-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Srgc7owuqAjdZKq63lJspierYtBP8nItjtTgB/V1x+Iu8M97HAfzL7/FFlVy/Asc C5V2q42m2yDlCubdL3KQEA== 0000950123-99-004312.txt : 19990510 0000950123-99-004312.hdr.sgml : 19990510 ACCESSION NUMBER: 0000950123-99-004312 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19990506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIGSTAR ENTERTAINMENT INC /NY CENTRAL INDEX KEY: 0001058430 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133995258 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-77963 FILM NUMBER: 99612964 BUSINESS ADDRESS: STREET 1: 19 FULTON ST 4TH FL CITY: NEW YORK STATE: NY ZIP: 10038 MAIL ADDRESS: STREET 1: 19 FULTON ST STREET 2: 5TH FL CITY: NEW YORK STATE: NY ZIP: 10038 S-1 1 BIGSTAR ENTERTAINMENT, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- BIGSTAR ENTERTAINMENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------- DELAWARE 5735 13-399-5258 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------- 19 FULTON STREET 5TH FLOOR NEW YORK, NEW YORK 10038 (212) 981-6300 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------- DAVID FRIEDENSOHN CHAIRMAN AND CHIEF EXECUTIVE OFFICER 19 FULTON STREET -- 5TH FLOOR NEW YORK, NEW YORK 10038 (212) 981-6300 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE OF PROCESS) ------------------------- PLEASE SEND A COPY OF ALL COMMUNICATIONS TO: RUBI FINKELSTEIN, ESQ. MICHAEL R. LITTENBERG, ESQ. RICHARD D. HARROCH, ESQ. SCHULTE ROTH & ZABEL LLP ORRICK, HERRINGTON & SUTCLIFFE LLP 900 THIRD AVENUE 30 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10112 (212) 756-2000 (212) 506-5380 (212) 593-3955 (FAX) (212) 506-3730 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, as amended (the "Securities Act"), check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] ------------------------- CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.001 per share.................. $46,000,000 $12,788 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act. ------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. BIGSTAR MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION -- MAY 6, 1999 PROSPECTUS - -------------------------------------------------------------------------------- Shares BIGSTAR.COM LOGO BIGSTAR ENTERTAINMENT, INC. Common Stock - -------------------------------------------------------------------------------- BigStar Entertainment, Inc. is offering shares of its common stock in an initial public offering. Prior to this offering, there has been no public market for BigStar's common stock. BigStar is an online filmed entertainment superstore that sells filmed entertainment products in all popular formats. It is anticipated that the public offering price will be between $ and $ per share. The shares of BigStar will be quoted in the Nasdaq National Market under the symbol BGST.
Per Share Total Public offering price................................ $ $ Underwriting discounts and commissions............... $ $ Proceeds, before expenses, to BigStar................ $ $
SEE "RISK FACTORS" ON PAGES 8 TO 14 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE INVESTING IN THE SHARES OF BIGSTAR. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- The underwriters may, under certain circumstances, purchase up to additional shares from BigStar at the public offering price, less underwriting discounts and commissions. Delivery and payment for the shares will be on , 1999. PRUDENTIAL SECURITIES , 1999 3 [ARTWORK] 2 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary................ 4 Risk Factors...................... 8 Forward-Looking Statements........ 15 Use of Proceeds................... 16 Dividend Policy................... 16 Dilution.......................... 17 Capitalization.................... 18 Selected Financial Data........... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20 Business.......................... 25
PAGE ---- Management........................ 36 Certain Transactions.............. 42 Principal Stockholders............ 43 Description of Capital Stock...... 45 Shares Eligible for Future Sale... 48 Underwriting...................... 49 Legal Matters..................... 50 Experts........................... 51 Where You Can Find More Information..................... 51 Index to Financial Statements..... F-1
- -------------------------------------------------------------------------------- The terms "BigStar," "we," "our" and "us" refer to BigStar Entertainment, Inc. unless the context suggests otherwise. The term "you" refers to a prospective investor. Our Internet address is www.BigStar.com. Information contained in our web sites is not part of this prospectus. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. 3 5 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that investors should consider before investing in our common stock. Investors should read the entire prospectus carefully. THE COMPANY We are a leading online filmed entertainment superstore that sells video cassettes, digital video discs, or DVDs, and laserdiscs. Through our web sites, customers have the convenience of shopping 24 hours a day, seven days a week. According to Media Metrix, we had 707,000 unique visitors to our web sites in March 1999, up from 67,000 in September 1998. We were formed in March 1998. We have four web sites that target purchasers of filmed entertainment products. Our main web site, BigStar.com, offers approximately 34,000 filmed entertainment products, including feature films and educational, health and fitness and instructional videos. Our other web sites are abcBigStar.com, which targets the children's filmed entertainment market, BigStarDVD.com, which focuses on DVD enthusiasts, and Astrophile.com, a content-only web site designed to attract customers to our product web sites. Among other marketing techniques, BigStar uses direct e-mail to attract new customers and increase purchases by existing customers. Our recently developed BigStar Direct Email(TM) software allows us to customize promotions to individuals based on their page viewing patterns, demographic information, indicated preferences and purchasing habits. Based on our preliminary use of this software, we believe that it will enhance the effectiveness of our e-mail promotions. At April 30, 1999, we had a database of more than 430,000 e-mail addresses of current and prospective customers. MARKET OPPORTUNITY The Internet is emerging as a significant medium for commerce. In addition, over the last several years, consumer video spending habits have shifted from renting video cassettes to purchasing them due to falling prices and broader distribution. Paul Kagan Associates estimates that annual retail sales of videos and DVDs in the United States will increase to $12.8 billion in 2003, up from $9.1 billion in 1998. We believe that as commerce on the Internet increases, sales of online filmed entertainment will also increase. 4 6 OUR ADVANTAGES Web-based retailers of filmed entertainment products face challenges in promoting and sustaining online sales. These challenges include competition from traditional retailers and attracting and retaining customers. We believe we are well-positioned to meet these challenges because of the following key strengths: - relationships with wholesalers that allow us to offer approximately 34,000 filmed entertainment products without the risks associated with carrying inventory; - our proprietary BigStar Direct Email software, which is designed to increase sales through one-to-one marketing; - proprietary software that integrates editorial content into our web sites; and - a management team experienced in electronic commerce and Internet marketing. OUR STRATEGY Our objective is to be the leading online filmed entertainment superstore. We intend to attain our objective through the following strategies: - continue to grow our customer base through advertising campaigns, strategic marketing relationships and our affiliate partner networks; - continue to use direct e-mail marketing; - provide a superior shopping experience; - continue to improve our technology; and - pursue additional revenue opportunities. OUR OFFICES Our principal executive offices are located at 19 Fulton Street, 5th Floor, New York, New York 10038 and our telephone number is (212) 981-6300. 5 7 THE OFFERING Shares offered by BigStar............... shares Total shares outstanding after this offering................................ shares Use of proceeds......................... To (1) increase marketing, advertising and promotion, (2) expand facilities, (3) hire additional personnel, (4) upgrade computer systems and develop additional software and (5) fund working capital and losses. A portion of the proceeds also may be used for possible future strategic alliances and acquisitions. Proposed Nasdaq National Market symbol.................................. BGST The information on this page is stated as of May 3, 1999. You should be aware that the total shares outstanding after this offering does not include: - 2,733,700 shares subject to outstanding options with a weighted average exercise price of $1.40 per share; - 1,790,384 shares subject to outstanding warrants with a weighted average exercise price of $2.03 per share; - 266,300 shares reserved for issuance under our stock option and incentive plans; and - shares reserved upon exercise of the underwriters' over-allotment option. RISK FACTORS Investors should consider the risk factors before investing in BigStar's common stock and the impact from various events which could adversely affect its business. See "Risk Factors." 6 8 SUMMARY FINANCIAL DATA
MARCH 10, 1998 (INCEPTION) TO DECEMBER 31, 1998 --------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales............................................. $ 789 Cost of sales......................................... 694 ---------- Gross profit.......................................... 95 Operating expenses: Sales and marketing................................ 1,430 General and administrative......................... 963 Web site and software development.................. 951 ---------- Total operating expenses.............................. 3,344,101 Loss from operations.................................. (3,249) Interest income....................................... 7 ---------- Net loss.............................................. $ (3,242) ========== Basic and diluted net loss per share.................. $ (0.60) Shares used in computing basic and diluted net loss per share.......................................... 5,366,564
The following table indicates a summary of our balance sheet at December 31, 1998. The table also shows how this data would appear if it were adjusted to reflect our receipt of the estimated net proceeds of $ million from our sale of common stock in this offering, at an assumed initial public offering price of $ , after deducting underwriting discounts and commissions and our estimated offering expenses. See also "Use of Proceeds" and "Capitalization."
