortization of the unearned compensation of $2,207,450 was recorded
for the year ended June 30, 2000.
On June 9, 1999, LightPoint issued 50,000 shares of common stock to an
officer in connection with a termination agreement and recorded $114,000 of
compensation expense during the year ended June 30, 1999 representing the fair
value of the common stock issued.
On June 9, 1999, by resolution of the board of directors, 120,000 options
were issued to certain officers. On July 1, 1999, the Company issued 50,000
shares of common stock and 50,000 options to a former officer of LightPoint in
connection with a termination agreement and recorded $114,000 of
F-14
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL STOCK (CONTINUED)
compensation expense, representing the fair value of the common stock issued. An
additional 100,000 options were issued on the same date to another former
officer of LightPoint in connection with a termination agreement. The 270,000
options issued are exercisable at $.25 per share and are contingent upon the
filing of a registration statement for an initial public offering. The options
expire three years from the date of issuance if an initial public offering has
not occurred. Upon consummation of the initial public offering, the Company will
record $2,902,500 of compensation expense, representing the difference between
the assumed initial public offering price of $11 per share and exercise $.25 per
share in connection with these options.
As described in Note 2, on July 1, 1999, in connection with the merger
between LightPoint and Victory, 2,072,600 shares of common stock of LightPoint
were exchanged for an equal number of common shares of Victory. The majority
shareholder of LightPoint surrendered 1,900,000 shares of LightPoint common
stock, which was recorded retroactively to LightPoint's date of inception.
Furthermore, warrants to purchase 2,239,841 shares of LightPoint common stock
were exchanged for an equal number of warrants to purchase shares of common
stock of Victory.
The Company's board of directors, by resolution, authorized the Company to
offer its securities through a private placement memorandum, pursuant to Rule
506 of Regulation D of the Securities Act of 1933, as amended. On July 26, 1999,
a private placement memorandum was issued by the Company, whereby the Company
offered to sell 500 units for $12,250 per unit, each unit consisting of 3,500
shares of common stock and 3,500 warrants. Each warrant entitled the registered
holder to purchase, at any time for a two year period from the date of issuance,
one share of common stock for $7.00. The warrants are subject to redemption by
the Company at $.10 per share of which 35,000 were redeemed as of June 30, 2000.
The private placement memorandum closed on December 17, 1999 and as of that date
1,948,625 shares of common stock and 1,948,625 warrants had been sold.
On January 10, 2000, a certain director was issued warrants to purchase
50,000 shares of common stock and granted options to purchase 100,000 shares of
common stock, 50,000 of which vest immediately and 50,000 of which vest after
one year if the director remains with the Company. The warrants and options are
exercisable at $.001 per share and expire within two years from the date of
issuance. The Company recorded $450,000 of unearned compensation in connection
with the options, in accordance with APB 25, representing the fair value of the
Company's common stock of $4.50, as determined by management, over the exercise
price. Amortization of the unearned compensation of $225,000 was recorded for
the year ended June 30, 2000 related to these options. The Company recorded
$225,000 in compensation in connection with the warrants, representing the fair
value of the Company's common stock of $4.50, as determined by management, over
the exercise price.
On March 1, 2000, pursuant to an employment agreement, the Chief Operating
Officer of Next Big Star, LLC was issued 35,000 options to purchase common
stock. The options vest and are exercisable over a three-year period beginning
March 1, 2001. The exercise price is the price determined at the time of the
initial public offering or if the initial public offering does not occur prior
to the vesting date the exercise price shall be the fair market value as of the
vesting date.
On April 18, 2000 the Company issued fully vested options to purchase 45,000
shares of its common stock to two members of its Board of Directors at an
exercise price of $3.50 per share. The Company recorded $202,500 in compensation
in connection with the options, representing the fair value of the Company's
common stock of $8.00, as determined by management, over the exercise price.
F-15
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL STOCK (CONTINUED)
In addition, on April 18, 2000, in connection with the joint venture between
Victory Internet Productions and McMahon Communications, Inc. (See Note 10), the
Company issued 50,000 options to Ed McMahon at an exercise price of $3.50 per
share and was fully vested upon issuance and expire five years. The Company
recorded $225,000 in compensation in connection with the options, representing
the fair value of the Company's common stock of $8.00, as determined by
management, over the exercise price.
On May 30, 2000, the Company redeemed 122,000 warrants at $.10 per warrant.
These warrants were issued in connection with the LightPoint and Victory private
placement offerings.
In April 2000, the Company's Board of Directors adopted the 2000 Long Term
Incentive and Share Award Plan ("the Plan"). The Plan provides for the granting
of up to 500,000 shares of common stock to employees, officers, directors,
consultants and independent contractors of the Company or any of its affiliates.
The Plan may be administered by the Company's Board of Directors or by a
committee of the Board of Directors. The administrator has the authority to
determine from time to time the eligible participants to whom stock options are
to be granted, the number of shares of common stock for which options are
exercisable and the purchase price of the shares, and all other terms and
conditions of the options. The administrator will determine the term of each
option and the vesting requirements, provided that the exercise period may not
exceed ten years from the date of grant. On May 19, 2000 and June 19, 2000, the
Company issued 143,000 and 25,000 options, respectively, to purchase shares of
common stock to officers and employees under the Plan. The options vest upon
consummation of the proposed initial public offering and are exercisable at the
initial public offering price.
Options outstanding as of June 30, 2000 consist of the following:
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE FAIR VALUE OF
NUMBER EXERCISE OPTIONS
OF SHARES PRICE GRANTED
--------- --------- -------------
Balance, June 30, 1998................................. -- $ -- $ --
Granted below market................................... 120,000 .25 2.26
--------- ------ -----
Balance, June 30, 1999................................. 120,000 .25 2.26
Granted below market................................... 250,000 .15 3.17
Granted at market...................................... 95,000 3.50 5.27
Granted at future IPO price............................ 203,000 11.00 --
--------- ------ -----
Balance, June 30, 2000................................. 668,000 $ 3.94 $3.36
========= ====== =====
The status of the above options as of June 30, 2000 is as follows:
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
NUMBER EXERCISE CONTRACTUAL
OF SHARES PRICE LIFE
--------- --------- -----------
Exercisable............................................ 195,000 $ 1.71 4.8 years
Unexercisable.......................................... 35,000 11.00 2.7 years
Contingent upon IPO.................................... 438,000 4.37 2.0 years
--------- ------ -----
Total................................................ 668,000 $ 3.94 2.5 years
========= ====== =====
F-16
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL STOCK (CONTINUED)
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its stock-based compensation to employees. Accordingly, compensation expense has
only been recognized for stock-based compensation issued to employees below the
fair market value of the common stock. Had compensation cost of the Company's
stock-based compensation issued to employees and directors been determined based
upon the fair value at the grant date consistent with the methodology described
under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro
forma net loss for 2000 would have been $13,413,684. Pro forma basic and diluted
loss per share would have been $1.43 for 2000.
Warrants outstanding as of June 30, 2000 consist of the following:
LightPoint was an S corporation from the date of inception (July 31, 1997)
through August 20, 1998, at which time it lost its S corporation status when it
exceeded the maximum number of shareholders as allowable under the Internal
Revenue Code. In lieu of corporate income taxes, the shareholders of an S
corporation are taxed on their proportionate share of LightPoint's taxable
income. As such, for the period from the date of inception through June 30,
1998, the financial statements contain no deferred tax benefit from the losses
incurred through June 30, 1998.
Subsequent to August 20, 1998, LightPoint began to account for income taxes
according to the liability method. At that date, the net deferred tax asset had
a full valuation allowance. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Measurement of deferred income tax is based
on enacted tax rates and laws that will be in effect when the differences are
expected to reverse, with the measurement of deferred income tax assets being
reduced by available tax benefits not expected to be realized.
F-17
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TAXES ON INCOME (CONTINUED)
The components of deferred tax assets and liabilities consisted of the
following:
JUNE 30, 1999 JUNE 30, 2000
------------- -------------
Deferred tax assets:
Settlement payable.............................. $ 18,800 $ 14,100
Warrants and options issued as compensation..... 267,400 352,000
Net operating loss carryforward................. 1,361,100 5,365,000
Valuation allowance............................. (1,573,500) (5,638,000)
----------- -----------
Deferred tax assets............................... 73,800 93,100
Deferred tax liabilities:
Depreciation and amortization................... (73,800) (93,100)
----------- -----------
Net deferred tax assets........................... $ -- $ --
=========== ===========
LightPoint's valuation allowance increased by $1,573,500 and $4,064,500
during the years ended June 30, 1999 and 2000, respectively. LightPoint and
Victory have recorded a valuation allowance to state its deferred tax assets at
estimated net realizable value due to the uncertainty related to realization of
these assets through future taxable income. At June 30, 2000, LightPoint and
Victory had an unused net operating loss carryforward ("NOL") of approximately
$14,259,000, which expires from 2018 to 2020. As a result of various stock
issuances and the merger, the use of these NOLs may be limited under the
provisions of section 382 of the Internal Revenue Code of 1986, as amended.
10. JOINT VENTURE
On January 14, 2000, Victory Internet Productions, Inc. ("VIP"), a
wholly-owned subsidiary of Victory entered into a joint venture agreement with
McMahon Communications, Inc. ("MCI") in order to develop, produce and exploit
NEXTBIGSTAR.COM, an Internet website, which will function as an online "talent
search." VIP and MCI each own 50% of the outstanding membership interest in Next
Big Star, LLC. The President and Chief Executive Officer of VIP and Ed McMahon
are the managers of Next Big Star, LLC. The voting arrangements provide that
while the current President and Chief Executive Officer is employed by Victory,
VIP will maintain voting control over the operations of Next Big Star, LLC,
operating as NEXTBIGSTAR.COM.
VIP is responsible for the day-to-day management of the website and all
legal and business affairs and related corporate functions. VIP and MCI will be
jointly responsible for the content of the Internet programming on the website.
VIP will receive a monthly management fee equal to 10% of the gross revenues
derived from the website, whether in the form of fees, advances, royalties or
profit participation. MCI will be paid a fee of $10,000 per month during the
development and pre-launch phase commencing January 1, 2000, which will increase
to approximately $42,000 a month on April 15, 2000 commencing with the actual
launch of the website. Fees paid to MCI during the year ended June 30, 2000 were
$156,000. This fee is an obligation of Next Big Star, LLC and will cover the on-
screen and other website hosting services of Ed McMahon and the related creative
consultant services for the website. In the event the cash flow of Next Big
Star, LLC is insufficient to make the payments to MCI, the payments will be
funded by VIP.
Under the operating agreement, net profits of NEXTBIGSTAR.COM are allocated
to the members evenly on a pro-rata basis and net losses are allocated solely to
VIP. Since VIP maintains voting control over
F-18
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. JOINT VENTURE (CONTINUED)
the operations of NEXTBIGSTAR.COM under a voting arrangement, the financial
statements of NEXTBIGSTAR.COM are included in the consolidated financial
statements of the Company.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment and office space under agreements
accounted for as operating leases, which expire on various dates ranging from
September 1999 to August 2004. As of June 30, 2000, future minimum lease
payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year are as follows:
YEAR ENDING JUNE 30,
--------------------
2001........................................................ 117,000
2002........................................................ 69,000
2003........................................................ 71,000
2004........................................................ 12,000
--------
Total future minimum lease payments..................... $269,000
========
Rent expense approximated $8,700, $70,200 and $274,500 for the periods ended
June 30, 1998, 1999 and 2000, respectively.
LITIGATION
On February 7, 2000, Big Star Entertainment, Inc. ("Plaintiff") filed an
action against the Company alleging trademark infringement and related claims
under Federal and state law related to NEXTBIGSTAR.COM. In April 2000, the Court
issued a Decision and Order denying the plaintiff's application for a
preliminary injunction. In May 2000, Plaintiff's counsel appealed the decision
of the Court. On August 22, 2000, the parties to the lawsuit settled the action
without admitting or denying liability. The Company has no financial obligation
in connection with this settlement.
As described in Note 6, the Company is also party to a lawsuit filed by CMI
International Holdings Limited ("CMI") in connection with notes payable due CMI
which are currently in default and has reached an agreement in principle to
settle.
The Company from time to time is party to various legal proceedings arising
in the normal course of business. Management believes that the final outcome of
these proceedings will not have a material adverse effect upon the Company's
financial position or results of operations.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements expiring at various dates
through July 2004. As of June 30, 2000, the Company's total noncancelable
obligation under all employment contracts was approximately $5,754,000, of which
$5,000,000 of this amount can be paid in cash or shares of common stock at the
employee's option.
LICENSE AGREEMENTS
As of June 30, 2000, Victory Distribution, Inc. had entered into licensing
agreements with third parties to manufacture and distribute THE DOOLEY AND PALS
SHOW program-related merchandise. The licensing agreements stipulate that
royalties will be received over the lives of the agreements as a
F-19
VICTORY ENTERTAINMENT CORP. AND PREDECESSOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
percentage of sales and a nonrefundable advance royalty is due upon signing the
agreement. At June 30, 2000, approximately $140,000 had been recorded as
unearned revenue related to the nonrefundable advance royalties. These royalties
will be recognized as revenue as the merchandise is manufactured and distributed
throughout the lives of the agreements.
CONSULTING AGREEMENTS
On July 1, 1999, the Company entered into consulting agreements with two
former officers of the Company each for a period of one year. Under the
agreements, the former officers agreed to serve as independent contractors. One
of the officers was to provide consultation, design and other services related
to animation projects and the other officer was to provide corporate support. In
exchange for their services, the Company agreed to pay the officers $125,000 and
$75,000, respectively, for their services in equal installments over a one-year
term. The Company paid approximately $89,000 under the agreements through
November 30, 1999, at which time, the agreement with the officer for $125,000
was terminated. The Company may be liable for up to $50,000 of the remaining
outstanding amount to be paid under that agreement depending on the final
outcome as to the cause of termination.
During April 2000, a former employee entered into a consulting agreement to
provide services through June 30, 2001 with a one year renewal option. The
Company is obligated to pay the consultant $150,000 throughout the term of the
agreement.
BROADCASTING DISTRIBUTION AGREEMENT
In July 1999, the Company entered into a broadcasting distribution
agreement, which amended a September 25, 1997 agreement, with South Carolina
Educational Communications, Inc. ("Distributor"), whereby the Company is to
produce numerous episodes of THE DOOLEY AND PALS SHOW for Distributor to
distribute to the Public Broadcasting System ("PBS") and/or other affiliates.
The agreement is for a period of five years from the date the last episode is
delivered, provided that the Company may terminate the Distributor's rights
after the end of the third broadcast season unless at least 80% of all PBS
stations in the territory (which is defined as North America, U.S., Canada,
Puerto Rico, the Virgin Islands and Guam) are airing the series or are committed
to do so. In consideration, the Company agreed to pay Distributor 5% of net
profits, derived from the exploitation of THE DOOLEY AND PALS SHOW series during
the term of the five year agreement, commencing on the date the last episode is
delivered, unless terminated earlier. Net profits, as defined in the agreement
represent gross receipts less production costs, distributor costs and fees,
merchandise manufacturing costs and licensing fees and reasonable expenses to
protect and enforce THE DOOLEY AND PALS SHOW trademarks and related intellectual
property. In addition, the Company may be required to reimburse Distributor up
to $250,000 for mutually agreed upon expenditures by Distributor under the terms
of the agreement.
12. TRANSACTIONS WITH RELATED PARTIES
A member of the Company's Board of Directors provided legal services to the
Company of approximately $54,000 during the year ended June 30, 2000 of which a
substantial portion was attributable to litigation relating to NEXTBIGSTAR.COM
(see Note 11).
Another member of the Company's Board of Directors was affiliated with an
entity that provided financial advisory services to the Company for which it
received consulting fees of $968,000 and $1,417,000, which are included in
general and administrative expenses, during the year ended June 30, 1999 and
2000, respectively. This entity affiliated with the director also received
341,241 warrants on November 30, 1998 for consulting services (see Note 8).
F-20
[INSIDE BACK COVER.]
[Storyboard frames for "Ed McMahon's NEXTBIGSTAR.COM," "THE DOOLEY AND PALS
SHOW," "VAMPS," "SK8RATZ," and "EXTREME TEAM" depicting various characters for
each of these projects.]
ALTERNATE PAGES
FOR RESALE PROSPECTUS
SUBJECT TO COMPLETION, DATED SEPTEMBER 22, 2000
PROSPECTUS
1,040,428 SHARES
VICTORY ENTERTAINMENT CORP.
COMMON STOCK
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD 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 JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
The selling shareholders named in this prospectus under the heading "Selling
Shareholders" are offering for sale, from time to time, up to 1,040,428 shares
of common stock of Victory Entertainment Corp., including 160,428 shares,
assuming a public offering price of $11.00 per share in Victory's initial public
offering, or IPO, to be issued upon consummation of Victory's initial public
offering and up to 880,000 shares of common stock issuable upon the exercise of
outstanding warrants to purchase common stock. The immediate sale of these
shares is restricted as described under the heading "Shares Eligible for Future
Sale--Lock-ups" in the IPO prospectus, which is part of this prospectus.
Each selling shareholder, acting as principal for its own account or in
brokerage transactions at prevailing market prices or in transactions at
negotiated prices, may offer the shares for sale. We will not receive any
proceeds from the sale of the shares by these selling shareholders, and any
proceeds we receive upon the exercise of warrants will be used for general
corporate purposes. It is not possible at the present time to determine the
price to the public in any sale of the shares by the selling shareholders, and
each selling shareholder reserves the right to accept or reject, in whole or in
part, any proposed purchase of shares. Accordingly, the public offering price,
the amount of any applicable underwriting discounts and commissions and the net
proceeds to the selling shareholders will be determined at the time of such sale
by the selling shareholders.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol VICT.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7 IN THE IPO PROSPECTUS, WHICH IS PART OF THIS PROSPECTUS, TO READ ABOUT
FACTORS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 2000
ADDITIONAL PAGES FOR RESALE PROSPECTUS
INFORMATION ABOUT THIS PROSPECTUS
Victory Entertainment Corp. has completed an initial public offering of
shares of its common stock. Sales of common stock by Victory in its IPO were
made under a prospectus dated , 2000 which, other than its cover
page, is included in its entirety as part of this prospectus and may be relied
upon by purchasers of shares offered hereby.
SELLING SHAREHOLDERS
This prospectus relates to the proposed resale by the holder of 160,428
shares of our common stock, assuming a public offering price of $11.00 per share
in our initial public offering, and by holders of up to 880,000 shares of common
stock issuable upon the exercise of outstanding warrants.
The selling shareholders named in the table below have sole voting and
investment power with respect to all shares beneficially owned by them.
Information with respect to beneficial ownership is based upon our stock records
and data supplied to us by the selling shareholders and assumes the consummation
of our initial public offering. The selling shareholders may offer less than the
amount of shares indicated. No representation is made that any shares will or
will not be offered for sale. We will not receive any of the proceeds from the
sale of the shares, but may receive up to a maximum of $8,932,000, assuming a
public offering price of $11.00 per share in our initial public offering, if the
holders of the warrants described below elect to pay the exercise price upon
exercise in cash rather than on a "cashless" basis.
The information shown under the heading "Shares Beneficially Owned After
Offering" assumes that all shares owned by the selling shareholders which are
offered are sold. The selling shareholders reserve the right to accept or
reject, in whole or in part, any proposed purchase of shares. The immediate sale
by the selling shareholders named below is restricted as described under the
heading "Shares Eligible For Future Sale--Lock-ups" in the IPO prospectus, which
is part of this prospectus.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED SHARES TO OWNED
BEFORE OFFERING BE OFFERED AFTER OFFERING
--------------------- ---------- -------------------
NAME NUMBER PERCENT NUMBER PERCENT
----------------------------------------- --------- --------- -------- --------
CMC Magnetics Corporation(1)............. 160,428 1.3% 160,428 0 0%
Wardley Investments Limited(2)........... 800,000 6.0% 800,000 0 0%
Weatherly Securities Corp.(3)............ 14,686 * 14,686 0 0%
Andrea Buccafola(3)...................... 6,117 * 6.117 0 0%
John Matthews(3)......................... 10,876 * 10,876 0 0%
Jack Najarian(3)......................... 10,876 * 10,876 0 0%
Stephanie Phillips(3).................... 31,328 * 31,328 0 0%
Steven Singer(3)......................... 6,117 * 6,117 0 0%
* Represents beneficial ownership of less than 1%.
(1) The number of shares to be offered by CMC Magnetics Corporation will be
determined by dividing $1,764,706 by the initial public offering price per
share in the IPO, which reflects the number of shares of common stock we
will issue to CMC in connection with the resolution of the CMC litigation.
For example, if the initial public offering price in our initial public
offering were $8.00, $11.00 or $14.00, the number of shares available for
sale by CMC under this prospectus would be 220,589, 160,428 or 126,051, as
the case may be. The address for CMC is 104 Min Chaun West Road, Taipei,
Taiwan.
-b-
(2) Consists of warrants to purchase 800,000 shares of common stock at an
exercise price of $9.35 per share. The address for Wardley Investments
Limited is Havilland Hall, Vaciquiedor, Saint Andrew Guernsey, Channel
Islands GY68TP.
(3) Consists of warrants to purchase shares of common stock at an exercise price
of $18.15 per share. These warrants were originally issued by us to
Weatherly Securities Corp. for services provided by Weatherly to us in
connection with the private placement of our 12% senior secured promissory
note. In connection with our IPO, Weatherly Securities Corp. will receive
additional warrants for shares of our common stock. The address for each of
these selling shareholders is c/o Weatherly Securities Corp., Two World
Trade Center, Suite 2946, New York, New York 10048.
PLAN OF DISTRIBUTION
The shares offered may be sold by the selling shareholders. These sales may
be made on one or more exchanges or in the over-the-counter market, including
the Nasdaq National Market, or otherwise, at prices and at terms then prevailing
or at prices related to the then current market price, or in negotiated
transactions. The shares may be sold by each of the selling shareholders acting
as principal for its own account or in ordinary brokerage transactions and
transactions in which the broker solicits purchasers. In effecting sales,
broker-dealers engaged by the selling shareholders may arrange for other
broker-dealers to participate in the resales.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders in amounts to be
negotiated in connection with the sale. These broker-dealers and any other
participating broker-dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales, and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act. In addition, any securities covered by
this prospectus which qualify for sale under Rule 144 may be sold under
Rule 144 rather than under this prospectus.
It is not possible at the present time to determine the price to the public
in any sale of the common stock by the selling shareholders. Accordingly, the
public offering price and the amount of any applicable underwriting discounts
and commissions will be determined at the time of such sale by the selling
shareholders. The aggregate proceeds to the selling shareholders from the sale
of the common stock will be the purchase price of the common stock sold less all
applicable commissions and underwriter's discounts, if any. We will pay
substantially all the expenses incident to the registration, offering and sale
of the common stock to the public by the selling shareholders, other than fees,
discounts and commissions of underwriters, dealers or agents, if any, and
transfer taxes.
-c-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated costs and expenses, other than the
underwriting discounts and commissions, to be incurred by Victory Entertainment
Corp. ("Victory" or the "registrant") in connection with the distribution of the
shares of common stock being registered hereby. Except for the Securities and
Exchange Commission Registration Fee, the National Association of Securities
Dealers, Inc. Filing Fee, the Nasdaq National Market Listing Fee and the
Underwriters' non-accountable expense allowance (which assumes no exercise of
the underwriters' overallotment option and assumes a public offering price of
$11.00 per share), all amounts are estimates.
SEC Registration Fee........................................ $ 11,634
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 3,674
Nasdaq National Market Listing Fee.......................... 84,875
Underwriters' Non-Accountable Expense Allowance............. 759,000
Printing and Engraving Costs................................ 200,000
Accounting Fees and Expenses................................ 250,000
Legal Fees and Expenses (excluding Blue Sky)................ 600,000
Transfer Agent and Registrar Fees........................... 10,000
Miscellaneous Expenses...................................... 230,817
----------
Total................................................... $2,150,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our articles of incorporation and bylaws provide for the indemnification of
our directors and officers to the fullest extent authorized by Florida law,
except that we will indemnify a director or officer in connection with an action
initiated by that person only if the action initiated by that person only if the
action was authorized by our board of directors. The indemnification provided
under our articles of incorporation and bylaws includes the right to be paid
expenses in advance of any proceeding for which indemnification may be had,
provided that the payment of these expenses incurred by a director or officer in
advance of any proceeding for which indemnification may be had, provided that
the payment of these expenses incurred by a director or officer in advance of
the final disposition of a proceeding may be made only upon delivery to us of an
undertaking by or on behalf of the director or officer to repay all amounts paid
in advance if it is ultimately determined that the director or officer is to
entitled to be indemnified. Under our articles of incorporation, if we do not
pay a claim for indemnification within 60 days after we have received a written
claim, the director or officer also will be entitled to be paid the expense of
prosecuting the action to recover these unpaid amounts.
As permitted by Florida law, our directors shall not be personally liable to
us or our shareholders for monetary damages for any statement, vote, decision,
or failure to act, regarding corporate management or policy, unless the director
breached or failed to perform his or her duties as a director:
- in violation of criminal law or in conscious disregard for our best
interests or with willful misconduct;
- in a transaction where he or she derived an improper personal benefit; or
- for unlawful distributions and in limited other circumstances.
Under our articles of incorporation and bylaws, we have the power to
purchase and maintain insurance on behalf of any person who is or was one of our
directors, officers, employees or agents, or
II-1
is it was serving at our request as a director, officer, employee, partner or
agent of another corporation or of a partnership, joint venture, limited
liability company, trust or other enterprise, against any liability asserted
against the person or incurred by the person in any of these capacities, or
arising out of the person's fulfilling one of these capacities. We maintain
insurance on behalf of all our officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the registrant which were not registered under the Act have
been issued or sold by the registrant within the past three years except as
follows:
1. On July 31, 1997, Lightpoint Entertainment, Inc., the registrant's
predecessor ("Lightpoint"), issued 2,000,000 shares of common stock to its
founders (of which 1,900,000 shares were surrendered to Lightpoint prior to the
merger described below).
2. Between July 13, 1998 and July 17, 1999, Lightpoint issued an aggregate
of 1,915,000 shares of its common stock at a purchase price of $2.50 per share
(except for 110,000 shares which were issued at a purchase price of $2.31 per
share) and warrants to purchase 1,805,000 shares of its common stock at an
exercise price of $7.00 per share and warrants to purchase 110,000 shares of its
common stock at an exercise price of $4.00 per share, in a series of offerings
conducted in accordance with Regulation D under the Securities Act.
3. On November 30, 1998, Lightpoint issued warrants to purchase 341,241
shares of common stock to consultants of Lightpoint for consulting services at
an exercise price of $0.25 per share.
4. On May 27, 1999 (the registrant's date of inception), the registrant
issued 5,000,000 shares to the registrant's chief executive officer at par
value.
5. On June 9, 1999, the registrant issued:
- 750,000 shares of common stock to non-employee consultants at par
value;
- 120,000 shares of common stock at par value and options to purchase
120,000 shares of the registrant's common stock, which vest upon
consummation of this offering, at $0.25 per share to individuals
designated to become officers of the registrant following the merger;
and
- 50,000 shares of the registrant's common stock at par value to the
registrant's legal counsel.
6. On June 9, 1999, Lightpoint issued 50,000 shares of its common stock to
an officer in connection with a termination agreement.
7. On June 30, 1999, immediately prior to the merger, Lightpoint issued
24,000 shares of its common stock to employees and other persons associated with
Lightpoint.
8. On July 1, 1999, pursuant to an agreement and plan of merger, Lightpoint
became a wholly owned subsidiary of the registrant, and each outstanding share
of Lightpoint common stock was exchanged for one share of common stock of the
registrant (2,072,600 shares) and each outstanding warrant to purchase shares of
Lightpoint common stock was converted into warrants to purchase a like number of
shares of the registrant's common stock (warrants for 2,239,841 shares).
9. In connection with termination agreements entered into on July 1, 1999 by
former officers of Lightpoint, the registrant issued 50,000 shares of common
stock at par value and options to purchase 150,000 shares of the registrant's
common stock, which vest upon consummation of this offering, at an exercise
price of $0.25 per share to former officers of Lightpoint.
10. As of August 16, 1999, the registrant agreed to issue 14,286 shares of
common stock at par value to a vendor of Lightpoint as part of a settlement, and
these shares were issued on May 31, 2000.
II-2
11. Between July 28, 1999 and December 17, 1999, the registrant issued an
aggregate of 1,948,625 shares of its common stock at a purchase price of $3.50
per share and warrants to purchase 1,948,625 shares of its common stock at an
exercise price of $7.00 per share, in a series of offerings conducted in
accordance with Regulation D under the Securities Act.
12. On January 10, 2000, the registrant issued warrants to a member of its
board of directors to purchase 50,000 shares of common stock at an exercise
price of $.001 per share and options to purchase 100,000 shares of the
registrant's common stock, 50,000 of which vested immediately and 50,000 of
which vest after one year if the grantee is still a member of the registrant's
board of directors, at an exercise price of $.001 per share.
13. On February 28, 2000, an investor received 10,000 shares of the
registrant's common stock upon the exercise of warrants at an exercise price of
$7.00 per share.
14. On March 1, 2000, the registrant issued options to purchase 35,000
shares of common stock, which vest over a period of three years, exercisable at
the initial public offering price, or the fair market value at the vesting date
if this offering is not consummated, to an officer of Next Big Star LLC.
15. On April 3, 2000, in connection with a private placement of a note
payable and warrants conducted in accordance with Regulation D of the Securities
Act the registrant issued:
- a $5,000,000 principal 12% Senior Secured Promissory Note;
- investor warrants to purchase 800,000 shares of its common stock at an
exercise price of $7.00 or, in the event this offering is consummated,
85% of the initial public offering price; and
- placement agent warrants to purchase 80,000 shares of our common stock
at an exercise price $7.00 or, in the event this offering is
consummated, 165% of the initial public offering price.
16. On April 18, 2000, the registrant issued fully vested options to
purchase 45,000 shares of its common stock at an exercise price of $3.50 per
share to members of its board of directors.
17. In connection with a joint venture between the registrant and McMahon
Communications, Inc., on April 18, 2000, the registrant issued fully vested
options to purchase 50,000 shares of common stock at an exercise price of $3.50
per share.
18. On May 19, 2000, subject to shareholder approval of the stock option
plan, the registrant issued 143,000 options to purchase shares of common stock
to officers and employees of the registrant under its stock option plan, which
vest over a three year period, exercisable at the initial public offering price.