AT DECEMBER 31, 1998 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash................................................... $ 816 $ Working capital (deficit).............................. (938) Total assets........................................... 1,338 Total long-term debt................................... 9 Total debt............................................. 11 Total stockholders' equity (deficit)................... (494)
7 9 RISK FACTORS You should carefully consider the following risk factors, in addition to the other information included in this prospectus, before purchasing shares of common stock of BigStar. Each of these risk factors could adversely affect our business, operating results and financial condition, which could adversely affect the value of an investment in our common stock. This investment involves a high degree of risk. BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE WILL FACE DIFFICULTIES TYPICALLY ENCOUNTERED BY DEVELOPMENT STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS. We commenced operations in March 1998. An investor purchasing our common stock must therefore consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, such as online commerce. These risks include our ability to: - continue to expand our customer base; - generate repeat business from existing customers; - respond to changes in a rapidly evolving and unpredictable business environment; - successfully compete against other companies that sell our products; - maintain current and develop new strategic relationships; - manage growth; - continue to develop and upgrade our technology; and - attract, retain and motivate qualified personnel. WE LACK SIGNIFICANT REVENUES AND EXPECT SIGNIFICANT CONTINUING LOSSES, WHICH COULD DECREASE THE VALUE OF YOUR SHARES. We have not achieved profitability and expect to continue to incur significant operating losses and net losses for at least the next several years. We incurred a net loss of approximately $3.2 million from March 10, 1998 (inception) through December 31, 1998. As of December 31, 1998, our accumulated deficit was approximately $3.2 million. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." We expect that our operating expenses will increase substantially as we continue to expand our business. As a result, we will need to generate significantly more revenues to achieve profitability. We may not be able to do so. If revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be reduced accordingly, our business, operating results and financial condition may be materially harmed. 8 10 OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF ELECTRONIC COMMERCE. If electronic commerce does not continue to grow or grows more slowly than expected, our business will be materially harmed. A number of factors could slow the growth of electronic commerce, including the following: - the network infrastructure required to support a substantially larger volume of transactions may not be developed; - government regulation may increase; - telecommunications capacity problems may result in slower response times; and - consumers may have concerns about the security of electronic commerce transactions. WE COMPETE WITH OTHER ONLINE RETAILERS AND TRADITIONAL FILMED ENTERTAINMENT RETAILERS WHO MAY BE MORE SUCCESSFUL THAN WE ARE IN ATTRACTING AND RETAINING CUSTOMERS. The retail filmed entertainment industry is intensely competitive. In addition, the online commerce market for retail filmed entertainment sales is new, rapidly evolving and competitive. We expect that online competition will further intensify since a competitor can launch a new site at relatively low cost. If we are unable to successfully compete against other retailers of filmed entertainment products, our business, operating results and financial condition would be materially harmed. Price competition in our industry also is intense, and price is one of the principal factors on which consumers base their purchasing decisions. Price competition may reduce our gross margins, which could materially harm our business, operating results and financial condition. Some of our competitors use aggressive pricing or inventory availability policies to build market share. Some also have adopted business models that include selling filmed entertainment products for less than their product cost and not charging customers for shipping and handling. Software applications also are available that can indicate which online site has the lowest price for a particular title and direct customers to our competitors' sites. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we have. In addition, some of our competitors devote substantially more resources to web site and systems development than we do. See "Business -- Competition" for further information concerning our competitors and competitive factors affecting our industry. WE DEPEND UPON STRATEGIC MARKETING RELATIONSHIPS TO GENERATE SALES. We use strategic marketing relationships to attract new customers, and this is an important part of our growth strategy. These relationships may not generate significant numbers of new customers. Alternatively, these relationships may be successful at generating new customers, but we may not be able to maintain these relationships or enter into more of them. If any of these events were to occur, it could materially harm our business, operating results and financial condition. See "Business -- Marketing and Promotion -- Strategic Marketing Relationships" for a discussion of these relationships. OUR RELIANCE ON E-MAIL MARKETING COULD LEAVE US VULNERABLE IF CONSUMERS REJECT THIS MARKETING TECHNIQUE OR IF THERE IS ADDITIONAL GOVERNMENTAL REGULATION. E-mail 9 11 marketing is a significant part of our growth strategy. If the acceptance or use of e-mail marketing is limited, it could harm our sales growth, which could materially harm our business, operating results and financial condition. Consumer rejection of this marketing technique or governmental regulation could limit its acceptance or use. Consumer acceptance of e-mail marketing also may be limited due to e-mail viruses. OUR RAPID GROWTH IS PLACING A SIGNIFICANT STRAIN ON OUR RESOURCES. We anticipate continued rapid expansion of our operations. If we are unable to manage our growth effectively, our business could be materially harmed. Our rapid expansion has placed a significant strain on our ability to manage our growth, including our ability to monitor operations, bill customers, control costs and maintain effective quality controls. Our anticipated future expansion will increase this strain. Our senior management team has been assembled in a very short period. These individuals have not previously worked together. The ability of our senior managers to work together effectively as a team is critical to successfully managing our growth. WE MUST MAINTAIN SATISFACTORY VENDOR RELATIONSHIPS TO COMPETE SUCCESSFULLY. We rely on wholesalers to fill our customers' orders. Our primary vendor of filmed entertainment products is Baker & Taylor Entertainment, from whom we obtained substantially all of our inventory in 1998. We also obtain filmed entertainment products from Valley Media and Rentrak. We are dependent upon maintaining these relationships for filling our customers' orders because there are a limited number of wholesalers who sell filmed entertainment products. If we are unable to maintain suitable relationships with vendors, we will be materially harmed. As we continue to grow, our wholesalers will need to satisfy our increasing product requirements on a timely basis. They also must continue to provide adequate selections of filmed entertainment titles and competitive prices. If our wholesalers are unable or unwilling to do so, it would materially harm our ability to compete, which would in turn materially harm our business, operating results and financial condition. WE COULD EXPERIENCE SYSTEM FAILURES THAT INTERFERE WITH CUSTOMERS' ACCESS TO OUR ONLINE SUPERSTORE. Our business depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. Systems interruptions that cause our web sites to be unavailable or that reduce our ability to process transactions could materially harm our business, operating results and financial condition. Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events. We have had minor systems interruptions in the past and expect further interruptions in the future. We have fully redundant systems but have not yet formalized a formal disaster recovery plan. ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS. To protect confidential information, we rely on encryption technology, which transforms information into a code designed to be unreadable by third parties. We also use authentication technology that utilizes passwords and other information to prevent unauthorized persons from accessing a customer's information. If a person circumvents our security measures, he or she could misappropriate proprietary information or cause interruptions in our operations. Security breaches that result in access to confidential information also could damage our reputation and expose us to a risk of loss or liability. In addition, we 10 12 may be required to make significant expenditures and expend considerable effort to try and protect against security breaches or remedy problems caused by these breaches. IF WE FAIL TO KEEP PACE WITH RAPID CHANGES INVOLVING THE INTERNET, IT COULD MATERIALLY HARM OUR ABILITY TO RETAIN AND ATTRACT CUSTOMERS. Internet technology, commercial applications and usage are all rapidly evolving. If we do not successfully respond to rapid changes involving the Internet, our business will be materially harmed. For example, we must respond to marketplace developments in a timely and cost-effective manner. In this regard, we must continue to develop, enhance and improve the responsiveness and features of our web sites and develop new features to meet customer needs. We also must respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. WE DO NOT PUBLISH OUR OWN EDITORIAL CONTENT, WHICH MEANS WE MUST RELY ON LICENSED THIRD-PARTY CONTENT ON OUR WEB SITES. We license third-party content, including filmed entertainment reviews, news reports and features, in order to attract and retain web site users. If we are unable to obtain desirable content from our content licensors or from new licensors, it could reduce visits to our web sites, which could materially harm our business. In addition, if we are unable to obtain content at an acceptable cost, it could materially harm our ability to compete and our operating results and financial condition. WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND MAY INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS. We regard our trademarks, trade secrets and similar intellectual property as important to our success. However, our efforts to establish and protect our proprietary rights may be inadequate to prevent misappropriation or infringement of our proprietary property. If we are unable to safeguard our intellectual property rights, it could materially harm our business, operating results and financial condition. We have established a network of links with numerous small online sites through our affiliate partners network. Many of the sites may not have licenses for the use of proprietary intellectual property that they display. The copyright holders of this proprietary intellectual property or their licensees may assert infringement claims against our affiliate partner sites and us because of our relationships with these sites. Although we believe that our use of third-party material on our web sites is permitted under current provisions of copyright law, some aspects of Internet content and commerce law are not clearly settled. We may therefore be the subject of alleged infringement claims of the trademarks and other intellectual property rights of third parties. If we become subject to these types of claims, our business could be materially harmed even if we successfully defend against the claims. It also is possible that future legal developments would prohibit us from having rights to downloadable information, sound or video. THE PROTECTION OF OUR DOMAIN NAMES IS UNCERTAIN BECAUSE THE REGULATION OF DOMAIN NAMES IS SUBJECT TO CHANGE. We currently hold various web domain names relating to our brand, including BigStar.com, abcBigStar.com, BigStarDVD.com and Astrophile.com. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. The regulation of domain names in the United States and in foreign countries is expected to change in the near future. As a result, we may be unable to acquire or maintain relevant domain names in 11 13 all countries in which we conduct business. If our ability to acquire or maintain domain names is limited, it could materially harm our business, operating results and financial condition. WE ARE SUBJECT TO GOVERNMENT REGULATION AND LEGAL LIABILITIES THAT MAY BE COSTLY AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS. Laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent. These laws and regulations could expose us to compliance costs and substantial liability, which could materially harm our business, operating results and financial condition. In addition, the growth of the Internet, coupled with publicity regarding Internet fraud, may lead to the enactment of more stringent consumer protection laws. These laws would also be likely to impose additional burdens on our business. In addition, some jurisdictions in the United States have objected to the sale of copyrighted materials, such as books, that are deemed pornographic and have started proceedings against online commerce companies selling these materials. Should jurisdictions object to the sale of some filmed entertainment products by us, we could be exposed to litigation that could be costly and that could materially harm our business. WE MAY BE SUBJECT TO LIABILITY FOR SALES AND OTHER TAXES. We do not collect sales or other similar taxes in most states. Our business could be materially harmed if additional sales and similar taxes are imposed on us, or if penalties are assessed on us for past nonpayment of these taxes. Recently adopted legislation provides that, prior to October 2001, a state cannot impose sales taxes on products sold on the Internet unless these taxes could be charged on non-Internet transactions involving the products. During this moratorium, it is possible that taxing mechanisms may be developed that would, following the moratorium, impose increasing sales and similar tax burdens on us. If these burdens are placed on us, our business could be materially harmed and there could be a material adverse effect on our operating results and financial condition. OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL. Our success is substantially dependent on the ability and experience of our senior management and other key personnel, particularly David Friedensohn, our Chief Executive Officer and Chairman of the Board, and David Levitsky, our Executive Vice President and General Manager. If one or more members of our management team become unable or unwilling to continue in their present positions, our business could be materially harmed. In addition, to manage our anticipated growth, we must hire more employees. Competition for personnel, particularly persons having software development and other technical expertise, is intense. If we are unable to hire additional qualified employees, our growth will be impaired. MANAGEMENT WILL CONTROL % OF BIGSTAR; THEIR INTERESTS MAY BE DIFFERENT FROM AND CONFLICT WITH YOURS. The interests of management could conflict with the interests of our other stockholders. Following this offering, executive officers and directors will beneficially own a total of approximately %, and % if the underwriters' over-allotment option is exercised in full, of our outstanding common stock. Accordingly, if they act together, they will have the power to control the election of directors and the approval of actions for which the approval of our shareholders is required. 12 14 WE MAY EXPERIENCE PROBLEMS FROM COMPUTER SYSTEMS THAT ARE NOT READY ON A TIMELY BASIS TO PROCESS INFORMATION ASSOCIATED WITH THE YEAR 2000. Many existing software programs may not accurately process dates arising in the year 2000 and after because they use only two digits to identify a year and assume that the two missing digits are always "19." We cannot assure you that all of the computer systems and related products and software that are important to our business will be ready by the deadline to deal with the concerns arising from the year 2000 problem. If they are not ready, we may experience difficulty in properly managing our web sites and face the possibility of business interruptions, financial loss, reputational harm and legal liability. Any of these could materially harm our business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000" for a more extensive discussion of year 2000 risks. Our business is dependent upon the operations and technology of various Internet sites, merchant acquiring banks, product wholesalers and credit card issuers, as well as other third parties. Our business, operating results and financial condition may be materially harmed if these or other third parties are not year 2000 compliant on a timely basis. OUR MANAGEMENT WILL HAVE SUBSTANTIAL DISCRETION OVER THE USE OF PROCEEDS OF THIS OFFERING AND MAY NOT APPLY THEM EFFECTIVELY. Management will have significant flexibility in applying the net proceeds of this offering and may apply the proceeds in ways with which you do not agree. The failure of management to apply these funds effectively could materially harm our business. See "Use of Proceeds" for a discussion of our intended uses of the net proceeds of this offering. WE HAVE ANTI-TAKEOVER PROVISIONS THAT COULD PREVENT AN ACQUISITION OF OUR BUSINESS AT A PREMIUM PRICE. Some of the provisions of our certificate of incorporation and bylaws could discourage, delay or prevent an acquisition of our company at a premium price or at all. These provisions: - permit the board of directors to increase its own size and fill the resulting vacancies; - provide for a staggered board; - authorize the issuance of preferred stock in one or more series; and - limit the persons who may call special meetings of stockholders. In addition, Section 203 of the Delaware General Corporation Law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock. See "Description of Capital Stock -- Preferred Stock" and "Description of Capital Stock -- Delaware Law and Certificate of Incorporation and Bylaw Provisions" for a more detailed discussion of these anti-takeover provisions. OUR STOCK PRICE MAY FLUCTUATE, WHICH MAY MAKE IT DIFFICULT TO RESELL YOUR SHARES AT ATTRACTIVE PRICES. The market price of our common stock may be highly volatile. The market prices of securities of other technology-based companies, particularly 13 15 Internet-related companies, currently are highly volatile. Factors that could cause volatility in our stock price include: - fluctuations in our quarterly operating results; - deviations in our results of operations from the estimates of securities analysts; - changes in the market valuations of other Internet companies and stock market price and volume fluctuations generally; - economic conditions specific to online commerce and the filmed entertainment retailing industry; - announcements by us or our competitors relating to new services or technologies, significant acquisitions, strategic relationships, joint ventures or capital commitments; - regulatory developments; and - additions or departures of our key personnel. SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD IMPAIR OUR STOCK PRICE. The market price of our common stock could drop due to sales of a large number of shares of our common stock or the perception that these sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. See "Shares Eligible for Future Sale" for further information concerning potential sales of our shares after this offering. Our officers, directors and our principal stockholders have entered into lock-up agreements under which they have agreed not to offer or sell any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days from the date of this prospectus without the prior written consent of Prudential Securities, on behalf of the underwriters. Prudential Securities may, at any time and without notice, waive the terms of those lock-up agreements specified in the underwriting agreement. YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION. You will experience an immediate and substantial dilution of $ per share in the net tangible book value per share of common stock from the initial public offering price, assuming an initial public offering price of $ per share. In addition, the exercise of options and warrants currently outstanding could cause additional substantial dilution to you. See "Dilution" for more detailed information regarding the potential dilution you may incur. 14 16 FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements based on our current expectations, assumptions, estimates and projections about BigStar and our industry. These forward-looking statements are identified by words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors described in the "Risk Factors" section and elsewhere in this prospectus. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. 15 17 USE OF PROCEEDS The net proceeds to BigStar from the sale of the shares of common stock in this offering are estimated to be approximately $ million, or $ million if the underwriters' over-allotment option is exercised in full, after deducting underwriting discounts and commissions and estimated offering expenses, assuming an initial public offering price of $ per share. We intend to use these net proceeds as follows: - to increase our marketing, advertising and promotion; - to expand our facilities; - to hire additional marketing, technical and production personnel; - to upgrade computer systems and for additional software development; and - to fund working capital needs and losses. A portion of the net proceeds also may be used for possible future strategic alliances and acquisitions. We presently do not have any understandings, commitments or agreements concerning these types of transactions. Pending these uses, we intend to invest the net proceeds temporarily in short-term, investment grade, interest-bearing securities or guaranteed obligations of the U.S. government. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We presently intend to retain all of our earnings, if any, to finance the expansion of our business and do not anticipate declaring or paying any cash dividends on our common stock. Future cash dividends, if any, will be paid at the discretion of our board of directors. The payment of dividends will depend upon: - future operations; - earnings; - capital requirements and surplus; - our general financial condition; - contractual restrictions; and - other factors deemed relevant by our board of directors. 16 18 DILUTION Purchasers of the common stock in this offering will experience immediate and substantial dilution in the net tangible book value of the common stock from the initial public offering price. Net tangible book value per share represents the amount of BigStar's total tangible assets less its total liabilities, divided by the number of shares of common stock issued and outstanding. At December 31, 1998, BigStar had negative net tangible book value of $(494,497) or $(0.08) per share of common stock. After giving effect to the sale of shares of common stock offered by BigStar, at an assumed initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses, BigStar's net tangible book value as of December 31, 1998 would have been $ or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate and substantial dilution of $ per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution: Assumed initial public offering price....................... $ Negative net tangible book value as of December 31, 1998................................................... $(0.08) Increase attributable to new investors.................... ------ Pro forma net tangible book value after this offering....... Dilution to new investors................................... $ ======
The following table summarizes as of December 31, 1998 the number of shares of common stock purchased from BigStar, the total consideration paid and the average price per share paid by existing stockholders and by investors purchasing shares in this offering. The following table excludes the deduction of underwriting discounts and commissions and other estimated expenses payable by BigStar. In addition, the following table assumes an initial public offering price of $ per share.
SHARES PURCHASED TOTAL CONSIDERATION ------------------ -------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE -------- ------- --------- -------- ------------- Existing stockholders....... $ New investors............... -------- ----- -------- ----- Total............. 100.0% 100.0% ======== ===== ======== =====
Assuming the exercise in full of the underwriters' over-allotment option, the net tangible book value of BigStar at December 31, 1998 would have been approximately $ per share, representing an immediate increase in net tangible book value of $ per share to BigStar's existing stockholders and an immediate and substantial dilution in net tangible book value of $ per share to new investors. 17 19 CAPITALIZATION The following table provides, as of December 31, 1998, the actual capitalization of BigStar. The table also provides the capitalization of BigStar as adjusted to reflect the receipt of the estimated net proceeds of this offering, at an assumed initial public offering price of $ per share. See "Use of Proceeds." You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes appearing elsewhere in this prospectus.
AS OF DECEMBER 31, 1998 ------------------------ ACTUAL AS ADJUSTED -------- ------------ (IN THOUSANDS) Long-term debt........................................... $ 9 $ ------- ------- Stockholders' equity (deficit) Preferred stock, $.001 par value; 10,000,000 shares authorized; no shares issued and outstanding, actual and as adjusted..................................... -- -- Common stock, $.001 par value; 40,000,000 shares authorized; 6,231,560 shares issued and outstanding, actual; shares issued and outstanding, as adjusted............................ 6 Additional paid-in capital............................. 2,353 Subscribed stock....................................... 453 Deferred compensation.................................. (64) Accumulated deficit.................................... (3,242) ------- ------- Total stockholders' equity (deficit)................ (494) ------- ------- Total capitalization........................... $ (485) $ ======= =======
Our actual and as adjusted number of outstanding shares of common stock does not include, as of May 3, 1999, 2,733,700 shares of common stock issuable upon exercise of options under our stock option and incentive plans, 1,790,384 shares of common stock issuable upon the exercise of outstanding warrants and assumes no exercise of the underwriters' over-allotment option. 18 20 SELECTED FINANCIAL DATA The selected financial data presented below as of December 31, 1998 is derived from the financial statements and related notes of BigStar, which have been audited by Arthur Andersen LLP, independent public accountants. The results of operations for the periods indicated do not necessarily reflect the results to be expected for any other period. You should read the selected financial data presented below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes appearing elsewhere in this prospectus.