19. On June 19, 2000, the registrant issued 25,000 options to purchase
shares of common stock to a new officer of the registrant under its stock option
plan, which vest over a three year period, exercisable at the initial public
offering price.
Except as indicated above, the issuance of the securities described above
were deemed to be exempt from registration under the Securities Act in reliance
on Section 4(2) of such Securities Act as transactions by an issuer not
involving any public offering. In addition, the issuances described in Items 18
and 19 were deemed exempt from registration under the Securities Act in reliance
upon Rule 701 promulgated under the Securities Act. The recipients of securities
in each such transaction represented their intentions to acquire the securities
for investment only and not with a view to or go sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
II-3
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following exhibits are filed as part of this registration statement:
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
1.1+ Form of underwriting agreement.
3.1+ Form of amended and restated articles of incorporation of
the registrant.
3.2+ Form of amended and restated bylaws of the registrant.
4.1 TRIANGLE Specimen common stock certificate.
5.1 Opinion of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. as
to the legality of securities being registered.
10.1+ Amended and Restated Employment agreement dated as of
July 1, 2000 between the registrant and Michael H. Gerber.
10.2+ Employment agreement dated as of July 12, 1999 between the
registrant and Art David, as amended.
10.3+ Employment Agreement dated June 19, 2000 between the
registrant and Jacob (Kobi) Jaeger
10.4+ Victory Entertainment Corp. 2000 Long Term Incentive and
Share Award Plan.
10.5+ Form of Common Stock Subscription Warrant issued in
Lightpoint's private placement.
10.6+ Form of Common Stock Subscription Warrant issued in the
registrant's private placement.
10.7+ Form of Consultant Warrant issued by Lightpoint to Merit
Advisors Group, Inc.
10.8+ Investor Warrant for the Purchase of Shares of Common Stock
issued by the registrant to Wardley Investments Limited,
including related Subscription Agreement.
10.9+ Placement Agent Warrant Certificate issued by the registrant
to Weatherly Securities Corp.
10.10+ Warrant Agreement dated as of March 28, 2000 between the
registrant and Weatherly Securities Corp.
10.11+ Distribution Agreement dated as of July 26, 1999 between
South Carolina Educational Communications, Inc. and
Lightpoint.
10.12+ Operating Agreement dated as of January 14, 2000 by and
among Next Big Star, LLC, Victory Internet Productions and
McMahon Communications Inc. and the related Agreement Among
Members, as amended.
10.13+ Promotion Agreement dated January 24, 2000 by and between
Next Big Star, LLC and Microsoft Corporation.
10.14+ Windows Media Technology Promotion Agreement dated
January 22, 2000 between Microsoft Corporation and Next Big
Star, LLC.
10.15+ Windows Media ICP Broadband Jumpstart Program Agreement
dated January 22, 2000 between Microsoft Corporation and
Next Big Star, LLC.
10.16+++ Master Services Agreement dated January 14, 2000 between
Exodus Communications, Inc. and Next Big Star, LLC.
10.17+++ Webcast Distribution Agreement dated January 21, 2000 by and
between iBEAM Broadcasting Corporation and Next Big
Star, LLC.
10.18+ Agreement dated April 24, 2000 between the registrant and
Creative Artists Agency.
II-4
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
10.19+ Agreement dated April 21, 1999 between Fred Silverman
Productions, Inc. and Lightpoint Entertainment, Inc.
10.20+ Distribution Agreement dated May 26, 2000 by and between
Next Big Star, LLC
and Mark Anthony Entertainment, Inc.
10.21+ Merchandising Agreement dated July 1, 1999 between Victory
Distribution, Inc.
and Stalwart Productions.
10.22+++ License Agreement dated as of April 1, 2000 between Victory
Distribution, Inc.
and Allison Manufacturing Co.
10.23+++ License Agreement dated as of May 1, 2000 between Victory
Distribution, Inc.
and Unique Industries, Inc.
10.24+++ License Agreement dated as of April 1, 2000 between Victory
Distribution, Inc.
and Pyramid Accessories.
10.25+++ License Agreement dated as of May 1, 2000 between Victory
Distribution, Inc.
and Starbound Entertainment.
10.26+++ License Agreement dated as of July 24, 2000 between Victory
Distribution, Inc.
and High Point Knitting, Inc.
10.27+++ License Agreement dated as of June 1, 2000 between Victory
Distribution, Inc.
and S. Goldberg & Co.
10.28+++ License Agreement dated as of June 21, 2000 between Victory
Distribution, Inc.
and Franco Manufacturing.
10.29+++ License Agreement dated as of June 6, 2000 between Victory
Distribution, Inc.
and Drew Pearson Marketing.
10.30 Form of Underwriters' Warrants to be issued by the
registrant to the underwriters upon consummation of its
initial public offering.
10.31 Settlement Stipulation dated September 6, 2000 among the
registrant, Lightpoint Entertainment, Inc., CMI
International Holdings, Ltd., CMC Magnetics Corporation and
the other parties thereto.
21.1+ Subsidiaries of the registrant.
23.1 Consent of Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
(included in their opinion filed as Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP.
24.1+ Power of attorney (included on signature page to the
original registration statement).
24.2+ Power of attorney for Michael Jay Solomon.
27.1 TRIANGLE Financial Data Schedule.
+ Previously filed.
++ Confidential treatment is being requested with respect to portions of this
exhibit.
TRIANGLE Superseding Exhibit.
(b) Financial Statement Schedules:
None.
II-5
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
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 provisions described under Item 14 above, 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.
The undersigned registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus 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.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
PROVIDED, HOWEVER, that paragraphs 1(i) and 1(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Exchange
Act that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Orlando, State of Florida, on September 22, 2000.
VICTORY ENTERTAINMENT CORP.
By: /s/ EDGAR N. MILLINGTON, JR.
-----------------------------------------
Name: Edgar N. Millington, Jr.
Title: Chief Financial Officer, Treasurer
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board, Chief September 22, 2000
---------------------------------- Executive Officer and President
Michael H. Gerber
/s/ EDGAR N. MILLINGTON, JR. Chief Financial Officer, Treasurer September 22, 2000
---------------------------------- and Secretary (principal financial
Edgar N. Millington, Jr. and accounting officer)
* Director September 22, 2000
----------------------------------
Michael Collyer
* Director September 22, 2000
----------------------------------
Paul Henderson
* Director September 22, 2000
----------------------------------
Charles Wilner
* Director September 22, 2000
----------------------------------
Michael Jay Solomon
*By: /s/ EDGAR N. MILLINGTON, JR.
--------------------------------------
ATTORNEY-IN-FACT
II-7
Exhibit 4.1
NUMBER SHARES
V
[VICTORY ENTERTAINMENT LOGO]
VICTORY ENTERTAINMENT CORP.
COMMON STOCK
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 920440 108
INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK OF $.001 PAR VALUE EACH OF
VICTORY ENTERTAINMENT CORP.
transferable on the books of the Corporation in person or by attorney upon
surrender of this certificate duly endorsed or assigned. This certificate and
the shares represented hereby are subject to the laws of the State of Florida,
and to the Articles of Incorporation and Bylaws of the Corporation, as now and
hereafter amended. This certificate is not valid until countersigned by the
Transfer Agent .
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ EDGAR N. MILLINGTON, JR. SEAL /s/ MICHAEL H. GERBER
---------------------------------- ----------------------------------
Edgar N. Millington, Jr. Michael H. Gerber
Vice President / Treasurer Chairman of the Board, President &
CEO
Countersigned and Registered:
FLORIDA ATLANTIC STOCK TRANSFER, INC
7130 NOB HILL ROAD, TAMARAC, FL 33321
Transfer Agent
By Authorized Signature
The Corporation is authorized to issue shares of common stock and shares of
preferred stock. The Corporation will furnish to the holder of the shares
represented by this certificate the information required by Section
607.0625(3), Florida Statutes, regarding the designations, relative rights,
preferences, and limitations applicable to each class of its shares on
request and without charge.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ________Custodian_______
TEN ENT - as tenants by the entireties (Cust) (Minor)
under Uniform Gifts to
JT TEN - as joint tenants with Minors Act _____________
right of survivorship (State)
and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
TO TRANSFER THE SAID STOCK OF THE BOOKS OF THE WITHIN-NAMED CORPORATION, WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED ____________________________
NOTICE: _________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER, AND
MUST BE GUARANTEED BY A COMMERCIAL BANK
OR TRUST COMPANY OR A MEMBER FIRM OF A
NATIONAL OR REGIONAL OR OTHER RECOGNIZED
STOCK EXCHANGE IN CONFORMANCE WITH A
SIGNATURE GUARANTEE MEDALLION PROGRAM.
Exhibit 5.1
(LETTERHEAD OF LOWNDES, DROSDICK, DOSTER, KANTOR & REED, P.A.)
September 22, 2000
Victory Entertainment Corp.
1000 Universal Studios Plaza
Building 22A
Orlando, Florida 32819
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in
connection with the filing of that certain Registration Statement (the
"Registration Statement") on Form S-1 (Registration No. 333-38794), as amended,
filed with the Securities and Exchange Commission (the "Registration Statement")
in connection with the registration under the Securities Act of 1933, as
amended, of (i) 2,645,000 shares (the "IPO Shares") of common stock, par value
$.001 per share ("Common Stock"), of Victory Entertainment Corp. (the "Company")
to be sold by you in your initial public offering (the "IPO"), (ii) a certain
number of shares of Common Stock to be issued to CMC Magnetics Corporation
("CMC") pursuant to the terms of a Settlement Stipulation (the "Settlement
Stipulation") in connection with the settlement of certain litigation between
CMI International Holdings, Ltd., Lightpoint Entertainment, Inc. and certain
other parties, as described in the Registration Statement, which number of
shares of Common Stock (the "CMC Shares") will be determined by dividing
$1,500,000 by 85% of the public offering price of the IPO Shares in the IPO, and
(iii) an additional 880,000 shares of Common Stock (the "Warrant Shares")
underlying certain investor warrants and placement agent warrants as described
in the Registration Statement (collectively, the "Warrants").
In connection with the delivery of this opinion, we have examined copies
of the Amended and Restated Articles of Incorporation and Amended and Restated
Bylaws of the Company, as set forth as exhibits to the Registration Statement,
copies of the Settlement Stipulation and the Warrants, certain resolutions
adopted by the Board of Directors of the Company, the form of stock certificate
representing the IPO Shares as set forth as an exhibit to the Registration
Statement, and such other records, agreements, instruments, certificates and
other documents of public officials, the Company and its officers and
representatives, and have made such inquiries of the Company and its officers
and representatives, as we have deemed necessary or appropriate in connection
with the opinions set forth herein. With respect to certain factual matters
material to our opinion, we have relied upon
Victory Entertainment Corp.
September 22, 2000
Page 2
representations from, or certificates of, officers of the Company. In making
such examination and rendering the opinions set forth below, we have assumed
without verification the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the authenticity of the originals of
such documents submitted to us as certified copies, the conformity to originals
of all documents submitted to us as copies and the authenticity of the originals
of such latter documents.
Based on such examination and review, and subject to the foregoing, we are
of the opinion that:
1. The IPO Shares, when sold, issued and delivered in the manner described
in the Registration Statement, will be validly issued, fully paid and
non-assessable.
2. The CMC Shares, when issued to CMC pursuant to the terms of the
Settlement Stipulation, will be validly issued, fully paid and non-assessable.
3. The Warrant Shares, when issued upon the exercise of the Warrants in
accordance with the terms thereof, will be validly issued, fully paid and
non-assessable.
We are licensed to practice law in the State of Florida. The opinions set
forth herein are based solely on and are limited in all respects to the
substantive laws of the State of Florida and the federal law of the United
States in force and effect on the date hereof. Accordingly, we express no
opinion as to matters governed by the laws of any other state or jurisdiction.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the Prospectus constituting a part thereof and any amendments
thereto.
Very truly yours,
LOWNDES, DROSDICK, DOSTER, KANTOR
& REED, P.A.
By: /s/ James J. Hoctor
----------------------------------
James J. Hoctor, Vice President
JJH/gj
EXHIBIT 10.30
FORM OF UNDERWRITERS' WARRANT
THIS WARRANT (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER SECTION 4 OF THE UNITED STATES SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), AND NEITHER THIS WARRANT NOR ANY SHARES
ACQUIRED UPON EXERCISE OF THIS WARRANT MAY BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. THE HOLDER OF THIS WARRANT AGREES FOR THE BENEFIT OF THE ISSUER THAT
(A) SUCH WARRANT MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1)(a) IN
ACCORDANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR PURSUANT TO ANOTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED
UPON AN OPINION OF COUNSEL), (b) TO THE ISSUER OR ITS SUBSIDIARIES, (c) OUTSIDE
THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER
THE SECURITIES ACT OR (d) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND (2) IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE
JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO,
NOTIFY ANY PURCHASER OF THE WARRANT EVIDENCED HEREBY OF THE RESALE RESTRICTIONS
SET FORTH IN (A) ABOVE.
No. W-___ Right to Purchase
Common Stock
WARRANT
THIS CERTIFIES THAT, for value received, [name of Underwriter], and its
successors and assigns registered with the undersigned (the "HOLDER"), is
entitled to purchase from VICTORY ENTERTAINMENT CORP., a Florida corporation
(the "COMPANY"), at any time or from time to time during the period specified in
Section 2, as adjusted pursuant to Section 4, __________ [an aggregate of 10% of
shares to be sold in the offering [less 80,000 shares]] fully paid and
nonassessable shares of the Company's Common Stock, par value $.001 per share
(the "COMMON STOCK"), at the Exercise Price (as defined below). The term
"EXERCISE PRICE," as used herein, means 165% of the Initial Public Offering
Price. The term "INITIAL PUBLIC OFFERING PRICE," as used herein, means the price
at which shares of Common Stock are offered and sold to the public in an initial
public offering (the "INITIAL PUBLIC OFFERING") of Common Stock pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "SECURITIES ACT"). The
-2-
term "WARRANT SHARES," as used herein, refers to the Common Stock issued or
issuable hereunder, and the term "AGGREGATE NUMBER," as used herein, refers to
the maximum number of shares of Common Stock issuable hereunder (as such number
may be decreased or increased as more fully set forth herein).
This Warrant ("WARRANT") is subject to the following terms, provisions,
and conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
(a) GENERAL EXERCISE. Subject to the provisions hereof, this Warrant
may be exercised from time to time following the IPO Closing Date (as defined in
Section 2) by the Holder, in whole or in part (but not as to a fractional
Warrant Share), by the surrender of this Warrant, together with a completed
Exercise Agreement in the form attached hereto as ANNEX A, to the Company during
normal business hours on any Business Day (as defined in Section 5) at the
Company's principal office in Orlando, Florida (or such other office or agency
of the Company as it may designate by notice to the Holder), and either (1) upon
payment to the Company in cash in United States dollars or by check payable in
United States dollars of the Exercise Price, for the Warrant Shares specified in
said Exercise Agreement; or (2) in the event the Holder elects a "cashless"
exercise under Section 1(b), upon receipt of the Exercise Agreement, for the
number of Warrant Shares determined in accordance with Section 1(b). The Warrant
Shares so purchased shall be deemed to be issued to the Holder or its designee
as the record owner of such shares as of the close of business on the date (the
"EXERCISE DATE") on which this Warrant shall have been surrendered, the
completed Exercise Agreement delivered and, if applicable, payment made for such
shares as aforesaid. In the event of a "cashless" exercise under Section 1(b),
the Exercise Date shall be the date used to determine the applicable Current
Market Price (as defined in Section 5). Certificates for the Warrant Shares so
purchased, representing the aggregate number of shares specified in said
Exercise Agreement, shall be delivered to the Holder within a reasonable time,
not exceeding seven business days, after this Warrant shall have been so
exercised. The certificates so delivered shall be in such denominations as may
be requested by the Holder and shall be registered in the name of said Holder or
such other name as shall be designated by the Holder; PROVIDED, in the event
such certificates are registered in a name other than the name of the Holder,
the Company shall have received an opinion of counsel, reasonably satisfactory
to the Company, that the issuance
-3-
of such Warrant Shares is exempt from registration under the Securities Act. If
this Warrant shall have been exercised only in part, then, unless this Warrant
has expired, the Company shall, at its expense, at the time of delivery of said
certificates, deliver to the Holder a new Warrant representing the number of
shares with respect to which this Warrant shall not then have been exercised.