MARCH 10, 1998 (INCEPTION) TO DECEMBER 31, 1998 --------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales............................................. $ 789 Cost of sales......................................... 694 ---------- Gross profit.......................................... 95 Operating expenses: Sales and marketing................................ 1,430 General and administrative......................... 963 Web site and software development.................. 951 ---------- Total operating expenses.............................. 3,344,101 ---------- Loss from operations.................................. (3,249) Interest income....................................... 7 ---------- Net loss.............................................. $ (3,242) ========== Basic and diluted net loss per share.................. $ (0.60) Shares used in computing basic and diluted net loss per share..................................... 5,366,564 DECEMBER 31, 1998 ---------- (IN THOUSANDS) BALANCE SHEET DATA: Cash.................................................. $ 816 Working capital (deficit)............................. (938) Total assets.......................................... 1,338 Total long-term debt.................................. 9 Total debt............................................ 11 Total stockholders' (deficit)......................... (494)
19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with BigStar's financial statements and notes to those statements and the other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion contains forward-looking information that involves risks and uncertainties. BigStar's results could differ materially from those anticipated by such forward-looking information due to the factors discussed under "Risk Factors" and elsewhere in this prospectus. See "Forward-Looking Statements." OVERVIEW BigStar was incorporated in March 1998. We began offering products for sale on our main web site, BigStar.com, in May 1998. Until that time, our operating activities related primarily to the development of the BigStar.com web site. Because we have a limited operating history on which to base an evaluation of our business and prospects, we believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as an indication of future performance. Since our inception, we have incurred significant operating losses. These losses primarily result from development costs associated with building our web sites and order processing systems, and marketing, advertising and promotion expenses. As of December 31, 1998, we had an accumulated deficit of approximately $3.2 million. As we expand our business, we believe that our operating expenses will increase significantly primarily due to increased marketing, advertising and promotion expenses, strategic partnerships, software development 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 next several years. 20 22 RESULTS OF OPERATIONS Quarterly Results of Operations Described below are selected statement of operations data for the three quarters ended December 31, 1998. This information is derived from unaudited quarterly financial statements that include, in the opinion of management, all adjustments necessary for a fair presentation of the information for these periods. Results of operations for any fiscal quarter are not expected to be indicative of results for any future period.
QUARTER ENDED ------------------------------------------------ JUNE 30, 1998 SEPT. 30, 1998 DEC. 31, 1998 ------------- -------------- ------------- (IN THOUSANDS) Net sales............................. $ 14,709 $ 172,740 $ 601,658 Cost of sales......................... 8,605 139,788 545,438 --------- --------- ----------- Gross profit.......................... 6,104 32,952 56,220 --------- --------- ----------- Sales and marketing expenses........ 40,085 247,468 1,142,314 General and administrative expenses......................... 106,913 233,789 601,573 Web site and software development expenses......................... 99,348 305,732 538,396 --------- --------- ----------- Total operating expenses.............. 246,346 786,989 2,282,283 --------- --------- ----------- Loss from operations.................. (240,242) (754,037) (2,226,063) Interest income (expense)............. -- (2,336) 9,490 --------- --------- ----------- Net loss.............................. $(240,242) $(756,373) $(2,216,573) ========= ========= ===========
March 10, 1998 (inception) to December 31, 1998 NET SALES. Net sales were $789,107 from March 10, 1998 (inception) to December 31, 1998. Net sales reflect sales of filmed entertainment products, net of returns, and include shipping and handling charges. Sales are recognized upon product shipment. BigStar recorded no barter income during 1998. Through December 31, 1998, BigStar had approximately 24,000 customers. Until November 1998, we sold primarily video cassettes. Beginning in November 1998, we commenced promoting DVDs through BigStarDVD.com. In order to increase our customer base, we promote selected products through aggressive pricing. In the future, we may increase the discounts we offer to our customers. COST OF SALES. Cost of sales from March 10, 1998 (inception) to December 31, 1998 was $693,831. Gross margin was 12.1% for this period. Cost of sales consists of the cost of merchandise sold and shipping and handling costs. SALES AND MARKETING EXPENSES. Sales and marketing expenses from March 10, 1998 (inception) to December 31, 1998 were approximately $1.4 million. Sales and marketing expenses consist primarily of payments relating to advertising, promotion and marketing programs. These expenses also include personnel costs and related expenses for marketing and selling activities. Sales and marketing expenses also include the costs of promotional filmed entertainment products that are made available to customers who agree to receive notification of future promotions. 21 23 GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses from March 10, 1998 (inception) to December 31, 1998 were $963,081. General and administrative expenses consist of payroll and related expenses for executive, accounting and administrative personnel, insurance, professional fees and other general and corporate expenses. WEB SITE AND SOFTWARE DEVELOPMENT EXPENSES. Web site and software development expenses from March 10, 1998 (inception) to December 31, 1998 were $951,153. Web site and software development expenses consist primarily of personnel costs and related expenses for the design, development and management of our web sites. These expenses also include costs for systems and telecommunications infrastructure, as well as the cost of content purchased and licensed from third parties. NET LOSS. BigStar's net loss was approximately $3.2 million from March 10, 1998 (inception) to December 31, 1998. 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 net operating loss may be limited due to ownership changes. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operating cash requirements primarily through sales of our common stock. In 1998, we raised net proceeds of approximately $1.9 million in two private placements. At December 31, 1998, our cash was $816,124, including $453,000 held in escrow pending a closing in January 1999. From January through April 1999, we sold 6,081,616 shares of common stock for net proceeds of approximately $11.8 million. Net cash used in operating activities of approximately $1.3 million in 1998 was primarily due to our net loss of approximately $3.2 million, offset by an increase in accounts payable, accrued payroll costs and accrued expenses of approximately $1.8 million. Net cash used in investing activities of $470,342 in 1998 was used for capital expenditures consisting of the purchase of computer equipment, office equipment and furniture. BigStar currently has an agreement with one of its wholesalers under which BigStar receives a credit for the purchase of goods with 60 day payment terms. At December 31, 1998, our principal commitments consisted of obligations for advertising under cancelable agreements and were approximately $456,000. We have no material commitments for capital expenditures but anticipate future purchases related to enhancements of our web sites. We believe that the net proceeds from this offering combined with our current cash balances will be sufficient to meet our anticipated cash needs for working capital, operating losses and capital expenditures for at least the next 12 months. Our future liquidity and capital requirements will depend upon numerous factors discussed under the section entitled "Risk Factors." 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. We cannot assure you that we will not require additional 22 24 financing within this time frame or that such additional funding, if needed, will be available on terms acceptable to us or at all. We do not currently use derivative financial instruments. SEASONALITY AND REVENUE FLUCTUATIONS BigStar's limited operating history and rapid growth make it difficult to ascertain the effects of seasonality on its business. Seasonal fluctuations in sales of filmed entertainment products may affect our sales. Fluctuations in revenue also may result from the timing of hit releases on video cassettes and DVD. YEAR 2000 COMPLIANCE We believe our internal information systems are year 2000 compliant. However, our failure to address potential year 2000 malfunctions in our computer and non-information technology equipment and systems and those of our business partners could result in our suffering business interruption, financial loss, reputational harm and legal liability. Prior to purchasing information technology systems, we have received confirmation from our vendors that the systems are year 2000 compliant. Systems developed internally or by third parties on our behalf were designed to be year 2000 compliant. We do not have any significant non-information technology equipment or systems. We are currently assessing year 2000 compliance risks related to our subcontractors, strategic partners, suppliers, service providers and other third-party relationships. In particular, our business is dependent upon the operations and technology of various Internet sites, merchant acquiring banks, product wholesalers and credit card issuers. We are in the process of making oral and written inquiries to these third parties to determine their year 2000 readiness. We have not, however, received year 2000 compliance assurances from all of these parties nor do we expect to. We also do not plan to independently verify any of the assurances we receive. In addition, these parties are reliant upon other companies' applications, some of which may contain or rely upon software that is not year 2000 compliant and that may not be revealed through our inquiries. Year 2000 compliance problems also could undermine the general infrastructure necessary to support BigStar's operations. For example, we depend on third-party Internet service providers, or ISPs, or hosting centers to provide connections to the Internet and to customer information systems. Any interruption of service from ISPs or hosting centers to provide connections could result in a temporary interruption of the operation of our web sites. Any interruption in the security, access, monitoring or power systems at the ISPs or hosting centers could result in an interruption of services. Moreover, it is difficult to predict what effect year 2000 compliance problems will have on the integrity and stability of the Internet. Should we identify any problem with respect to our year 2000 readiness, we will seek to develop a remedy, test the proposed remedy and prepare a contingency plan, if necessary. We intend to develop contingency plans to resolve our most reasonably likely worst case year 2000 problems, which have not yet been identified. We intend to complete our determination of the worst case scenarios after we have received and 23 25 analyzed responses to our inquiries of third parties. We expect to complete our contingency plan by the end of September 1999. We do not expect the costs of year 2000 compliance to be material to our operations. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS During 1998, we adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The adoption of this standard has had no impact on our financial statements. Accordingly, BigStar's comprehensive net loss is equal to its net loss for the period from March 10, 1998 (date of inception) to December 31, 1998. In June 1997, the Financial Accounting Standards Board, or FASB, issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. Management has determined that it does not have any separately reportable business segments. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance for determining whether computer software is internal-use software and accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. SOP 98-1 also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. BigStar does not expect the adoption of SOP 98-1 to have a material effect on its capitalization policy. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement is not expected to affect BigStar since it does not currently engage in derivative instruments or hedging activities. 