The Company shall pay any and all United States federal and state taxes and
other expenses and charges payable in connection with the preparation, execution
and delivery of share certificates (and any new Warrants) pursuant to this
Section 1 except that, in case such share certificates shall be registered in a
name or names other than the Holder, funds sufficient to pay all transfer taxes
which shall be payable in connection with the execution and delivery of such
share certificates shall be paid by the Holder to the Company at the time of the
delivery of such share certificates by the Company as mentioned above.
(b) CASHLESS EXERCISE. The Holder shall have the right to pay all or a
portion of the Exercise Price by making a "CASHLESS EXERCISE" pursuant to this
Section 1(b), in which case the portion of the Exercise Price to be so paid
shall be paid by reducing the number of shares of Common Stock otherwise
issuable pursuant to the Exercise Agreement by an amount equal to (1) the
Exercise Price to be so paid divided by (2) the Current Market Price (as defined
in Section 5 hereof).
The number of shares of Common Stock to be issued to the Holder as a result of a
Cashless Exercise will therefore be as follows:
(CURRENT MARKET PRICE/SHARE - EXERCISE PRICE/SHARE) X MAXIMUM WARRANT SHARES(1)
Current Market Price/Share
(1) The number of Warrant Shares issuable immediately before the
Cashless Exercise set forth in the Exercise Agreement.
Within three business days of receipt of the Warrant and an Exercise
Agreement specifying a Cashless Exercise, the Company shall provide to the
Holder in writing its determination of the Current Market Price (including the
basis therefor), which shall be determined as of the Exercise Date.
(c) LOCK-UP PERIOD. The Holder agrees that, without the prior written
consent of the Company, the Holder will not, during the period commencing on the
date hereof and ending 365 days after the date of the final prospectus relating
to the Initial Public Offering (the "LOCK-UP PERIOD"), (1) offer,
-4-
pledge, announce the intention to sell, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, this Warrant or any Warrant Shares, or (2) enter into
any swap, option, future, forward or other agreement that transfers, in whole or
in part, any of the economic consequences of ownership of this Warrant or any
Warrant Shares, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. In addition, the Holder agrees that, without the prior
written consent of the Company, it will not, during the Lock-Up Period, exercise
any right with respect to the registration of this Warrant or any Warrant
Shares, including under Section 6.
2. PERIOD OF EXERCISE. After the date of consummation of the Initial
Public Offering (the "IPO CLOSING DATE") and before 5:00 p.m. eastern standard
time on the fifth anniversary of the IPO Closing Date, this Warrant is
exercisable at any time or from time to time.
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance, be
validly issued, fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issue thereof.
(b) RESERVATION OF SHARES. During the period within which this Warrant
may be exercised, the Company will at all times have authorized, and
reserved for the purpose of issue upon exercise of this Warrant, a
sufficient number of shares of Common Stock to provide for the exercise
of this Warrant. The Company will not take any action which would cause
the Aggregate Number to exceed the total number of shares of Common
Stock or other securities then authorized by the Company's articles of
incorporation and available for the purpose of issue upon such
exercise.
(c ) REGISTRATION. If the issuance of any Warrant Shares required to be
reserved for purposes of exercise of this Warrant requires registration
with or approval of any governmental authority under any United States
federal or state law (other than any registration under the Securities
Act or under applicable state securities or blue sky laws) or listing
on any United States securities exchange,
-5-
before such shares may be issued upon exercise of this Warrant, the
Company will, at its expense, use its best efforts to cause such shares
to be duly registered or approved, or listed on the relevant securities
exchange, as the case may be, at such time, so that such shares may be
issued in accordance with the terms hereof.
4. ADJUSTMENTS. The Exercise Price and the Aggregate Number of shares
of Common Stock issuable upon the exercise of this Warrant (the "EXERCISE RATE")
are subject to adjustment from time to time upon the occurrence of the events
enumerated in this Section 4.
(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If the Company:
(1) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or other capital stock of the Company; or
(2) subdivides, combines or reclassifies its outstanding shares of
Common Stock,
then the Exercise Rate in effect immediately prior to such action shall be
proportionately adjusted so that the Holder may receive the Aggregate Number and
kind of shares of capital stock of the Company which the Holder would have owned
immediately following such action if this Warrant had been exercised immediately
prior to such action and the Exercise Price in effect immediately prior to such
action shall be adjusted to a price determined by multiplying the Exercise Price
in effect immediately prior to such action by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding before giving effect
to such action and the denominator of which shall be the number of shares of
Common Stock and/or such other capital stock outstanding referred to in the
foregoing clause (a)(1) after giving effect to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
If after an adjustment the Holder of this Warrant upon exercise of it
may receive shares of two or more classes of capital stock of the Company, the
Board of Directors of the Company shall determine the allocation of the adjusted
Exercise Price between the classes of capital stock. After such
-6-
allocation, the exercise privilege and the Exercise Price of each class of
capital stock shall thereafter be subject to adjustment on terms comparable to
those applicable to Common Stock in this Section 4.
Such adjustment shall be made successively whenever any event listed
above shall occur.
(b) ADJUSTMENT FOR CERTAIN ISSUANCES OF COMMON STOCK. If the Company
issues or sells to any Person shares of its Common Stock or distributes any
rights, options or warrants entitling any Person to purchase shares of Common
Stock, or securities convertible into or exchangeable for Common Stock, in each
case, at a price per share less than the Current Market Value on the record date
for determining entitlements to participate in such issuance, sale or
distribution (the "TIME OF DETERMINATION"), the Exercise Rate shall be adjusted
in accordance with the formula:
E' = E X O + N
-------
O + N X P
-----
M
and the Exercise Price shall be adjusted in accordance with the following
formula:
EP' = EP X E
E'
where:
E' = the adjusted Exercise Rate.
E = the Exercise Rate immediately prior to the Time of
Determination for any such issuance, sale or
distribution.
EP' = the adjusted Exercise Price.
EP = the Exercise Price immediately prior to the Time
of Determination for any such issuance, sale or
distribution.
O = the number of Fully Diluted Shares (as defined
below) outstanding immediately prior to the Time of
Determination for any such issuance, sale or
distribution.
-7-
N = the number of additional shares of Common Stock
issued, sold or issuable upon exercise of such
rights, options or warrants.
P = the per share price received and receivable by the
Company in the case of any issuance or sale of
Common Stock or rights, options or warrants
inclusive of the exercise price per share of Common
Stock payable upon exercise of such rights, options
or warrants.
M = the Current Market Value per share of Common Stock
on the Time of Determination for any such issuance,
sale or distribution.
For purposes of this Section 4 the term "FULLY DILUTED SHARES" shall
mean (i) the shares of Common Stock outstanding as of a specified date, and (ii)
the shares of Common Stock into or for which rights, options, warrants or other
securities outstanding as of such date are exercisable or convertible (other
than this Warrant).
The adjustments shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
relevant Time of Determination. Notwithstanding the foregoing, the Exercise Rate
and the Exercise Price shall not be subject to adjustment in connection with (i)
the issuance of any shares of Common Stock upon exercise of any such rights,
options or warrants or conversion or exchange of convertible or exchangeable
securities which have previously been the subject of an adjustment under this
Agreement for which the required adjustment has been made or which were issued
by the Company on or prior to the date of issuance of this Warrant, (ii) any
exercise of this Warrant, (iii) any underwritten public offering of Common Stock
or securities convertible into or exchangeable for Common Stock or (iv) any
issuance of Common Stock or securities convertible or exchangeable for Common
Stock pursuant to Rule 144A of the Securities Act. If at the end of the period
during which any such rights, options or warrants are exercisable or such other
securities are convertible or exchangeable, not all rights, options or warrants
shall have been exercised or such other securities converted or exchanged, this
Warrant shall be immediately readjusted to what it would have been if "N" in
each of the above formulas had been the number of shares actually issued.
-8-
(c) ADJUSTMENT FOR OTHER DISTRIBUTIONS. If the Company distributes to
holders of its Common Stock (i) any evidences of indebtedness of the Company or
any of its subsidiaries, (ii) any assets of the Company or any of its
subsidiaries (whether in cash, property or otherwise), or (iii) any rights,
options or warrants to acquire any of the foregoing or to acquire any other
securities of the Company, the Exercise Rate shall be adjusted in accordance
with the formula:
E' = E X M
M - F
and the Exercise Price shall be decreased (but not increased) in accordance with
the following formula:
EP' = EP X E
E'
where:
E' = the adjusted Exercise Rate.
E = the current Exercise Rate on the record date
referred to in this paragraph (c) below.
EP' = the adjusted Exercise Price.
EP = the current Exercise Price on the record date
referred to in this paragraph (c) below.
M = the Current Market Value per share of Common Stock
on the record date referred to in this paragraph (c)
below.
F = the fair market value (as determined in good faith
by the Company's Board of Directors) on the record
date referred to in this paragraph (c) below of the
indebtedness, assets, rights, options or warrants
distributable in respect of one share of Common
Stock.
The adjustments shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive the distribution.
If any adjustment is made pursuant to clause (iii) above of this subsection (c)
as a result of the issuance of rights, options or warrants and at the end of the
period during which any such
-9-
rights, options or warrants are exercisable, not all such rights, options or
warrants shall have been exercised, this Warrant shall be immediately readjusted
as if "F" in the above formula was the fair market value on the record date of
the indebtedness or assets actually distributed upon exercise of such rights,
options or warrants divided by the number of shares of Common Stock outstanding
on the record date.
This subsection does not apply to rights, options or warrants referred
to in subsection (b) of this Section 4.
(d) OTHER CONSIDERATIONS. The following provisions shall be applicable
to the making of adjustments of the Exercise Price and Exercise Rate herein
before provided for in this Section 4:
(i) The sale or other disposition of any issued shares of Common Stock
owned or held by or for the account of the Company shall be deemed an
issuance thereof for the purposes of this Section 4.
(ii) The adjustments required by the preceding paragraphs of this
Section 4 shall be made whenever and as often as any specified event
requiring an adjustment shall occur, except as expressly provided herein.
For the purpose of any adjustment, any specified event shall be deemed to
have occurred at the close of business on the date of its occurrence.
(iii) In computing adjustments under this Section 4 fractional
interests in Common Stock shall be taken into account to the nearest
one-thousandth (.001) of a share and shall be aggregated until they equal
one whole share.
(iv) If the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive any item described in
Sections 4(a) through 4(c) hereof, but abandon its plan to pay or deliver
such item, then no adjustment shall be required by reason of the taking of
such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
(v) The consideration for any additional shares of Common Stock
issuable pursuant to any options, warrants or other rights to subscribe for
or purchase the same shall be the consideration received or receivable by
the Company for issuing such options, warrants or other rights, plus
-10-
the additional consideration payable to the Company upon the exercise
of such options, warrants or other rights. The consideration for any
additional shares of Common Stock issuable pursuant to the terms of any
convertible or exchangeable securities shall be the consideration received
or receivable by the Company for issuing any options, warrants or other
rights to subscribe for or purchase such convertible or exchangeable
securities, plus the consideration paid or payable to the Company in
respect of the subscription for or purchase of such convertible or
exchangeable securities, plus the additional consideration, if any, payable
to the Company upon the exercise of the right of conversion, exercise or
exchange of such convertible or exchangeable securities. In case of the
issuance at any time of any additional shares of Common Stock or
convertible or exchangeable securities in payment or satisfaction of any
dividend upon any class of stock other than Common Stock, the Company shall
be deemed to have received for such additional shares of Common Stock or
convertible or exchangeable securities a consideration equal to the amount
of such dividend so paid or satisfied.
(vi) Shares of Common Stock, convertible or exchangeable securities or
warrants, rights or options to acquire any of the foregoing shall not be
deemed outstanding for purposes of this Section 4 if held by the Company.
(e) FURTHER ADJUSTMENTS. In case of any capital reorganization, other
than in the cases referred to in Section 4(a), (b) or (c) hereof and other than
any capital reorganization that does not result in any reclassification of the
outstanding shares of Common Stock into shares of other stock or other
securities or property, or the consolidation or merger of the Company with or
into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock into shares of other
stock or other securities or property), or the sale of all or substantially all
of the assets of the Company (collectively such actions being hereinafter
referred to as "REORGANIZATIONS"), there shall thereafter be deliverable upon
exercise of this Warrant (in lieu of the number of shares of Common Stock
theretofore deliverable) the number of shares of stock or other securities or
property to which a holder of the number of shares of Common Stock that would
otherwise have been deliverable upon the exercise of this Warrant would have
been entitled upon such Reorganization if this Warrant had been exercised in
-11-
full immediately prior to such Reorganization. In case of any Reorganization,
appropriate adjustment, as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a duly adopted resolution
certified by the Company's Secretary, shall be made in the application of the
provisions herein set forth with respect to the rights and interests of Holder
so that the provisions set forth herein shall thereafter be applicable, as
nearly as possible, in relation to any such shares or other securities or
property thereafter deliverable upon exercise of this Warrant.
The Company shall not effect any such Reorganization unless prior to or
simultaneously with the consummation thereof the successor corporation (if other
than the Company) resulting from such Reorganization or the corporation or other
entity purchasing such assets shall expressly assume, by a supplemental warrant
or other acknowledgment executed and delivered to the Holder the obligation to
deliver to the Holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, the Holder may be entitled to
purchase, and the due and punctual performance and observance of each and every
covenant, condition, obligation and liability under this Warrant to be performed
and observed by the Company in the manner prescribed herein.
The foregoing provisions of this Section 4(e)(ii) shall apply to
successive Reorganization transactions.
(f) NO DUPLICATION OF ADJUSTMENTS. The occurrence of a single event
shall not trigger an adjustment of the Exercise Price and Exercise Rate under
more than one paragraph of this Section 4.
(g) MINIMUM ADJUSTMENT OF AGGREGATE NUMBER; EFFECTIVE DATE FOR
ADJUSTMENTS. If the amount of any adjustment of the Aggregate Number required
pursuant to this Section 4 would result in an increase in the number of Warrant
Shares purchasable hereunder which is less than one percent (1%) of the number
of Warrant Shares purchasable hereunder immediately before such adjustment is
otherwise so required to be made, such amount shall be carried forward and
adjustment with respect thereto made at the time of and together with any
subsequent adjustment which, together with such amount and any other amount or
amounts so carried forward, shall result in an increase in the number of Warrant
Shares purchasable hereunder which is at least one percent (1%) of number of
Warrant Shares purchasable hereunder immediately before such adjustment;
PROVIDED that, upon the exercise of this Warrant, all adjustments
-12-
carried forward and not theretofore made up to and including the date of such
exercise shall, with respect to the portion of this Warrant then exercised, be
made.
(h) NO EXERCISE PRICE ADJUSTMENT BELOW PAR VALUE. Anything herein to
the contrary notwithstanding, the Company shall not be required to make any
adjustment of the Exercise Price in the event such adjustment will result in an
Exercise Price below the existing par value of the Company's Common Stock.
(i) NOTICE OF ADJUSTMENT. Upon the occurrence of any event requiring an
adjustment of the Exercise Rate or Exercise Rate, then and in each such case the
Company shall promptly deliver to the Holder an officer's certificate stating
the Exercise Rate and Exercise Price resulting from such adjustment and the
increase or decrease, if any, in the number of shares of Common Stock issuable
upon exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
5. DEFINITIONS. For the purpose of this Warrant, the following terms
shall have the following meanings:
"AFFILIATE": shall mean, with respect to any specified Person, any
other Person directly or indirectly controlling or specified Person,
including, but not limited to, any holder of 10% or more of the voting
securities of any Person. For the purposes of this definition, "control"
when used with respect to any specified Person means the power to direct
the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
A "BUSINESS DAY" is a day that is not a Legal Holiday. A "Legal
Holiday" is a Saturday, a Sunday, a federally-recognized holiday or a day
on which banking institutions are not required to be open in the State of
New York.
"CAPITAL STOCK": shall mean any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interest in (however designated) capital stock.
-13-
The "CLOSING BID PRICE" for any Security on each Business Day means the
closing price, regular way, on such day on the principal exchange on which
such Security is traded, or if no sale takes place on such day, the average
of the closing bid and asked prices on such day.
"COMMISSION": the United States Securities and Exchange Commission and
any other similar or successor agency of the United States federal
government administering the Securities Act or the Exchange Act.
"CURRENT MARKET VALUE": per share of Common Stock or of any other
security (herein collectively referred to as a "SECURITY") at any date
shall be:
(1) if the Security is not registered under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the
value of the Security determined as of a date within 30 days preceding
such date by an Independent Financial Expert selected by the Company,
or
(2) if the Security is registered under the Exchange Act,
the average of the daily closing bid prices of such Security
for the 20 consecutive Business Days preceding such date,
but only if such Security shall have been listed on a
national securities exchange or the Nasdaq National Market
or traded through an automated quotation system during such
entire 20 Business Day period.
"INDEPENDENT": any Person who (i) is in fact independent, (ii) does not
have any direct financial interest or any material indirect financial
interest in the Company or any of its subsidiaries, or in any affiliate of
the Company or any of its subsidiaries (other than as a result of holding
securities of the Company in trading accounts) and (iii) is not an officer,
employee, promoter, trustee, partner, director or Person performing similar
functions for the Company or any of its subsidiaries or any affiliate of
the Company or any of its subsidiaries.
"INDEPENDENT FINANCIAL EXPERT": a reputable accounting, appraisal or
investment banking firm that is, in the reasonable judgment of the Board of
Directors of the Company, qualified to perform the task for which such firm
has been engaged hereunder, is nationally recognized and disinterested and
Independent with respect to the Company
-14-
and its affiliates and is reasonably acceptable to the Holder.
"PERSON": an individual, corporation, partnership, limited liability
company, trust or trustee thereof, estate or executor thereof,
unincorporated organization or joint venture, court or governmental unit or
any agency or subdivision thereof, or any other legally recognizable
entity.
6. REGISTRATION RIGHTS.
(a) RIGHT TO PARTICIPATE IN REGISTRATIONS. If, following the Lock-Up
Period, the Company proposes to register shares of capital stock (as defined in
Section 5) under the Securities Act, in connection with a public offering for
its own account (other than a registration statement on Form S-8 or Form S-4
under the Securities Act or on any other registration statement which is not
suitable for use to register the Warrant Shares), the Company shall each such
time give notice of such proposed registration to the Holder of this Warrant.
Subject to the terms and provisions of this Section 6, upon the request of the
Holder made within 20 days after the giving of such notice by the Company, the
Company shall use its best efforts to cause all Warrant Shares the Holder shall
have requested to be included in the proposed registration ("REGISTRABLE
SHARES") to be included in such registration to the extent required to permit
the sale or other disposition by such Holder of such Registrable Shares, unless,
in the opinion of counsel to the Company, registration of such Registrable
Shares is not required to transfer such Registrable Shares. Notwithstanding
anything to the contrary contained herein, the Company shall not be required to
register any Registrable Shares if such Registrable Shares, at the time of the
filing of such registration, are covered by or included in any other
registration theretofore filed by the Company under the Securities Act. Any
Registrable Shares registered pursuant to this Section 6(a) shall be included in
such registration on the same terms and conditions as those applicable to the
other shares of capital stock being registered. Notwithstanding anything to the
contrary contained herein, for the purposes of this Section 6, "Registrable
Shares" shall not include Warrant Shares which are eligible for resale under
Rule 144(k) of the Securities Act.
In the event an offering to be conducted pursuant to the proposed
registration is to be an underwritten public offering, the Company shall advise
the Holder as a part of the written notice given pursuant to this Section 6(a),
and the
-15-
registration rights provided in this Section 6(a) shall be subject to the
condition that, if the managing underwriter or underwriters of such offering
conclude that marketing factors require a limitation on the number of securities
to be underwritten, the Company shall include in such registration: (i) first,
all shares of the capital stock the Company proposes to sell; (ii) second, all
shares of capital stock requested to be included in such registration by all
holders who have registration rights EXPRESSLY superior to the rights contained
in this Section 6; and (iii) third, the Warrant Shares requested by the Holder
to be included in such registration and all shares of the capital stock
requested to be included in such registration by any other holders of the
capital stock who are entitled to include shares of the capital stock in such
registration pursuant to written registration rights agreements granted by the
Company on a PARI PASSU basis (the "OTHER SHAREHOLDERS") in excess of the number
of shares of the capital stock the Company under clause (i) and the holders
described under clause (ii) propose to sell which, in the opinion of such
underwriters, can be sold without adversely affecting the anticipated price or
probability of success of such offering (such aggregate number of shares of the
capital stock included in such offering to be allocated pro rata among Holder
and the Other Shareholders on the basis of the number of shares of the capital
stock requested to be included therein by the Holder and each Other
Shareholder).
(b) REGISTRATION PROCEDURES. If and whenever the Company is required
pursuant to Section 6(a) to use its best efforts to cause the Registrable Shares
to be included in the registration of securities of the Company under the
Securities Act, the Company will, as expeditiously as possible:
(i) prepare and file with the Securities and Exchange Commission (the
"COMMISSION") a registration statement (the "REGISTRATION STATEMENT")
covering the Registrable Shares and use its best efforts to cause the
Registration Statement to become effective and to remain effective for so
long as may reasonably be necessary to complete the sale or other
disposition of such Registrable Shares; PROVIDED that the Company shall not
in any event be required to use its best efforts to maintain the
effectiveness of the Registration Statement for a period in excess of 180
days;
(ii) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus contained
therein as may be necessary to
-16-
keep the Registration Statement effective, and comply with the provisions
of the Securities Act, with respect to the sale or other disposition of
such Registrable Shares whenever the Holders thereof shall desire to sell
or otherwise dispose of the same but only to the extent provided in this
Section 6(b); PROVIDED, the Holder, upon receipt from the Company of notice
that an event has occurred which requires a post-effective amendment to the
Registration Statement, a supplement to the prospectus included therein or
a supplemental filing with the Commission to be incorporated by reference
therein, shall promptly discontinue the sale of Registrable Shares until
the Holder receives copies of a supplemental or amended prospectus from the
Company or notice from the Company that the existing prospectus has become
available for such sale, which the Company shall provide as soon as
practicable after such notice of discontinuance; PROVIDED, HOWEVER, in the
event the Company provides such notice of discontinuance to the Holder, the
180 day period referred to in clause (i) above shall be extended for the
period equal to the number of days during which the prospectus, as
supplemented as necessary, was not available to facilitate sales of the
Registrable Shares by the Holder;
(iii) furnish to the Holder such numbers of copies of the Registration
Statement, the prospectus contained therein (including each preliminary
prospectus), and each amendment and supplement to the Registration
Statement and such prospectus, in conformity with the requirements of the
Securities Act, and such other documents, as the Holder may reasonably
request in order to facilitate the sale or other disposition of the
Registrable Shares; and
(iv) use its best efforts to register or qualify such Registrable
Shares for sale under the securities or blue sky laws of such jurisdictions
as the Holder may request, and do any and all other acts and things that
may be necessary under such securities or blue sky laws to enable the
Holder to consummate the sale or other disposition of the Registrable
Shares in such jurisdictions; PROVIDED that the Company shall not in any
event be required to keep any such registration or qualification in
effect after the expiration of the period during which the Company
maintains the effectiveness of the Registration Statement and shall not
for any such purpose be required to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified or to
subject itself to taxation in any such jurisdiction.
-17-
(c) REQUIRED INFORMATION. The Company shall not be required to use its
best efforts to include the Registrable Shares in a proposed registration of its
securities under the Securities Act unless and until (i) the Holder furnishes to
the Company such information regarding the Holder and the Registrable Shares and
the intended method of disposition of such Registrable Shares as the Company
shall reasonably request in order to satisfy the requirements applicable to such
registration, and (ii) in the event the offering to be conducted pursuant to
such registration is to be an underwritten public offering, the Holder agrees to
the terms of an underwriting agreement agreed to between the Company and the
underwriter or underwriters of such offering and executes all documents
reasonably required to effect such offering.
(d) EXPENSES OF REGISTRATION. The Company shall pay or cause to be paid
and shall indemnify and hold harmless the Holder from and against any and all
reasonable costs and expenses incurred in connection with any registration of
Registrable Shares under Section 6(a), including, without limitation, all
federal and state blue sky filing and registration or qualification fees
attributable to such shares and fees (not to exceed $5,000); PROVIDED, HOWEVER
that the Company shall not be required to pay any brokerage and underwriting
discounts and commissions attributable to such shares or the fees and expenses
of any financial, legal or accounting advisors employed by the Holder in
connection with any such registration.
(e) INDEMNIFICATION. In connection with any registration of the
Registrable Shares pursuant to the provisions of this Section 6, the Company
shall indemnify and hold harmless the Holder to the extent that companies
generally indemnify and hold harmless underwriters in connection with public
offerings under the Securities Act, and the Holder shall indemnify and hold
harmless the Company, each director and officer of the Company, and each person
who controls the Company within the meaning of the Securities Act to the extent
that selling shareholders generally indemnify and hold harmless issuers of
securities in connection with public offerings under the Securities Act with
respect to the written information provided by such Holder for use by the
Company in the preparation of the Registration Statement.
(f) TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register Registrable Shares under this Section 6 may be assigned
to any assignee of Registrable Shares.
-18-
(g) LIMITATIONS ON GRANTING OTHER REGISTRATION RIGHTS. The Company will
not provide or otherwise grant to any officer, director or other party,
registration rights with respect to the Company's securities which would
conflict with the provisions in this Section 6.
7. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the Holder or such
shares for any issuance tax in respect thereof; PROVIDED that the Company shall
not be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
the Holder.
8. AVAILABILITY OF INFORMATION. The Company will cooperate with the
Holder in supplying such information as may be reasonably necessary for the
Holder to complete and file any information reporting forms presently or
hereafter required by the Commission as a condition to the availability of an
exemption from the Securities Act, for the sale of this Warrant or any Warrant
Shares. The Company will deliver to the Holder, promptly upon their becoming
available, copies of all financial statements, reports, notices, and proxy
statements sent or made available generally by the Company to its shareholders,
and copies of all regular and periodic reports and all registration statements
and prospectuses filed by the Company with any securities exchange, the
Commission or similar agency.
9. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
entitle the Holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the Holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the Holder hereof, shall give rise to any
liability of the Holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
10. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
(a) WARRANT TRANSFERABLE. Subject to Section 10(f), the transfer of
this Warrant and all rights hereunder, in whole or in part, is registrable at
the office or agency of the Company referred to in Section 10(e) by the Holder
in person or by his duly authorized attorney (which may include officers of the
Company), upon surrender of this Warrant properly endorsed together with a
completed Assignment Agreement in the form
-19-
attached hereto as ANNEX B. Each taker and holder of this Warrant, by taking or
holding the same, consents and agrees that this Warrant, when endorsed in blank,
shall be deemed negotiable, and that the holder hereof, when this Warrant shall
have been so endorsed, may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner and holder hereof for any
purpose and as the person entitled to exercise the rights represented by this
Warrant and to the registration of transfer hereof on the books of the Company;
but until due presentment for registration of transfer on such books the Company
may treat the registered holder hereof as the owner and holder hereof for all
purposes, and the Company shall not be affected by any notice to the contrary.
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is
exchangeable, upon the surrender hereof by the Holder hereof at the office or
agency of the Company referred to in Section 10(e), for new Warrants of like
tenor representing in the aggregate the right to purchase the number of shares
of Common Stock which may be purchased hereunder, each of such new Warrants to
represent the right to purchase such number of shares of Common Stock as shall
be designated by said Holder hereof at the time of such surrender. For purposes
hereof, the term "Warrant" shall be deemed to include any and all such
replacement Warrants, whether issued pursuant to this Section 10(b) or any other
Section hereof.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 10, this Warrant shall be promptly cancelled by the Company. The
Company shall pay any and all United States federal and state taxes (other than
securities transfer taxes) and all other expenses and charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 10.
-20-
(e) REGISTER. The Company shall maintain, at its principal office in
Orlando, Florida (or such other office or agency of the Company as it may
designate by notice to the Holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) RESTRICTIVE LEGENDS. Each certificate for any Warrant Shares issued
upon the exercise of this Warrant, and each stock certificate issued upon the
transfer of any such Warrant Shares (except as otherwise permitted by this
Section 10) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. SUCH
SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR ANY EXEMPTION THEREFROM UNDER THE SECURITIES ACT AND
UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES MAY NOT BE
TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THE WARRANT
PURSUANT TO WHICH THESE SHARES HAVE BEEN ISSUED, AND NO TRANSFER OF
THESE SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH
CONDITIONS SHALL HAVE BEEN COMPLIED WITH.
Each Warrant issued in substitution for any Warrant pursuant to this
Section 10 and each Warrant issued upon the transfer of any Warrant (except as
otherwise permitted by this Section 10) shall be stamped or otherwise imprinted
with a legend substantially in the form of the legend contained on the front
page of this Warrant.
(g) TERMINATION OF RESTRICTIONS. The restrictions imposed by Section
10(f) upon the transferability of Warrants and Warrant Shares shall apply as to
this Warrant and any Warrant Shares until (i) such securities shall have been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering such securities, or (ii) such time as,
in the reasonable opinion of counsel for the Company, or upon the written
opinion of counsel for the Holder reasonably acceptable to the Company, such
restrictions are not required in order to comply with the Securities Act.
Whenever such restrictions shall terminate as to any Warrants or Warrant Shares,
the holder thereof shall be entitled
-21-
to receive from the Company, without expense, new certificates of like tenor not
bearing the restrictive legends set forth in Section 10(f).