24 26 BUSINESS We are a leading online filmed entertainment superstore. We sell filmed entertainment products in all popular formats such as video cassettes, DVDs and laserdiscs. Through our web sites, customers have the convenience of shopping 24 hours a day, seven days a week. According to Media Metrix, we had 707,000 unique visitors to our web sites in March 1999, up from 67,000 in September 1998. Our main web site, BigStar.com, offers approximately 34,000 filmed entertainment products, including feature films and educational, health and fitness and instructional videos. Our other web sites are abcBigStar.com, which targets the children's filmed entertainment market, BigStarDVD.com, which focuses on DVD enthusiasts, and Astrophile.com, a content-only web site designed to attract customers to our product web sites. INDUSTRY OVERVIEW The Internet is emerging as a significant global communications medium. It enables millions of people to conduct research, share information and transact business electronically. International Data Corporation estimates that in 1998 there were approximately 70 million U.S. Internet users and that the number of users will grow to approximately 154 million users in 2002. Further, International Data Corporation estimates that 49.1% of U.S. households will be online by 2002, up from 26.5% in 1998. The growth in the Internet represents a substantial opportunity for companies to conduct business online. Internet retailers are able to communicate more effectively with customers by providing: - visual product presentations; - up-to-date pricing and product information; - customer support, including opportunities for customer feedback; - product offerings tailored to customer preferences; and - electronic billing and payment systems. An increasing number of products and services are sold online, including books, brokerage services, computers, music and travel services. International Data Corporation estimates that sales to U.S. households over the Internet will increase from approximately $12.4 billion in 1998 to approximately $60.6 billion in 2002. Video Cassettes Over the last several years, consumer video spending habits have shifted from renting videos to purchasing them. This trend has been driven by falling prices and broader distribution. According to the Veronis Suhler & Associates 1998 Communications Industry Forecast, the average household with a video cassette recorder purchased 7.9 tapes in 1997, compared with only 3.8 tapes in 1992. According to Paul Kagan Associates, revenues from retail sales of video cassettes are expected to total more than $8.7 billion annually in 2003. 25 27 'Sales of children's videos comprise a significant portion of the total market for purchased filmed entertainment. BigStar aggressively targets this market through its abcBigStar.com web site. According to Kalorama Information, sales of children's animated and live action videos in the United States were approximately $2.6 billion in 1996 and are expected to increase to $3.8 billion in 2001. Digital Video Discs We believe growth in the video market will be supported by the increased acceptance of DVDs. This new storage medium is capable of storing substantially more data than a video cassette, allows for easier searching and frequently has better sound quality. DVD players may be purchased as a component in a home entertainment system or integrated into a computer system as a DVD-ROM storage device. Although DVD-ROM drives are primarily for computer software storage and playback, they also may be used to view filmed entertainment on a computer screen. Paul Kagan Associates estimates that the installed base of DVD players in U.S. households will increase from 1.1 million in 1998 to 18.4 million in 2003, representing a compound annual growth rate of 75.7%. Paul Kagan Associates estimates that retail sales of DVDs in the United States will increase from approximately 14.3 million discs in 1998 to approximately 228.4 million discs in 2003, representing a compound annual growth rate of 74.0%. According to Paul Kagan Associates, annual U.S. revenue from retail sales of DVDs was approximately $286 million in 1998, and is expected to increase to approximately $4.1 billion in 2003, representing a compound annual growth rate of 70.3%. Laserdiscs Due to the success of the DVD format, the laserdisc market has contracted. However, according to Paul Kagan Associates, the installed base of laserdisc players in U.S. households was more than two million in 1998. Accordingly, we offer a large selection of laserdiscs to serve this substantial installed base of potential purchasers. Broadband Delivery of Filmed Entertainment Within the next few years, new technologies may enable consumers to download digital filmed entertainment directly into the home. We believe the potential of this new market will depend on the expansion of affordable broadband access to households and sales of significant numbers of consumer electronic storage devices capable of receiving and recording large amounts of digital information. INDUSTRY CHALLENGES Web-based retailers of filmed entertainment products face challenges in promoting and sustaining online sales, including the following: - COMPETITION FROM TRADITIONAL RETAIL INDUSTRY. Most customers purchase filmed entertainment products from traditional store-based retailers, many of which have longer operating histories, larger customer bases and greater brand recognition than online retailers. Online retailers must convince customers that purchasing filmed entertainment on the Internet offers advantages to them such as greater product selection, better prices and increased convenience. 26 28 - ATTRACTING AND RETAINING CUSTOMERS. The online commerce market is new, rapidly evolving and intensely competitive. Online retailers must increase their brand awareness, attract customers, develop customer trust and loyalty and maintain high levels of customer traffic on their web sites. THE BIGSTAR ADVANTAGES We believe we are well-positioned to meet the challenges facing online filmed entertainment retailers because of the following key strengths: Wide Selection and Lower Costs We currently offer approximately 34,000 filmed entertainment products for sale. As a result of our distribution strategy, we do not need to carry physical inventory. In contrast, traditional filmed entertainment retailers must make significant investments in inventory, real estate and personnel for each store location. The amount of space available in a physical store also limits the number of titles and the amount of inventory that a traditional retailer can carry in any one store. BigStar Direct Email Our recently developed BigStar Direct Email software will help us increase sales through one-to-one-marketing with our customers. This software creates personalized electronic catalogs based upon an individual's page viewing patterns on BigStar's web sites, demographic information, indicated preferences and purchasing habits. BigStar Direct Email can also deliver graphics and pictures to further enhance the effectiveness of e-mail promotions. BigStar Direct Email may be adapted to promote other products and services to online buyers. BigStar believes there may be an opportunity to sell or license this software to publishers, retailers and electronic commerce web sites. Proprietary Software We have created proprietary software to enhance our web sites and reduce costs. For example, we enhance content licensed from third parties by using software that generates links between sources of content. These links allow users to quickly and easily locate news, actor and director biographies, photos and other editorial programming contained in different databases. We believe that integrating content from many sources into one easy-to-navigate web site produces a superior user experience, which in turn attracts more users to our web sites, lengthens site visits and results in more purchases. We are also developing a software program that will allow us to automatically select a wholesaler to fulfill a particular order based on variables such as price, title availability, shipping costs, speed of delivery and credit terms. We believe this program will reduce our cost of sales by helping us to purchase products more efficiently and cost effectively. We expect this software to be in use by the end of the third quarter of 1999. 27 29 Targeted Web Sites We have developed separate web sites for different demographic segments who purchase filmed entertainment products. Through the BigStar web sites BigStar.com, abcBigStar.com, BigStarDVD.com and Astrophile.com, we target several distinct online groups, including: - people seeking well-known feature films and specialty titles such as educational, health and fitness and instructional videos; - parents seeking to educate and entertain their children through the purchase of filmed entertainment products; - owners of DVD players who seek a wide variety of titles and in-depth technical and product information; and - movie fans seeking extensive information about films. We believe that customers are more receptive to web sites that provide information and products tailored to their interests. Our strategy of using targeted web sites is designed to increase initial and repeat visits and sales. Experienced Management Team Our management team has more than 15 years of experience managing electronic commerce sites and web marketing campaigns. In particular, one of our founders was Chairman and Chief Executive Officer of an entertainment and commerce web site. Our other founder served as a Director of Marketing for a major online retailer of music and videos. In addition, our Vice President -- Site Development was a senior consultant to several major online and traditional marketers of books and filmed entertainment products. We believe that our management team provides significant advantages in the rapidly evolving market in which we compete. BUSINESS STRATEGY Our objective is to be the leading online filmed entertainment superstore. We intend to attain our objective through the following strategies: Continue to Grow Customer Base According to Media Metrix, we had 707,000 unique visitors to our web sites in March 1999, up from 67,000 in September 1998. We intend to continue to grow our customer base through online and offline advertising, strategic marketing relationships and our affiliate partner networks. For example, we intend to significantly increase advertising on leading web sites and other traditional media, conduct an ongoing public relations campaign and develop business alliances and partnerships. Continue to Use Direct E-mail Marketing BigStar uses direct e-mail marketing to attract new customers and increase purchases by existing customers. Our BigStar Direct Email software allows us to customize promotions to individuals based on their page viewing patterns, demographic information, indicated preferences and purchasing habits. Based on our preliminary use of this software, we believe that it will enhance the effectiveness of our e-mail 28 30 promotions. At April 30, 1999, we had a database of more than 430,000 e-mail addresses of current and prospective customers. Provide a Superior Shopping Experience By providing customers with a superior shopping experience, we believe that we can increase both our customer base and repeat customer purchases. Our web sites collectively offer approximately 34,000 filmed entertainment products. Our web sites are designed to be easy to use and contain search functions, an electronic shopping basket, personalized user profiles and secure credit card payment processing and allow customers to choose from a variety of delivery options. In addition, we seek to offer our customers a superior shopping experience through informative and entertaining editorial content. Continue to Improve Technology We believe that innovative technology is essential to successfully providing online retail services. As a result, we have developed our BigStar Direct Email software. We also have developed technology that enables other web sites to create their own filmed entertainment web sites and link to BigStar.com. We intend to continue to develop, acquire and implement enhancements to our web sites and order processing systems. For example, we intend to continue to enhance the capabilities of our BigStar Direct Email software. We also are developing a software program that will allow us to automatically select a wholesaler to fill a particular order based on variables such as price, title availability, shipping costs, speed of delivery and credit terms. We expect this software to be in use by the end of the third quarter of 1999. Pursue Additional Revenue Opportunities We intend to pursue additional revenue opportunities, which may include the following: - expand to fulfill international orders; - expand into new product categories, such as movie soundtracks, merchandise and memorabilia and video games; - acquire complementary businesses or technologies; - license our BigStar Direct Email technology to other web-based marketers; and - develop the capacity to sell filmed entertainment through digital downloads. BIGSTAR WEB SITES We have created four web sites to target purchasers of filmed entertainment products. Our web sites are BigStar.com, abcBigStar.com, BigStarDVD.com and Astrophile.com. We intend to develop additional web sites that feature specific categories of filmed entertainment products. 