11. NOTICES. All notices, requests, and other communications required
or permitted to be given or delivered hereunder to the Holder or to the holder
of shares acquired upon exercise of this Warrant shall be in writing, and shall
be personally delivered, or shall be sent by certified or registered mail,
postage prepaid and addressed, to such holder at the address shown for such
holder on the books of the Company, or at such other address as shall have been
furnished to the Company by notice from such holder. All notices, requests, and
other communications required or permitted to be given or delivered hereunder to
the Company shall be in writing, and shall be personally delivered, or shall be
sent by certified or registered mail, postage prepaid and addressed, to the
office of the Company at 1000 Universal Studios Plaza, Building 22A, Orlando,
Florida 32819, or at such other address as shall have been furnished to the
Holder by notice from the Company. Any such notice, request, or other
communication may be sent by telegrams or telex, but shall in such case be
subsequently confirmed by a writing personally delivered or sent by certified or
registered mail as provided above. All notices, requests, and other
communications shall be deemed to have been given either at the time of the
delivery thereof to (or the receipt by, in the case of a telegram or telex) the
person entitled to receive such notice at the address of such person for
purposes of this Section 11, or, if mailed, at the completion of the third full
day following the time of such mailing thereof to such address, as the case may
be.
12. GOVERNING LAW; SUBMISSION TO PROCESS. THIS WARRANT SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE
OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.
13. REMEDIES. The Company stipulates that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific enforcement of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
-22-
14. MISCELLANEOUS.
(a) AMENDMENTS. This Warrant and any provision hereof may not be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party (or any predecessor in interest thereof) against
which enforcement of the same is sought.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
Sections of this Warrant are inserted for purposes of reference only, and shall
not effect the meaning of construction of any of the provisions hereof.
(c) SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all the Company's assets.
(d) OBLIGATIONS OF WARRANT HOLDERS. By accepting this Warrant, the
Holder thereof agrees to all of its obligations contained herein.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer on this [ ] day of [ ], 2000.
VICTORY ENTERTAINMENT CORP.
By:
Name:
Title:
ANNEX A
FORM OF EXERCISE AGREEMENT
Dated: ______, _____.
To: VICTORY ENTERTAINMENT CORP.
The undersigned, pursuant to the provisions set forth in the
within Warrant, hereby agrees to purchase ________ ("WARRANT SHARES") shares of
Common Stock covered by such Warrant, and makes payment herewith in full
therefor at the price per share provided by such Warrant either (check one):
o in cash or by check in the amount of U.S. $__________; or
o by "cashless" exercise in accordance with Section 1(b) of such
Warrant (in which case the number of Warrant Shares issuable
upon this exercise will be appropriately determined).
Please issue a certificate or certificates for the appropriate
number of shares of Common Stock in the name of and pay any cash in U.S. dollars
for any fractional share to:
Name:
Signature:
Title of Signing Officer or
Agent
(if any):
Note: The above signature
should correspond exactly
with the name on the face
of the within Warrant or
with the name of the
assignee appearing in the
assignment form.
Signature guaranteed by:
NOTE: Signature must be
guaranteed by a commercial
bank, trust company, or by a
member firm of a registered
national securities exchange.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
ANNEX B
FORM OF ASSIGNMENT AGREEMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights of the undersigned under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
, and hereby irrevocably constitutes and appoints _________ ________________ as
agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: __________________, ____.
In the presence of
Name:
Signature:
Title of Signing Officer or
Agent
(if any):
Address:
Note: The above signature
should correspond exactly
with the name on the face
of the within Warrant.
EXHIBIT 10.31
IN THE CIRCUIT COURT OF THE
NINTH JUDICIAL CIRCUIT, IN AND
FOR ORANGE COUNTY, FLORIDA
CMI INTERNATIONAL
HOLDINGS, LTD.,
PLAINTIFF,
V. CASE NO: CI 99-3996
DIV. 34
LIGHTPOINT ENTERTAINMENT,
INC., A FLORIDA CORPORATION, HERBERT
BUTLER, INDIVIDUALLY, AND MARK
KYLE A/K/A KYLE MARK,
INDIVIDUALLY,
DEFENDANTS.
------------------------------------/
SETTLEMENT STIPULATION
Plaintiff CMI INTERNATIONAL HOLDINGS, LTD. ("CMI") and Defendants
HERBERT BUTLER ("Butler") and MARK KYLE ("Kyle"), individually and as an alleged
general partner of Lightpoint Entertainment, an alleged Florida general
partnership, and Defendant LIGHTPOINT ENTERTAINMENT, INC. ("Lightpoint") hereby
stipulate and agree to settle this action but only if the terms and conditions
set forth herein have been satisfied within the required time limitations.
WHEREAS, CMI brought this action against Lightpoint, Butler, Kyle and
an entity believed not to exist known as Lightpoint Entertainment, a Florida
limited liability company, alleging the right to recover an amount exceeding
$2,000,000.00. CMI has asserted claims based on two promissory notes (the
"Notes"), one dated October 23, 1997 and one
dated December 16, 1997, and claims for reformation of the Notes, money lent and
unjust enrichment ("Note Action Claims");
WHEREAS, Lightpoint, Butler and Kyle deny that they owe any amount to
CMI and contend they have valid defenses to the Note Action Claims;
WHEREAS, CMI or its affiliate CMC Magnetics Corporation ("CMC") have
contended that they have rights under that certain Lightpoint Entertainment /
CMC Magnetics Distribution Agreement between CMC and Lightpoint effective July
1, 1998 ("Lightpoint Distribution Agreement");
WHEREAS, Lightpoint has contended that the Lightpoint Distribution
Agreement is void, invalid, and unenforceable and that it never had any force or
effect;
WHEREAS, Lightpoint, Butler and Kyle, on the one hand, and CMI and CMC,
on the other hand, now desire to settle this action, terminate any and all prior
agreements between them including but not limited to the Lightpoint Distribution
Agreement and resolve any and all legal and equitable claims, rights and
interests that each may have against the other but only if the terms and
conditions set forth herein have been satisfied within the required time
limitations;
WHEREAS, CMC is a party to this stipulation to acknowledge its
agreement to the terms hereof; and
WHEREAS VICTORY ENTERTAINMENT CORP. ("VEC") is the parent corporation
of Lightpoint and is a party to this stipulation to acknowledge its agreement to
the
-2-
terms hereof and the requirement to perform the obligations which it is required
to perform hereunder.
NOW, THEREFORE, in consideration of the mutual agreements set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby mutually acknowledged by Lightpoint, Butler,
Kyle, VEC, CMC and CMI (alternately referred to as "Party," individually, or
"Parties," collectively), the Parties agree as follows:
1. The above recitals are true and correct and are incorporated herein.
2. Within 10 business days of receipt of the first payment received by
VEC from the underwriters of VEC's initial public offering of common stock
("IPO" and "IPO Underwriters," as appropriate), in accordance with the terms of
an underwriting agreement to be entered into between VEC and the IPO
Underwriters relating to the IPO, but no later than December 31, 2000:
(A) VEC shall pay CMI one million US dollars (US$1,000,000.00) ("CMI
Payment") in cash or immediately available funds.
(B) VEC shall issue in the name of CMC the number of shares of VEC
common stock (the "CMC Shares") equal to 1,500,000 divided by eighty-five
percent (85%) of the IPO Price, subject to a six-month "Lock-up" period as
set forth in paragraph 4 hereof. The "IPO Price" as used herein means the
per share price at which shares of VEC common stock are offered and sold to
the public in the IPO pursuant to an effective registration statement (the
"IPO Registration Statement") under the Securities Act of 1933, as
-3-
amended (the "Securities Act"). All such shares when issued shall be
validly issued, fully paid and non-assessable. VEC shall register (the
"CMC Registration Statement") the CMC Shares as set forth in and in
accordance with the terms and conditions of the attached EXHIBIT A.
3. If the CMC Registration Statement is not effective by the 180th day
following the date (the "IPO Date") of the first sale of the IPO shares to the
IPO Underwriter regardless of the reason therefor and regardless of whether the
CMC Registration Statement was effective at any time prior to such 180th day,
VEC agrees to pay CMC the additional sum of Five Hundred Thousand U.S. Dollars
(US$500,000) (the "Additional CMI Payment") as additional consideration (and not
as liquidated damages or a penalty) for the settlement being agreed to pursuant
to the terms and conditions set forth herein not later than ten (10) business
days after such 180th day, in cash or immediately available funds.
Notwithstanding the foregoing, VEC shall not be obligated to pay CMC the
Additional CMI Payment if the CMC Registration Statement is not effective as of
the 180th day after the IPO Date as a proximate result of CMC's failure to
provide the information described in clause (b) of EXHIBIT A within a reasonable
period of time (not to exceed 15 business days) after receipt of written request
therefor from VEC; provided VEC requests such information not later than sixty
(60) days of the IPO Date, or, if the CMC Registration Statement is to be
declared effective sooner than 180 days from the IPO Date, not later than sixty
(60) days before the earlier date that VEC desires the CMC Registration
Statement to become effective.
4. CMC agrees that, without the prior written consent of VEC, which
will not be granted without the written consent of the IPO Underwriters, CMC
will not,
-4-
during the period commencing on the date hereof and ending 180 days after the
IPO Date: (1) offer, pledge, announce the intention to sell, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, the entitlement to shares under
this stipulation or the shares issued pursuant to this stipulation or (2) enter
into any swap, option, future, forward or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the
entitlement to shares under this stipulation or the shares issued pursuant to
this stipulation, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of common stock or such other securities, in
cash or otherwise.
5. In connection with VEC's registration obligation with respect to the
CMC Shares, without the prior written consent of CMC, so long as CMC or any of
its Affiliates (as the term "Affiliates" is defined under Rule 144 promulgated
under the Securities Act) owns any CMC Shares, VEC shall not release any VEC
Shares owned by any VEC officers, directors or affiliates thereof from the
Lock-up Agreement to which such shares are subject, prior to that date which is
365 days from the effective date of the registration statement relating to the
IPO. The preceding sentence shall not apply if VEC shall pay the Additional CMI
Payment to CMI in accordance with Section 3 above. VEC represents and warrants
that as of the date of this Stipulation, a total of 5,368,500 VEC Shares are
owned by its officers, directors and its Affiliates and are subject to the
Lock-up Agreement in the form of the attached EXHIBIT B.
-5-
6. In connection with the issuance to CMC by VEC of the CMC Shares, CMC
confirms that:
(A) CMC is an institutional "Accredited investor" (as defined in Rule
501 (a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and
has such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of an investment in the CMC
Shares, and CMC is able to bear the economic risk of its investment for an
indefinite period of time; and
(B) CMC is acquiring the CMC Shares for its own account for investment
and not with a view to distribution and with no present intention of
distributing the CMC Shares, except in accordance with the effective CMC
Registration Statement. CMC understands that the CMC Shares are being
issued to CMC in a transaction which is exempt from the registration
requirements of the Securities Act and, upon issuance, the certificates
evidencing the CMC Shares shall bear a customary restrictive legend.
7. VEC acknowledges and agrees that CMC's decision to invest in the CMC
Shares was made in reliance upon VEC's representations, warranties, covenants
and disclosures set forth herein and in that certain "Confidential Private
Placement Memorandum" dated August 30, 2000. VEC represents and warrants that no
representation or warranty of VEC set forth herein or in the Confidential
Private Placement Memorandum and no statement contained herein or therein,
contains any untrue statement of a material fact or
-6-
omits to state all material facts which are necessary in order to make
statements contained herein and therein not misleading.
8. CMI, Lightpoint, Butler and Kyle agree concurrently herewith to
execute or cause their attorneys to execute joint stipulations for dismissal
with prejudice (the "Joint Stipulation(s)") from this case of each party
executing a Joint Stipulation, and providing that each party shall bear its own
costs and attorneys fees. The Joint Stipulations shall not be filed, but upon
execution shall immediately be delivered to J. Brock McClane, Esquire (the
"Escrow Agent") to be held in escrow, in accordance with the terms and
conditions of paragraph 14 hereof.
9. The Parties agree concurrently herewith to execute general releases
in the form attached hereto as composite EXHIBIT C (the "Releases") and to
immediately deliver the Releases to the Escrow Agent, to be held in escrow in
accordance with the terms and conditions of paragraph 14 hereof. The Releases
shall not be deemed to be delivered or effective except as provided in paragraph
14.
10. Upon the execution of this stipulation by all of the Parties, this
stipulation shall be filed with the Court whereupon the Parties agree that the
Court should enter an order approving the stipulation and abating the case until
December 31, 2000, or such earlier date, if any, as VEC officially withdraws its
IPO Registration Statement, unless the action is earlier dismissed pursuant to
the terms hereof.
-7-
11. In the event the CMI Payment and issuance of the CMC Shares in the
amounts set forth in paragraph 2 are not received by CMI and CMC on or before
the earliest date specified for payment and issuance thereof in paragraph 2
hereof, CMI may forthwith proceed with this case without the necessity of
further order of the Court. In such case, the Releases and Joint Stipulations
shall be void and of no effect and shall be disbursed by the Escrow Agent
pursuant to the provisions of paragraph 14 hereof.
12. In the event the CMI Payment and issuance of the CMC Shares in the
amounts set forth in paragraph 2 are received by CMI and CMC, or Lynn J. Hinson,
Esquire in their behalf, on or before the earliest date specified for the
payment and issuance thereof in paragraph 2 hereof, CMI and/or CMC, directly or
through their counsel, Lynn J. Hinson, Esquire, shall notify the Escrow Agent of
their receipt.
13. The Parties hereby appoint J. Brock McClane, Esquire, as the Escrow
Agent in accordance with the terms of this Stipulation. J. Brock McClane,
Esquire hereby agrees to act as the Escrow Agent pursuant to the terms and
conditions of this Stipulation and executes this Stipulation as Escrow Agent to
acknowledge and agree to perform the duties and obligations as Escrow Agent. As
provided herein, CMI, Lightpoint, Butler and Kyle have agreed to deliver the
Joint Stipulations to the Escrow Agent to be held as provided herein. As also
provided herein, the Parties have agreed to deliver the Releases to the Escrow
Agent.
-8-
14. Escrow Agent shall hold the Joint Stipulations and Releases and
shall not disburse, deliver or otherwise release from his possession except upon
the following conditions:
(A) If VEC pays CMI $1,000,000.00 US Dollars, in cash or immediately
available funds, and issues in the name of CMC the CMC Shares in the
amounts specified in paragraph 2 hereof on or before the earliest date
specified in paragraph 2 hereof for the payment and issuance thereof, and
Lynn J. Hinson, Esquire notifies the Escrow Agent in writing that the
$1,000,000.00 payment and CMC Shares have been received, the Escrow Agent
shall file the Joint Stipulations with the Court and deliver the Releases
in favor of the defendants to J. Brock McClane, Esquire in his capacity as
counsel for VEC and Lightpoint. Escrow Agent shall simultaneously deliver
the Release in favor of CMI and CMC to CMI and CMC.
(B) If VEC does not pay CMI $1,000,000.00 US Dollars in cash or
immediately available funds and does not issue in the name of CMC the CMC
Shares in the amounts specified in paragraph 2 hereof on or before the
earliest date specified in paragraph 2 hereof for the payment and issuance
thereof, Lynn J. Hinson, Esquire shall notify the Escrow Agent in writing
that the payment has not been received, and the CMC Shares have not been
delivered. Upon receipt of such notice, Escrow Agent shall deliver the
Joint Stipulations and the Release in favor of the defendants to Lynn J.