29 31 BigStar.com BigStar.com is our main web site and contains all of the filmed entertainment products that can be purchased from us. This web site offers approximately 34,000 filmed entertainment products, including feature films and educational, health and fitness and instructional videos. BigStar.com also contains in-depth information on more than 69,000 filmed entertainment titles, biographies of actors and directors, daily movie news, movie stills and online chats with Hollywood stars. abcBigStar.com We have targeted the children's market with the development of abcBigStar.com. This web site offers approximately 2,700 children's filmed entertainment products. This site also includes information that helps adults purchase suitable titles for children, such as age-appropriate recommendations for more than 700 titles. BigStarDVD.com BigStar has targeted DVD enthusiasts with the development of BigStarDVD.com. This web site offers approximately 2,100 DVD products and has information about the features and technical standards of many of these titles. Astrophile.com Astrophile.com is a content-only entertainment web site designed to entertain and educate users. This web site features more than 4,000 biographies, 200 interviews, movie stills and transcripts of chats with popular actors and actresses and is updated weekly. We believe that this site is one of the most comprehensive and up-to-date information sources on Hollywood celebrities on the Internet. We do not sell products through Astrophile.com. Instead, we use the site to attract movie fans. Through hyperlinks, visitors to Astrophile.com can visit our other web sites where products can be purchased. WEB SITE FEATURES Our web sites have several key features designed to enhance each customer's shopping experience. Content We have enhanced our web sites by adding editorial content. We believe that the inclusion of editorial content on our product web sites increases the time each customer spends on our web sites, as well as the likelihood and frequency of subsequent visits and purchases. Examples of our editorial content include reviews, biographies, news, photos and other editorial programming. We license the majority of our editorial content from third parties, rather than develop it internally, because we believe that this approach is more cost-effective. In addition, we have original editorial features including polls, chats and trivia. 30 32 Searching Visitors can search our web sites by genre, category, title, actor, director or other criteria. For example, the "kids search" function on abcBigStar.com allows parents to select suitable filmed entertainment products for children according to age. We also have developed software links that make it easier for users to access editorial content from separate sources. For example, a user reading a biography of a particular actor can click a single button to view information about each of the movies in which the actor has appeared. Electronic Shopping Basket Our web sites allow a customer to put each selected item into an electronic shopping basket by clicking on the item. Customers can continue shopping while adding to or deleting items from the electronic shopping basket. Once the customer has finalized his or her selection, the customer submits an order. In addition, a customer may save the items in the shopping basket and purchase them during a later visit to our web sites. Personalized Features Visitors to our web sites can enter a profile that personalizes the web sites to the user. Users that enter a profile are then greeted by name when they log on to our web sites. They also receive personalized recommendations through e-mail and other customized services such as personalized sales offers and notices of exclusive sale promotions. We also send web site news, periodic updates about new movies, featured selections and special offers to these customers. Secure Credit Card Payment We utilize secure server software for transactions. Our software encrypts all of the customer's personal information, including credit card number, name and address, to ensure security and privacy. Order Fulfillment Customers can select from a variety of delivery options, including overnight delivery and gift messages. We use e-mail to notify customers that their orders have been received and shipped. Most of our products are available for shipment within one to three days. MARKETING AND PROMOTION We use a variety of methods, which are discussed below, to attract users to our web sites. By using multiple methods to promote our web sites, we believe we increase our traffic and sales. In addition, we are not dependent on any single method of promotion or marketing partner. From inception through April 30, 1999, we estimate our web sites attracted more than 10 million visits. Of this amount, we estimate that approximately 5 million visits occurred during the first quarter of 1999. We plan to significantly increase our marketing and sales expenditures in 1999. 31 33 Direct Marketing We engage in one-to-one marketing using our BigStar Direct Email software. This software allows us to create personalized electronic catalogs based on an individual's page viewing on our web sites, demographic information, indicated preferences and purchasing habits. Big Star Direct Email software can also deliver graphics and pictures to further enhance the effectiveness of our e-mail promotions. In addition, we send online promotions to addresses in our e-mail database that we have collected from our strategic marketing partners. Using e-mail enables us to do frequent mailings on a cost-effective basis. We also intend to develop other direct marketing campaigns, such as the inclusion of inserts in major credit card statement mailings. Online and Offline Advertising Campaigns We have online marketing campaigns on a number of high traffic web sites. From September 1998 through March 1999, we conducted campaigns on more than 70 web sites. These campaigns use a variety of online marketing techniques, including: - click-through banners that bring consumers directly to our web sites; - campaigns that collect the e-mail addresses of visitors who wish to receive online promotions; - affiliate promotion campaigns; - coupons, contests and other sponsorships; and - inclusion of our search technology in relevant content areas of other web sites. We also conduct special promotions at various times during the year, such as the holiday season and the Academy Awards season. For example, we created a special gift giving program on our web sites for the 1998 holiday season. We generally enter into short-term advertising commitments that can be canceled on a maximum of 60 days' notice. As a result, we can cancel and quickly replace advertising that performs poorly. In addition to Internet-specific marketing and advertising, we also use or plan to use print, radio, outdoor and television advertising. Strategic Marketing Relationships We have entered into strategic marketing relationships with Yahoo!, MovieFone, Earthlink Network, The New York Times on the Web, Mail.com, MiningCo.com and Women.com Networks. For example, the BigStar Celebrity Chat series is hosted by Yahoo! in its Yahoo! Chat area. This series features chats with movie and television stars. These chats are showcased and archived for future reference on our web sites. We believe that the BigStar Celebrity Chat series is a highly effective means of promoting our web sites because it reaches a large number of users. BigStar is also the exclusive provider of videos, DVDs and laserdiscs for MovieFone, the largest provider of movie tickets online. Our agreement with 32 34 MovieFone also allows us to send electronic mailings to MovieFone's mailing list and advertise our products to MovieFone's online users. We recently entered into a strategic marketing agreement with Earthlink Network, a leading Internet service provider, or ISP, with over 1,000,000 subscribers. We will be the exclusive online provider of filmed entertainment products on Earthlink's web site. The agreement calls for placement of a link to BigStar's web sites on Earthlink's home page, the inclusion of an exclusive co-branded movie store for Earthlink's members and other prominent placements on the Earthlink web site. In addition, we build customized filmed entertainment stores for our strategic partners, such as the stores we have created for MiningCo.com and Women.com Networks. These online stores offer customers search and selection capabilities on the affiliates' web sites. These stores attract new customers and increase sales for BigStar. Affiliate Partner Networks Our affiliate program enables other web sites to create their own filmed entertainment web site and link to BigStar. When first-time visitors follow a link to our online superstore, the affiliated web site receives a percentage of any resulting sale. Because there is no payment unless a sale occurs, the program is an efficient means of acquiring new customers. In order to encourage other web sites to participate in the affiliate program, we provide without charge all of the necessary software to establish the filmed entertainment area and link, as well as other technical and customer service support. ORDER FULFILLMENT AND CUSTOMER SERVICE Our products are usually shipped directly from our wholesalers to the customer. As a result, we currently do not maintain an inventory of products. For the year ended December 31, 1998, we purchased substantially all of our products from Baker & Taylor. We also have contractual relationships with Valley Media and Rentrak. Our distribution agreement with Baker & Taylor extends through December 31, 2000. The agreement automatically renews for an additional two-year term unless terminated before the end of the initial term. BigStar has no obligation to make minimum purchases under this agreement. We utilize electronic links with our wholesalers to process orders. This reduces processing time and costs. Products are generally shipped by our wholesalers the same day they receive an order from us. We are developing a proprietary software program that will enable us to automatically select a wholesaler to fill a particular order based on variables such as price, title availability, shipping costs, speed of delivery and credit terms. We believe this program will reduce our cost of sales by enabling us to purchase many products more efficiently. In addition, by providing electronic access to the inventories of multiple wholesalers, this program will help us increase the number of items we offer and the number that are in stock at any given time. This software program also will 33 35 give us the capability to bundle different types of products together for product promotions. We plan to contract with a third party during 1999 for a distribution facility to handle a small amount of order fulfillment internally. Carrying selected inventory will allow us to offer additional products and provide quicker shipping on some items and special promotions to our customers. In addition, we believe that having our own distribution facility may also facilitate fulfillment of international orders. We believe that our ability to attract and retain customers depends in part on the strength of our customer support. We seek to achieve frequent communication with and feedback from our customers to continually improve our online superstore and related services. Our customer service staff monitors our incoming customer e-mails and generally responds within 24 hours. We also send automated e-mails after a purchase has been made to inform customers of the status of their orders. In addition, we also plan to add a toll-free telephone number that directs customer inquiries to a voice response system or a customer service representative. COMPETITION The online commerce market is new and rapidly evolving. We expect that our online competition will further intensify. In addition, the broader retail filmed entertainment industry is intensely competitive. Our current or potential competitors include: - online sellers of videotapes, DVDs and other video products, including DVD EXPRESS, Movie Street, Reel.com, a subsidiary of Hollywood Entertainment, CDnow, Buy.com, Amazon.com and Total E, an online store from Columbia House; - publishers and wholesalers of video and related products, such as Columbia House, Good Times Entertainment and Time Life Video; - traditional filmed entertainment retailers, such as Blockbuster and Hollywood Entertainment, that currently sell or may sell filmed entertainment products or services through stores or over the Internet; and - specialty video retailers, mass merchandisers, department and electronic consumer stores, as well as non-store retailers such as mail-order video clubs. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we have. Some of BigStar's competitors also may be able to secure merchandise from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to web site and systems development than we can. We believe that the principal competitive factors in our market are: - brand recognition; - ease of use, content quality and convenience of web sites; - price; - selection; and - personalized services. 34 36 INTELLECTUAL PROPERTY We use proprietary technology in our business. Most of our software and systems have been developed internally. For example, we have developed our BigStar Direct Email software that allows us to conduct one-to-one-marketing with our customers. We also have developed software that enables other web sites to create their own filmed entertainment web site and link to BigStar.com. In addition, we are in the process of developing a software program to enable us to purchase products from wholesalers more efficiently. Some of our software is developed on our behalf by outside consultants. We also license software from third parties. The source code for our proprietary software is protected both as a trade secret and as copyrighted work. We enter into confidentiality and assignment agreements with our consultants and vendors with access to our proprietary information. We have applied for the registration of some of our trademarks and service marks in the United States. We have no patents. EMPLOYEES As of April 30, 1999, we had 50 full time employees, including 20 in technology positions, 7 in marketing, 6 in site development, 9 in customer service and 8 in administrative and executive positions. We believe our relations with our employees are satisfactory. LEGAL PROCEEDINGS BigStar is not currently involved in any material legal proceedings. FACILITIES Our principal executive offices are located at 19 Fulton Street, 5th Floor, New York, New York 10038, where we lease approximately 8,000 square feet of space. 35 37 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of BigStar are as follows:
NAME AGE POSITION - ---- --- -------- David Friedensohn*.................. 37 Chief Executive Officer and Chairman of the Board David Levitsky...................... 37 Executive Vice President, General Manager, Secretary and Director Robert S. Yingling.................. 37 Vice President -- Finance and Chief Financial Officer Donna M. Williams................... 36 Vice President -- Marketing Anthony Witek....................... 47 Vice President -- Operations Brooke Bessert...................... 31 Vice President -- Site Development Eugene Mondrus...................... 30 Vice President -- Technology D. Jonathan Merriman*............... 38 Director William Lansing..................... 40 Director Steven A. Ledger*................... 39 Director
- --------------- * Member of audit and compensation committees. David Friedensohn has served as the Chairman and Chief Executive Officer of BigStar since our formation in March 1998. Prior to joining BigStar, Mr. Friedensohn was the Chief Executive Officer of SonicNet, which was sold in December 1997 as part of Paradigm Music Entertainment to TCI Music, an affiliate of Tele-Communications, Inc. Mr. Friedensohn previously held the positions of Vice President, Business Development and General Manager of the Wildflower Partners Fund at Prodigy from October 1995 until January 1997 and was Chairman of the Board and President of SonicNet from January 1996 to January 1997. Prior to working at Prodigy, Mr. Friedensohn was President of GB Investment Corp., a consulting company to the entertainment industry. Mr. Friedensohn received a Bachelor of Arts from Dartmouth College in 1983 and a Masters in Business Administration from Columbia University Graduate School of Business in 1987. David Levitsky has served as the Executive Vice President, General Manager and Secretary and as a Director of BigStar since our formation in March 1998. From June 1997 to January 1998, Mr. Levitsky served as the Director of Marketing of New Century Network, a joint venture of Cox Newspapers, Knight Ridder, The New York Times Company and other large media companies. Prior to joining New Century Network, Mr. Levitsky served as a Director of Marketing for Columbia House Online. From 1990 through 1996, Levitsky served as a Director of Marketing for the Columbia House Video Club. Mr. Levitsky received a Bachelor of Arts from Columbia University in 1983 and a Masters in Business Administration in Information Systems and Finance from New York University Stern School of Business in 1996. Robert S. Yingling has served as the Vice President -- Finance and Chief Financial Officer of BigStar since April 1999. Prior to joining BigStar, Mr. Yingling 36 38 was a consultant to several Internet companies, including EarthWeb and DynamicWeb Enterprises, as well as BigStar. From January 1997 to August 1998, Mr. Yingling was the Chief Financial Officer of GDC International. Previously, Mr. Yingling was Director of Finance at Standard Microsystems and a Manager at Arthur Andersen. Mr. Yingling received a Bachelor of Science in Accounting from Lehigh University in 1983 and a Masters in Business Administration from Columbia University Graduate School of Business in 1996. Mr. Yingling is a certified public accountant. Donna M. Williams has served as Vice President -- Marketing of BigStar since April 1998. From May 1997 to April 1998, Ms. Williams ran a marketing consulting business. From June 1994 to May 1997, Ms. Williams was employed by The Times Mirror Company where she held various positions, including Vice President of Business Development for Mosby, a subsidiary focused on medical publishing. Ms. Williams also spent five years with the Bankers Trust Company in the Merchant Banking division. Ms. Williams received her Bachelor of Arts in Economics from Mount Holyoke College in 1984 and a Masters in Business Administration from Columbia University Graduate School of Business in 1992. Anthony Witek has served as Vice President -- Operations of BigStar since May 1999. From December 1996 to April 1999, Mr. Witek was a Managing Director of Thomson Newspapers in software development and production. Prior to joining Thomson Newspapers, Mr. Witek was the Director of Application Development for new business ventures for Prodigy Services. Mr. Witek received a Bachelor of Business Administration from Hofstra University in 1974. Brooke Bessert has served as Vice President -- Site Development of BigStar since our formation in March 1998. From 1992 to 1998, Ms. Bessert acted as a computer and web site consultant to various companies, including barnesandnoble.com, Columbia House, Time Inc., The McGraw Hill Companies and Radio Free Europe/ Radio Liberty. She received a Bachelor of Science in Economics with a concentration in Marketing from The Wharton School, University of Pennsylvania in 1990. Eugene Mondrus has served as Vice President -- Technology of BigStar since November 1998. Prior to joining BigStar, Mr. Mondrus was a software development consultant with Oracle and a software and hardware analyst for Progressive Strategies during 1998. From June 1996 to September 1997, Mr. Mondrus held the position of Webmaster at Bigfoot International, directing web site operations. Prior to joining Bigfoot International, Mr. Mondrus worked as a software programmer and consultant for various companies. D. Jonathan Merriman has served as a Director of BigStar since our formation in March 1998. Mr. Merriman is the Managing Director of the Capital Markets Group of First Security Van Kasper & Company, an investment banking and brokerage firm. Mr. Merriman joined First Security Van Kasper in June 1998 and oversees the Research, Institutional Sales and Trading Syndicate, and Derivatives Trading Departments. Prior to joining First Security Van Kasper, Mr. Merriman served as a Managing Director at The Seidler Companies. From 1990 to 1996, Mr. Merriman was the Managing Director of the Equity Department at Dabney/Resnick/Imperial. Mr. Merriman attended the New York University Stern School of Business and received a Bachelor of Arts from Dartmouth College in 1982. Mr. Merriman serves on 37 39 the Board of First Security Van Kasper, as well as Brio Industries and Pacer Technology. William Lansing has served as a Director of BigStar since April 1999. Mr. Lansing is the President and Chief Executive Officer of Fingerhut, a database marketing company that sells a range of products and services through catalogs, direct marketing and the Internet. Prior to joining Fingerhut in May 1998, Mr. Lansing served as Vice President of Business Development for General Electric from October 1996 to May 1998. Prior to joining General Electric, Mr. Lansing served as Chief Operating Officer for Prodigy from January 1996 to October 1996, an on-line joint venture of IBM and Sears. Mr. Lansing was also a Partner at McKinsey & Company from October 1986 to January 1996, where he led the Internet practice. Mr. Lansing received a Bachelor of Arts from Wesleyan University in 1980, a Masters in Business Administration from Harvard University and a law degree from Georgetown Law School in 1985. Mr. Lansing currently serves as a Director for Digital River, Select Comfort, Freeshop.com, PCFlowers.com and Mountainzone.com. Steven A. Ledger has served as a Director of BigStar since April 1999. Mr. Ledger is a Managing Partner and Founder of Storie Partners, a private partnership formed in 1993 to invest in emerging growth companies. Mr. Ledger has served the San Francisco Sentry Investment Group and San Francisco Sentry Securities as a Managing Partner since 1993. Mr. Ledger received a Bachelor of Arts from the University of Connecticut in 1982. Mr. Ledger currently serves as a Director of APB Multimedia, HyCurve, PeopleNet Communications and Software Technologies. BOARD COMPOSITION Our board of directors consists of five directors. Our bylaws provide that the authorized number of directors may be changed by resolution of the board of directors. Prior to the closing of this offering, the terms of office of the members of the board of directors will be divided into three classes. At each annual meeting of stockholders after the initial classification, the successors to directors whose term will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of the total number of directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of BigStar. Each officer is elected by, and serves at the discretion of the board of directors. Each of BigStar's officers and directors, other than non-employee directors, devotes full time to the affairs of BigStar. BigStar's non-employee directors devote such time to the affairs of BigStar as is necessary to discharge their duties. The audit committee of the board of directors is responsible for reviewing any transactions, other than compensation arrangements, between BigStar and our executive officers and directors, the plans for and audits of BigStar, compliance with any written policies and procedures and the adequacy of our systems of internal accounting controls. The audit committee also considers annually the qualifications of our independent auditors. Effective upon consummation of this offering, the audit 38 40 committee will be composed of David Friedensohn, Steven A. Ledger and D. Jonathan Merriman. The compensation committee of the board of directors reviews and recommends to the board the compensation and benefits of all executive officers of BigStar, administers BigStar's stock option plans and establishes and reviews general policies relating to compensation and benefits of employees of BigStar. Effective upon consummation of the offering, the compensation committee will consist of David Friedensohn, Steven A. Ledger and D. Jonathan Merriman. No interlocking relationships exist between BigStar's board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. DIRECTOR COMPENSATION Directors do not currently receive cash compensation from BigStar for their service as members of the board of directors, although they are reimbursed for certain expenses in connection with attendance at board and committee meetings. BigStar does not provide additional compensation for committee participation or special assignments of the board of directors. LIMITATION OF LIABILITY AND INDEMNIFICATION Our certificate of incorporation and bylaws contain provisions indemnifying our directors and executive officers against liabilities to the fullest extent permitted by law. In our certificate of incorporation, we have eliminated the personal liability of our directors to BigStar and its stockholders for monetary damages for breach of their fiduciary duty, including acts constituting gross negligence. However, in accordance with Delaware law, a director will not be indemnified for a breach of its duty of loyalty, acts or omissions not in good faith or involving intentional misconduct or a knowing violation or any transaction from which the director derived improper personal benefit. In addition, our bylaws further provide that BigStar may advance to our directors and officers expenses incurred in connection with proceedings against them for which they are entitled to indemnification. BigStar has entered into indemnification agreements with its officers and directors containing provisions which may require BigStar to, among other things, indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors, other than liabilities arising from willful misconduct of a culpable nature, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. 39 41 EXECUTIVE COMPENSATION The following table sets forth information concerning compensation paid during 1998 to our chief executive officer and each other executive officer whose aggregate salary and bonus for 1998 was in excess of $100,000. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------- NAME AND PRINCIPAL POSITION SALARY ($) - --------------------------- ------------------- David Friedensohn Chief Executive Officer................................. $160,000 David Levitsky Executive Vice President................................ $120,000