Hinson, Esquire, who shall immediately destroy the Joint Stipulations and
notify CMI and CMC of
-9-
its destruction. Escrow Agent shall also deliver the Release in favor
of CMC and CMI to J. Brock McClane, Esquire, in his capacity as counsel
for VEC and Lightpoint. The Releases and Joint Stipulations shall be
deemed to have never been delivered or become effective, and shall be
void and of no further force and effect.
15. CMI represents and warrants to Lightpoint and VEC that the
performance of its obligations hereunder will not conflict with, result in a
breach of or violate any of the terms or provisions of, or constitute a default
under, any agreement to which CMI is a party or by which CMI is bound, nor will
it result in any violation of the provisions of its charter or bylaws.
16. Lightpoint and VEC represent and warrant to CMI and CMC that the
performance of their obligations hereunder will not conflict with, result in a
breach of, or violate any of the terms or provisions of, or constitute a default
under, any agreement to which Lightpoint or VEC is a party or by which
Lightpoint or VEC is bound, nor will it result in any violation of the
provisions of their respective charters or bylaws.
17. This Stipulation and the construction and enforcement thereof shall
be governed by Florida law.
18. This Stipulation, and any amendment, modification or other revision
to this Stipulation, shall not be effective or binding upon CMI, CMC, Lightpoint
or VEC (the "Primary Parties") unless each of them has executed and delivered
this Stipulation and all documents to be executed and delivered in connection
herewith as provided herein, and
-10-
no amendment, modification or other revision to this Stipulation shall be
effective or binding upon any of the Primary Parties unless each of the Primary
Parties has executed and delivered a written document setting forth such
amendment, modification or other revision.
Similarly, this Stipulation, and any amendment, modification or other
revision to this Stipulation, shall not be effective or binding upon any of the
Primary Parties, on the one hand, and upon Kyle, on the other hand, unless each
of the Primary Parties and Kyle have executed and delivered this Stipulation and
all documents to be executed and delivered in connection herewith and, in the
case of any amendment, modification or other revision to this Stipulation,
unless Kyle and each of the Primary Parties has executed and delivered a
document setting forth such amendment, modification or other revision.
Similarly, this Stipulation, and any amendment, modification or other
revision to this Stipulation, shall not be effective or binding upon any of the
Primary Parties, on the one hand, and upon Butler, on the other hand, unless
each of the Primary Parties and Butler has executed and delivered this
Stipulation and all documents to be executed and delivered in connection
herewith and, in the case of any amendment, modification or other revision to
this Stipulation, unless Butler and each of the Primary Parties has executed and
delivered a document setting forth such amendment, modification or other
revision.
19. In the event of any legal or equitable action arising out of this
Stipulation, including, without limitation, the initiation of any legal action
by CMC to enforce the provisions of the attached Exhibit A, relating to VEC's
obligations with respect to the
-11-
Registration of the CMC Shares, the prevailing party shall recover its
reasonable attorneys fees and court costs.
20. VEC's obligations hereunder to make the CMI Payment and to issue
the CMC Shares are conditioned on the consummation of the IPO on or before
December 31, 2000.
21. Upon the delivery of the CMI Payment to CMI in cash or immediately
available funds and the issuance of the CMC Shares in the name of CMC in the
amounts specified in paragraph 2 hereof on or before the earliest date specified
in paragraph 2 hereof, to the extent CMI and CMC have or claim any right, title
or interest, contingent or otherwise, to or in any intellectual property owned
or developed by Lightpoint Entertainment, Inc. or its affiliates including VEC,
Victory Distribution, Inc., Victory Animation Studios, Inc., Victory Television,
Inc. and Premium Entertainment Corp., and including any and all interest they or
any of them have or have had in any intellectual property associated with "The
Dooley and Pals Show," including but not limited to the trademarks of "Dooley"
and "Martie the Mighty Marshmallow Man," CMI and CMC relinquish, remise and
release such claims then and forever.
22. Upon the delivery of the CMI Payment to CMI in cash or immediately
available funds and the issuance of the CMC Shares in the name of CMC in the
amounts specified in paragraph 2 hereof on or before the earliest date specified
in paragraph 2 hereof,
-12-
(a) the Lightpoint Distribution Agreement shall be terminated
automatically and without further notice or action, and
(b) Lightpoint and VEC shall be released from all prior contracts,
agreements and understandings between Lightpoint and VEC or either of
them, on one hand, and CMI and CMC or either of them, on the other
hand, of whatever nature, whether oral or written, including but not
limited to the Lightpoint Distribution Agreement, automatically and
without further notice or action. CMI and CMC shall be released from
all prior contracts, agreements and understandings between CMI and CMC
or either of them, on one hand, and Lightpoint and VEC or either of
them, on the other hand, of whatever nature, whether oral or written,
including but not limited to the Lightpoint Distribution Agreement,
automatically and without further notice or action. None of
Lightpoint, VEC, CMI or CMC shall have any further right or obligation
whatsoever under any prior contracts, agreements and understandings
terminated or from which Lightpoint or VEC are released by operation
of this paragraph, and any existing claim of CMI and CMC or either of
them, on the one hand, against Lightpoint and VEC or either of them,
on the other hand, under any prior contracts, agreements and
understandings, including but not limited to the Note Action Claims,
shall be and are forever barred, and any existing claim of Lightpoint
-13-
and VEC or either of them, on the one hand, against CMI and CMC or
either of them, on the other hand, under any prior contracts,
agreements and understandings, including but not limited to the Note
Action Claims, shall be and are forever barred.
In the event Kyle does not sign this stipulation and fulfill all of his
obligations and requirements hereunder, all prior contracts, agreements and
understandings between Kyle, one the one hand, and CMC or CMI, on the other
hand, if any, pursuant to which Kyle may be liable, including but not limited to
any loan agreements or promissory notes shall be fully enforceable against Kyle.
In the event Butler does not sign this stipulation and fulfill all of
his obligations and requirements hereunder, all prior contracts, agreements and
understandings between Butler, on the one hand, and CMC or CMI, on the other
hand, if any, pursuant to which Butler may be liable, including but not limited
to any loan agreements or promissory notes shall be fully enforceable against
Butler.
In the event Lightpoint or VEC fail to execute this stipulation or the
CMI Payment is not delivered to CMI in cash or immediately available funds and
the CMC Shares issued in the name of CMC in the amounts specified in paragraph 2
hereof on or before the earliest date specified in paragraph 2, then this
stipulation shall not terminate the Lightpoint Distribution Agreement or release
any Party's obligation to any other Party or bar any Party's claims under any
prior contracts, agreements, and understandings including but not limited to the
Note Action Claims.
-14-
This stipulation and the rights and obligations of the Parties
hereunder shall not be affected by this section.
23. This stipulation may be executed in two or more counterparts, and
copies of executed counterparts transmitted by fax shall be deemed originals for
all purposes.
-15-
24. Time is of the essence in the performance of any and all
obligations of the Parties under this stipulation.
LIGHTPOINT ENTERTAINMENT, INC.
By:
-------------------------------------------------
Edgar N. Millington
Secretary
Dated: , 2000
-----------------------------------------
[NO SIGNATURE]
-----------------------------------------------------
Herbert Butler
Dated: , 2000
-----------------------------------------
[NO SIGNATURE]
-----------------------------------------------------
Mark Kyle
Dated: , 2000
-----------------------------------------
VICTORY ENTERTAINMENT CORP.
By:
--------------------------------------------
Michael H. Gerber
Chairman
Dated: , 2000
----------------------------------------
-----------------------------------------------
J. Brock McClane
Escrow Agent
Dated: , 2000
-------------------------------------
CMI INTERNATIONAL HOLDINGS, LTD.
By:
-------------------------------------------
Its:
Dated: , 2000
-------------------------------------
-16-
CMC MAGNETICS CORPORATION
By:
-----------------------------------------------
Its:
----------------------------------------------
Dated: , 2000
-------------------------------------
--------------------------------------------------
Lynn J. Hinson
Counsel for CMI International Holdings, Ltd.
And CMC Magnetics Corporation
Dated: , 2000
-----------------------------------------
-17-
EXHIBIT A
REGISTRATION PROCEDURES
The registration procedures set forth below will apply to the shares
(the "CMC Shares") of common stock, par value $.001 per share (the "Common
Stock"), of Victory Entertainment Corp. ("VEC") to be issued to CMC Magnetics
Corporation ("CMC") upon the consummation of VEC's initial public offering of
Common Stock (the "IPO"), as provided in the settlement stipulation (the
"Stipulation") to which this Exhibit A is attached. Terms used herein with an
initial capitalized letter, but not defined herein, shall have the meaning
ascribed thereto in the Stipulation.
(a) REGISTRATION PROCEDURES.
(i) VEC will prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement (the "CMC Registration
Statement") covering the resale of the CMC Shares by CMC, which will be filed
with the (i.e., as a pre-effective amendment to the Form S-1) IPO registration
statement, and will use its best efforts to cause the CMC Registration Statement
to become effective at the time of the IPO but, in no event, later than 180 days
after the effective date of the IPO Registration Statement, and to cause the CMC
Registration Statement to remain effective until the earlier of (A) the date on
which CMC shall have sold or otherwise disposed of all the CMC Shares or (B) the
first date on which all of the CMC Shares can be sold by CMC under Rule 144(k)
of the Securities Act of 1933, as amended (the "Securities Act").
(ii) VEC shall notify CMC, in writing, promptly after VEC has received
notice of the time the CMC Registration Statement has become effective or any
supplement to any prospectus forming a part of the CMC Registration Statement
has been filed.
(iii) VEC will prepare and file with the Commission, and promptly
notify CMC of the filings of, such amendments and supplements to the CMC
Registration Statement and the prospectus contained therein as may be necessary
to keep the CMC Registration Statement effective for the entire period described
in clause (a)(i) above, and to comply with the provisions of the Securities Act,
with respect to the sale or other disposition of all CMC Shares covered by the
CMC Registration Statement.
(iv) VEC will advise CMC promptly after it has received notice or
obtained knowledge thereof of the issuance of any stop order by the Commission
suspending the effectiveness of the CMC Registration Statement or the initiation
or threatening of any proceeding for that purpose and promptly use its
reasonable best efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such stop order should be issued as promptly as possible.
During any period in which any such stop order shall be in effect,
-1-
CMC agrees to discontinue its sale of the CMC Shares covered by the CMC
Registration Statement.
(v) VEC will prepare and promptly file with the Commission (and, if
necessary, state blue sky officials), and promptly notify CMC of the filing of
any amendment or supplement to the CMC Registration Statement or the prospectus
contained therein as may be necessary to correct any false statements or
material omissions, if, at the time when CMC is obligated to deliver a
prospectus relating to the registered CMC Shares under the Securities Act, any
event has occurred the result of which the CMC Registration Statement or any
prospectus contained therein must be amended in order that it does not contain
any untrue statement of a material fact, or omit to state a material fact
necessary to make the statements therein in light of the circumstances in which
they were made, not misleading.
Further, if at any time when CMC shall be obligated to deliver a
prospectus in connection with the sale of its registered CMC Shares, the
prospectus previously furnished CMC and then in effect may no longer be used
under the Securities Act, VEC will prepare promptly upon request such amendment
or amendments to the CMC Registration Statement and such prospectus as may be
reasonably necessary to permit compliance with the requirements of the
Securities Act and applicable blue sky laws.
(vi) If VEC common stock is then listed on any securities exchange or
quoted on the NASDAQ, VEC will use its best efforts to cause all CMC shares
covered by the CMC Registration Statement to be listed on such exchange or
quoted on the NASDAQ.
(vii) VEC will furnish to CMC such numbers of copies of the CMC
Registration Statement, the prospectus contained therein, including a
preliminary prospectus, and each amendment and supplement to the CMC
Registration Statement and the prospectus contained therein, in conformity with
the requirements of the Securities Act, and such other documents, as CMC may
reasonably request in order to facilitate the sale or other disposition of the
registered CMC Shares.
(viii) VEC will use its best efforts to register or qualify the CMC
Shares for sale under the securities or blue sky laws of such jurisdictions as
CMC may request, and do any and all other acts and things that may be necessary
under such securities or blue sky laws to enable CMC to consummate the sale or
other disposition of the CMC Shares in such jurisdictions; provided that VEC
will not in any event be required to keep any such registration or qualification
in effect after the expiration of the period during which VEC maintains the
effectiveness of the CMC Registration Statement and shall not for any such
purpose be required to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified or to subject itself to taxation in
any such jurisdiction.
(b) REQUIRED INFORMATION. VEC will not be required to file the CMC
Registration Statement or cause the CMC Registration Statement to become or
remain effective
-2-
as described in (a) above unless and until CMC furnishes to VEC such information
regarding CMC and the CMC Shares and the intended method of disposition of such
CMC Shares as VEC reasonably requests, in writing, in order to satisfy the
requirements applicable to such registration. Promptly following the execution
and delivery of the Stipulation, VEC shall furnish CMC with all such written
requests and all questionnaires or other forms which CMC must complete or
furnish in order for VEC to timely meet its registration obligations. VEC shall
provide CMC's counsel representing CMC in connection with the Stipulation (or
such other legal counsel designated by CMC) with copies of all such written
requests, questionnaires or other forms given or furnished by VEC to CMC,
simultaneous with the delivery thereof to CMC.
(c) EXPENSES OF REGISTRATION, VEC will pay or cause to be paid any and
all costs and expenses of VEC incurred in connection with the registration of
the CMC Shares, including, without limitation, all federal and state filing and
registration or qualification fees, legal and accounting fees and printing
expenses; PROVIDED, HOWEVER, that VEC will not be required to pay any brokerage
and underwriting discounts and commissions attributable to CMC's sale of its
registered CMC Shares or the fees and expenses of any financial, legal or
accounting advisors employed by CMC in connection with any such registration.
(d) INDEMNIFICATION. In connection with the registration by VEC of the
CMC Shares, VEC will indemnify and hold harmless CMC and each person, if any,
who controls CMC within the meaning of either Section 15 of the Securities Act
or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, the legal fees and other expenses reasonably
incurred in connection with any suit, action or proceeding or any claim
asserted) caused by any untrue statement or alleged untrue statement of a
material fact contained in the CMC Registration Statement or the final
prospectus (the "Prospectus") filed pursuant to Rule 424(b) under the Securities
Act (as amended or supplemented if VEC shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to CMC furnished to VEC in writing by or on
behalf of CMC expressly for use therein.
CMC will indemnify and hold harmless VEC, its directors, its officers
who sign the CMC Registration Statement and each person who controls VEC within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act to the same extent as the foregoing indemnity from VEC to CMC, but only with
reference to information relating to CMC furnished to VEC in writing by or on
behalf of CMC expressly for use in the CMC Registration Statement, the
Prospectus, any amendment or supplement thereto, or any
-3-
preliminary prospectus; and provided further, that in no event shall CMC's
obligation of indemnification exceed the gross proceeds realized by CMC from the
sale of its registered VEC shares pursuant to such CMC Registration Statement.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnity may be sought pursuant to any of the
two preceding paragraphs of this clause (d), such person (the "Indemnified
Person") shall promptly notify the person against whom such indemnity may be
sought (the "Indemnifying Person") in writing, and such Indemnifying Person,
upon request of the Indemnified Person, shall retain counsel reasonably
satisfactory to the Indemnified Person to represent the Indemnified Person and
any others the Indemnifying Person may designate in such proceeding and shall
pay the fees and expenses of such counsel related to such proceeding. In any
such proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person and not the Indemnifying Person unless (i) the
Indemnifying Person and the Indemnified Person shall have mutually agreed to the
contrary, (ii) the Indemnifying Person has failed within a reasonable time to
retain counsel reasonably satisfactory to the Indemnified Person or (iii) the
named parties in any such proceeding (including any impleaded parties) include
both the Indemnifying Person and the Indemnified Person and representation of
both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that no
Indemnifying Person shall, in connection with any proceeding or related
proceeding in the same jurisdiction, be liable for the fees and expenses of more
than one separate firm (in addition to any local counsel) for all Indemnified
Persons, and that all such fees and expenses shall be reimbursed as they are
incurred. Any such separate firm for CMC and such control persons of CMC shall
be designated in writing by CMC, and any such separate firm for VEC, its
directors, its officers who sign the CMC Registration Statement and such control
persons of VEC shall be designated in writing by VEC. No Indemnifying Person
shall be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, each Indemnifying Person agrees to indemnify any
Indemnified Person from and against any loss or liability by reason of such
settlement or judgment, subject to the express limitations on indemnification
set forth hereinabove. No Indemnifying Person shall, without the prior written
consent of the Indemnified Person, effect any settlement of any pending or
threatened proceeding in respect of which any Indemnified Person is or could
have been a party and indemnity could have been sought hereunder by such
Indemnified Person, unless such settlement includes an unconditional release of
such Indemnified Person from all liability on claims that are the subject matter
of such proceeding.
EXHIBIT B
LOCK-UP AGREEMENT
May 17, 2000
VICTORY ENTERTAINMENT CORP.
1000 Universal Studios Plaza
Building 22A
Orlando, Florida 32819
Re: VICTORY ENTERTAINMENT CORP. - INITIAL PUBLIC OFFERING
Ladies and Gentlemen:
The undersigned understands that Victory Entertainment Corp., a Florida
corporation (the "COMPANY"), proposes to enter into an Underwriting Agreement
(the "UNDERWRITING AGREEMENT") with the several underwriters (the
"UNDERWRITERS") to be named therein, providing for the initial public offering
(the "PUBLIC OFFERING") by the several Underwriters of common stock of the
Company (the "COMMON STOCK").
In consideration of the Underwriters' agreement to purchase and make
the Public Offering of the Common Stock, and for other good and valuable
consideration receipt of which is hereby acknowledged, the undersigned hereby
agrees that, without the prior written consent of the Company, which will not be
granted without the written consent of the Underwriters, the undersigned will
not, during the period commencing on the date of the final prospectus relating
to the Public Offering (the "PROSPECTUS") and ending 365 days thereafter, (1)
offer, pledge, announce the intention to sell, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock, or any securities of the
Company which are substantially similar to the Common Stock, including, but not
limited to, (x) any securities convertible into or exercisable or exchangeable
for Common Stock or (y) any shares of Common Stock which may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission, or (2) enter into any
swap, option, future, forward or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of the Common Stock or any
securities of the Company which are substantially similar to the Common Stock,
including, but not limited to, any securities convertible into or exercisable or
exchangeable for Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. In addition, the undersigned agrees that,
without the prior written consent of Company, which will not be granted without
the written consent of the Underwriters, it will not, during the aforementioned
365-day period, make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities of the Company
which
are substantially similar to the Common Stock, including, but not limited to,
any securities convertible into or exercisable or exchangeable for Common Stock.
Notwithstanding the foregoing, this Lock-Up Agreement shall not apply
to shares of Common Stock purchased by the undersigned in the Public Offering or
in the open market following the consummation of the Public Offering. In
addition, if the undersigned is an individual, he or she may transfer any Common
Stock either during his or her lifetime or on death by will or by intestacy (1)
to his or her immediate family, (2) to a trust or other entity the beneficiaries
or equity holders of which are exclusively the undersigned and/or a member or of
his or her immediate family or (3) as a charitable contribution; PROVIDED,
HOWEVER, that in any such case it shall be a condition to such transfer that the
transferee execute an agreement stating that the transferee is receiving and
holding the Common Stock transferred subject to the provisions of this Lock-Up
Agreement, and there shall be no further transfer of such Common Stock except in
accordance with this Lock-Up Agreement. For purposes of this Lock-Up Agreement,
"IMMEDIATE FAMILY" shall mean spouse, lineal descendant, father, mother, brother
or sister of the transferor.
In furtherance of the foregoing, the Company and any duly appointed
transfer agent for the registration or transfer of the securities described
herein are hereby authorized to decline to make any transfer of securities if
such transfer would constitute a violation or breach of this Lock-Up Agreement.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lock-Up Agreement. All authority
herein conferred or agreed to be conferred and any obligations of the
undersigned hereunder shall be binding upon the successors, assigns, heirs or
personal representatives of the undersigned.
The undersigned understands that, if the Underwriting Agreement is not
executed on or before March 31, 2001, or if the Underwriting Agreement (other
than the provisions thereof which survive termination) shall terminate or be
terminated prior to payment for and delivery of the Common Stock to be sold
thereunder, the undersigned shall be released from all obligations under this
Lock-Up Agreement.
The undersigned agrees to comply with any additional restriction or
condition on the disposition of the securities described herein which may be
required to qualify the offering of the shares in any jurisdiction in accordance
with the blue sky or securities laws of such jurisdiction.
To enable the Company and the Underwriters to enforce the foregoing,
the undersigned hereby consents to the placing of restrictive legends consistent
with this Lock-Up Agreement upon the certificates evidencing the securities
described herein and to the entry of stop-transfer orders consistent with this
Lock-Up Agreement on the books and records of the transfer agent of such
securities with respect to any such securities registered in the name of the
undersigned or beneficially owned by the undersigned. The Company agrees to
instruct the transfer agent to place such legends and enter such stop-transfer
orders and not to transfer
-2-
any such securities without the consent of the Company and the Underwriters as
set forth herein.
The undersigned understands that the Underwriters will be entering into
the Underwriting Agreement and proceeding with the Public Offering in reliance
upon this Lock-Up Agreement.
-3-
THIS LOCK-UP AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES THEREOF.
Very truly yours,
Fill in Name
(1)By:
Name:
Title:
Accepted as of the date
first set forth above:
VICTORY ENTERTAINMENT CORP.
By:
Name:
Title:
(1) To be filled in if this Lock-Up Agreement is being signed on behalf of
a corporation, partnership, trust or other entity.
-4-
EXHIBIT C
GENERAL RELEASE - PLAINTIFFS SIDE
KNOW ALL MEN BY THESE PRESENTS:
In consideration of the sum of Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, CMI International Holdings, Ltd., CMC Magnetics Corporation and
Bob Wong, for themselves and their successors and assigns (collectively,
"Releasors"), do hereby irrevocably and unconditionally remise, release, acquit,
satisfy, and forever discharge all persons and entities identified on the
attached Exhibit 1 and their respective assigns, heirs, devisees and attorneys
(collectively, "Releasees") of and from all past, present and future claims,
demands, obligations, actions, causes of action, rights, damages, costs,
attorneys' fees, expenses, complaints, charges, suits, debts, dues, sums of
money, accounts, reckonings, bonds, bills, losses, specialties, covenants,
contracts, controversies, agreements, promises, variances, trespasses, damages,
judgments, executions, and liabilities, whether known or unknown, whether based
in law or equity, whether based in tort, contract or other theory of recovery,
and whether for compensatory, punitive or other damages, that Releasors ever
had, now have or may at any time in the future have against Releasees by reason
of any matter, cause or thing whatever from the beginning of the world to the
day of these presents.
Notwithstanding the foregoing, it is understood and agreed that this
Release is being executed pursuant to the Settlement Stipulation (the
"Settlement Stipulation") made by and between Lightpoint Entertainment, Inc.,
Herbert Butler, Mark Kyle, Victory Entertainment Corp., CMI International
Holdings, Ltd. and CMC Magnetics Corporation. The obligations of the parties
expressly set forth in the Settlement Stipulation, including but not limited to
Exhibit A thereto, are specifically EXCEPTED from this Release. Furthermore,
notwithstanding any other provision hereof, J. Brock McClane is not released
from his obligations, duties and responsibilities as Escrow Agent as provided by
the Settlement Stipulation.
This Release shall be NULL and VOID unless CMI International Holdings,
Ltd. receives the payment of $1,000,000.00 US Dollars (US One Million) in cash
or immediately available funds and CMC Magnetics Corporation receives the CMC
Shares as provided by the Settlement Stipulation in the amounts specified in
paragraph 2 hereof on or before the earliest date specified in paragraph 2
hereof.
Notwithstanding any other provision hereof, if either Herbert Butler or
Mark Kyle fails to sign the Settlement Stipulation, he shall not be released
hereby.
The persons signing below individually or on behalf of their respective
entities warrant that they have read this release and know the contents thereof,
have discussed it with their attorneys, and sign the same as their own free act.
LIGHTPOINT ENTERTAINMENT, INC.
By:
Edgar N. Millington
Secretary
VICTORY ANIMATION STUDIOS, INC.
By:
Its:
VICTORY DISTRIBUTION, INC.
By:
Its:
VICTORY TELEVISION, INC.
By:
Its:
VICTORY INTERNET PRODUCTIONS, INC.
By:
Its:
PREMIUM ENTERTAINMENT CORP.
By:
Its:
VICTORY ENTERTAINMENT CORP.
By:
Michael H. Gerber
Chairman
[NO SIGNATURE]
Herbert Butler
[NO SIGNATURE]
Mark Kyle
LIGHTPOINT ENTERTAINMENT, LLC (DL)
By:
Its:
CMI INTERNATIONAL HOLDINGS, LTD.
By:
Its:
CMC MAGNETICS CORPORATION
By:
Its:
[NO SIGNATURE]
Bob Wong
EXHIBIT "1"
VICTORY ANIMATION STUDIOS, INC.
VICTORY ENTERTAINMENT CORP.
VICTORY DISTRIBUTION, INC.
VICTORY TELEVISION, INC.
VICTORY INTERNET PRODUCTIONS, INC.
LIGHTPOINT ENTERTAINMENT, INC.
PREMIUM ENTERTAINMENT CORP.
LIGHTPOINT ENTERTAINMENT, a Florida Limited Liability Company
LIGHTPOINT ENTERTAINMENT, LLC, a Delaware Limited Liability Company
HERBERT BUTLER
MARK KYLE
ALL CURRENT OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS AND CONSULTANTS OF
VICTORY ANIMATION STUDIOS, INC., VICTORY ENTERTAINMENT CORP., VICTORY
DISTRIBUTION, INC., VICTORY TELEVISION, INC., VICTORY INTERNET PRODUCTIONS,
INC., LIGHTPOINT ENTERTAINMENT, INC., PREMIUM ENTERTAINMENT CORP. AND MCCLANE
TESSITORE
EXHIBIT C (CONT'D)
GENERAL RELEASE - DEFENDANTS' SIDE
KNOW ALL MEN BY THESE PRESENTS:
In consideration of the sum of Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, all persons and entities identified on the attached Exhibit 1, for
themselves and their successors and assigns (collectively, "Releasors"), do
hereby irrevocably and unconditionally remise, release, acquit, satisfy, and
forever discharge CMI International Holdings, Ltd., CMC Magnetics Corporation
and Bob Wong and their respective assigns, heirs, devisees and attorneys
(collectively, "Releasees") of and from all past, present and future claims,
demands, obligations, actions, causes of action, rights, damages, costs,
attorneys' fees, expenses, complaints, charges, suits, debts, dues, sums of
money, accounts, reckonings, bonds, bills, losses, specialties, covenants,
contracts, controversies, agreements, promises, variances, trespasses, damages,
judgments, executions, and liabilities, whether known or unknown, whether based
in law or equity, whether based in tort, contract or other theory of recovery,
and whether for compensatory, punitive or other damages, that Releasors ever
had, now have or may at any time in the future have against Releasees by reason
of any matter, cause or thing whatever from the beginning of the world to the
day of these presents.
Notwithstanding the foregoing, it is understood and agreed that this
Release is being executed pursuant to the Settlement Stipulation (the
"Settlement Stipulation") made by and between Lightpoint Entertainment, Inc.,
Herbert Butler, Mark Kyle, Victory Entertainment Corp., CMI International
Holdings, Ltd. and CMC Magnetics Corporation. The obligations of the parties
expressly set forth in the Settlement Stipulation, including but not limited to
Exhibit A thereto, are specifically EXCEPTED from this Release.
This Release shall be NULL and VOID unless CMI International Holdings,
Ltd. executes and has filed with the Ninth Judicial Circuit Court of Florida in
Case No. CI-99-3996 a joint stipulation of dismissal of Lightpoint
Entertainment, Inc. from the case with prejudice in accordance with paragraph 8
of the Settlement Stipulation.
The persons signing below individually or on behalf of their respective
entities warrant that they have read this release and know the contents thereof,
have discussed it with their attorneys, and sign the same as their own free act.
LIGHTPOINT ENTERTAINMENT, INC.
By:
Edgar N. Millington
Secretary
VICTORY ANIMATION STUDIOS, INC.
By:
Its:
VICTORY DISTRIBUTION, INC.
By:
Its:
VICTORY TELEVISION, INC.
By:
Its:
VICTORY INTERNET PRODUCTIONS, INC.
By:
Its:
PREMIUM ENTERTAINMENT CORP.
By:
Its:
VICTORY ENTERTAINMENT CORP.
By:
Michael H. Gerber
Chairman
[NO SIGNATURE]
Herbert Butler
[NO SIGNATURE]
Mark Kyle
LIGHTPOINT ENTERTAINMENT, LLC (DL)
By:
Its:
CMI INTERNATIONAL HOLDINGS, LTD.
By:
Its:
CMC MAGNETICS CORPORATION
By:
Its:
[NO SIGNATURE]
Bob Wong
EXHIBIT "1"
VICTORY ANIMATION STUDIOS, INC.
VICTORY ENTERTAINMENT CORP.
VICTORY DISTRIBUTION, INC.
VICTORY TELEVISION, INC,
VICTORY INTERNET PRODUCTIONS, INC.
LIGHTPOINT ENTERTAINMENT, INC.
PREMIUM ENTERTAINMENT CORP.
LIGHTPOINT ENTERTAINMENT, a Florida Limited Liability Company
LIGHTPOINT ENTERTAINMENT, LLC, a Delaware Limited Liability Company
HERBERT BUTLER
MARK KYLE
ALL CURRENT OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS AND CONSULTANTS OF
VICTORY ANIMATION STUDIOS, INC., VICTORY ENTERTAINMENT CORP., VICTORY
DISTRIBUTION, INC., VICTORY TELEVISION, INC., VICTORY INTERNET PRODUCTIONS,
INC., LIGHTPOINT ENTERTAINMENT, INC., PREMIUM ENTERTAINMENT CORP. AND MCCLANE
TESSITORE
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Victory Entertainment Corp.
Orlando, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated August 4, 2000, except for Note 6, as
to which the date is September 6, 2000, and Note 11, as to which the date is
August 22, 2000, relating to the financial statements of Lightpoint
Entertainment, Inc., the predecessor corporation and Victory Entertainment Corp.
and subsidiaries, which is contained in that Prospectus. Our report contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
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