There were no option grants during 1998 for the officers listed in the Summary Compensation Table. No options were exercised in 1998. EMPLOYMENT AGREEMENTS In March 1999, we entered into an employment agreement with David Friedensohn. The agreement provides for Mr. Friedensohn to be employed as Chief Executive Officer of BigStar for an unspecified period of time. As a result, either BigStar or Mr. Friedensohn may terminate the employment relationship at any time. Pursuant to the agreement, BigStar shall nominate Mr. Friedensohn to serve on the board of directors. The agreement obligates BigStar to pay Mr. Friedensohn an annual salary of $160,000 in 1999, $200,000 in 2000 and $250,000 in 2001. We will also pay Mr. Friedensohn a guaranteed bonus of $90,000 in 1999, $20,000 in 2000 ($40,000 if BigStar then has publicly traded shares) and $75,000 in 2001 ($150,000 if BigStar has publicly traded shares). In addition, Mr. Friedensohn was granted options to purchase 400,000 shares of common stock at an exercise price of $2.00 per share pursuant to our 1999 Stock Option and Incentive Plan. The shares vest in equal installments over 48 months and are exercisable until the earlier of five years or 90 days after Mr. Friedensohn's termination of employment. STOCK OPTION AND INCENTIVE PLANS 1998 and 1999 Plans We currently have a 1998 Stock Option and Incentive Plan and a 1999 Stock Option and Incentive Plan. Each stock option and incentive plan is administered by the board of directors, which has the sole discretion to select the employees, officers and consultants to whom awards are made, to determine the nature and amounts of such awards and to interpret, construe and implement the plans. Each stock option and incentive plan provides for awards of the following: - non-qualified stock options and incentive stock options; - stock appreciation rights; - restricted stock subject to forfeiture and restrictions on transfer; and 40 42 - performance awards entitling the recipient to receive cash or common stock in the future following the attainment of performance goals determined by the board of directors. As of April 30, 1999, under the 1998 Stock Option and Incentive Plan, options to purchase 1,000,000 shares were authorized and options to purchase 992,200 shares had been granted. As of April 30, 1999, under the 1999 Stock Option and Incentive Plan, options to purchase 2,000,000 shares were authorized and options to purchase 1,741,500 shares had been granted. 41 43 CERTAIN TRANSACTIONS In March 1998, we issued and sold 254,000 shares of common stock at a purchase price of $0.59 per share to Morton H. Meyerson, a principal stockholder of BigStar. We also issued a warrant to Mr. Meyerson to purchase 254,000 shares of common stock at a price per share of $0.59, which was exercised by Mr. Meyerson in December 1998. In May 1998, we issued and sold to Mr. Meyerson 152,000 shares of common stock at a purchase price of $0.59 per share. In April 1998, we issued a warrant to D. Jonathan Merriman, a director of BigStar, to purchase 100,000 shares of common stock at a price per share of $0.59, exercisable at any time prior to January 31, 2000. On January 1, 1999, we also issued a warrant to Mr. Merriman to purchase 100,000 shares of common stock at a price per share of $1.81, exercisable at any time prior to January 1, 2002. Effective February 1, 1999, we entered into a lease for office space. David Friedensohn, our Chief Executive Officer, is a partial guarantor of this lease. In February and April 1999, we paid an aggregate of $310,360 to First Security Van Kasper & Company, of which Mr. Merriman is a Managing Director, as compensation in connection with private equity financings. We also issued to First Security Van Kasper & Company warrants to purchase 126,392 shares of common stock at an exercise price of $1.81 per share, exercisable at any time prior to February 18, 2003, and warrants to purchase 144,000 shares of common stock at an exercise price of $3.13 per share, exercisable at any time prior to April 20, 2002. In April 1999, we issued and sold 1,655,172 shares of common stock at a purchase price of $1.81 per share to Storie Partners and issued a warrant to Storie Partners to purchase 240,000 shares of common stock at an exercise price of $3.13 per share, exercisable any time prior to April 1, 2003. Steven A. Ledger, a director of BigStar, is a Managing Partner and founder of Storie Partners. In April 1999, we issued a warrant to William Lansing, a director of BigStar, to purchase 50,000 shares of common stock at an exercise price of $2.00 per share, exercisable at any time prior to April 20, 2003. 42 44 PRINCIPAL STOCKHOLDERS The following table provides information regarding the beneficial ownership of BigStar's common stock, as of May 3, 1999, and as adjusted for this offering, assuming no exercise of the underwriters' over-allotment option by: - each person who we know beneficially owns more than 5% of our common stock; - each of our directors; - each of the officers listed in the Summary Compensation Table; and - all of our directors and executive officers as a group. We believe that each person named below has sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options or warrants held by such person that are exercisable within 60 days of May 3, 1999, but excludes shares of common stock underlying options or warrants held by any other person. Unless otherwise indicated, the address of each listed director and officer is c/o BigStar Entertainment, Inc., at 19 Fulton Street, 5th Floor, 11th Floor, New York, NY 10005.
PERCENTAGE OF PERCENTAGE OF SHARES SHARES SHARES BENEFICIALLY BENEFICIALLY BENEFICIALLY OWNED OWNED OWNED PRIOR TO OFFERING AFTER THIS OFFERING ------------ ----------------- -------------------- Storie Partners, L.P.(1)............ 1,895,172 14.9% 100 Pine Street San Francisco, California 94104 Morton H. Meyerson.................. 660,000 5.3 4514 Cole Avenue, Suite Dallas, Texas 75205 David Friedensohn(2)................ 2,225,000 17.8 David Levitsky(3)................... 1,800,000 14.4 D. Jonathan Merriman(4)............. 484,188 3.7 William Lansing(5).................. 2,083 * Steven A. Ledger(6)................. 1,895,172 14.9 All directors and executive officers as a group (10 persons)(7)........ 6,914,443 50.5%
- ------------------------- * less than 1% (1) Includes a warrant to purchase 240,000 shares of common stock. (2) Includes 100,000 shares of common stock beneficially owned by The Friedensohn 1999 Annuity Trust. Mr. Friedensohn beneficially owns the shares of common stock held by the trust. 43 45 (3) Includes 75,000 shares of common stock beneficially owned by The Levitsky 1999 Annuity Trust. Mr. Levitsky beneficially owns the shares of common stock held by the trust. (4) Mr. Merriman is a Senior Managing Director of First Security Van Kasper & Company. In such capacity, Mr. Merriman beneficially owns the warrants of First Security Van Kasper & Company entitling it to purchase 270,392 shares of common stock. (5) Represents the shares beneficially owned by Mr. Lansing pursuant to a warrant to purchase 50,000 shares of common stock. (6) Mr. Ledger is a Managing Partner of Storie Advisors, Inc., the general partner of Storie Partners. Mr. Ledger beneficially owns the shares of common stock beneficially owned by Storie Partners and a warrant of Storie Partners to purchase 240,000 shares of common stock. (7) Includes 1,245,475 shares of common stock issuable upon the exercise of warrants and options. 44 46 DESCRIPTION OF CAPITAL STOCK The following description of the material terms of our capital stock is not intended to be complete. Our capital stock is fully described in our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part. Our capital stock is also governed by the provisions of applicable Delaware law. Our authorized stock consists of 40,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. As of May 3, 1999, 12,458,376 shares of common stock were outstanding and were held by 115 holders of record. No shares of preferred stock were outstanding. COMMON STOCK Each holder of common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders. There are no cumulative voting rights. Holders of common stock are entitled to receive ratably dividends, if any, as may be declared from time to time by the board of directors out of legally available funds, except that holders of preferred stock issued after the sale of the common stock in this offering may be entitled to receive dividends before the holders of the common stock. In the event of a liquidation, dissolution or winding up of BigStar, holders of common stock would be entitled to share in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted the holders of any then outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights. In addition, there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and the shares of common stock offered by us in this offering, when issued and paid for, will be fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock may be adversely affected by the rights of the holders of shares of any series of preferred stock that we designate in the future. PREFERRED STOCK The board of directors is authorized, without stockholder approval, to issue up to an aggregate of 10,000,000 shares of preferred stock, $0.001 par value per share, in one or more series. Each series will have the rights and preferences as are determined by the board of directors, including: - voting rights; - dividend rights; - conversion rights; - redemption privileges; and - liquidation preferences. Preferred stock will have voting, dividend and liquidation rights superior to the common stock which may adversely affect the rights of holders of common stock. 45 47 WARRANTS As of May 3, 1999, BigStar had outstanding warrants to purchase 1,790,384 shares of common stock at a weighted average exercise price of $2.03 per share. Some of these warrants have net exercise provisions under which the holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares, based on the fair market value of BigStar's common stock at the time of the exercise of the warrant, after deducting the exercise price. These warrants expire on dates ranging from December 1999 to April 2003. REGISTRATION RIGHTS As part of the private placement of common stock that we consummated from January through April 1999, BigStar entered into registration rights agreements with the private placement investors. In January 1999, BigStar also entered into registration rights agreements with David Friedensohn and David Levitsky. According to the terms of the registration rights agreements, holders of 10,454,080 registrable shares of common stock, including warrants exercisable for common stock, will be entitled to piggyback registration rights in connection with any registration by BigStar of its securities for its own account or the account of other securityholders. In the event that BigStar proposes to register any shares of common stock under the Securities Act, the holders of the piggyback registration rights are entitled to receive notice and are entitled to include their shares in the registration statement. Holders of our common stock with piggyback registration rights will not be able to participate in this offering. In addition, holders of the registrable shares (10,454,080 shares), which includes shares of common stock issuable upon the exercise of warrants and options that have been granted registration rights, are entitled to demand that BigStar file a registration statement with respect to the registration of the shares under the Securities Act. BigStar is required to notify all holders of the registrable shares in the event that holders of at least 25% of the then outstanding registrable shares notify BigStar that they intend to offer or cause to be offered for public sale at least 25% of the then outstanding registrable shares. BigStar is not required to effect: - more than two demand registrations or one registration; - a demand registration until 180 days after the effectiveness of the registration statement filed in connection with this offering; - a demand registration for up to 180 days following a good faith determination by the board that it would be detrimental to BigStar; and - a demand registration for up to 180 days following the effectiveness of any registration statement (other than on Form S-8) covering BigStar capital stock. At any time after BigStar becomes eligible to file a registration statement on Form S-3, which is expected to be one year after this offering, the holders of registrable securities may require BigStar to file one registration statement on Form S-3 covering their shares during any given 12 month period or more than four registrations in total on Form S-3. However, BigStar is not required to file a Form S-3 registration statement if the market value of the registrable shares to be sold by the holders in any Form S-3 registration is less than $1,000,000. 46 48 These registration rights terminate five years following the consummation of this offering. In addition, holders may not exercise registration rights once they can sell their shares in the public market without registration. DELAWARE LAW AND CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS BigStar is subject to Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents BigStar from engaging, under some circumstances, in a business combination, which includes a merger or sale of more than 10% of its assets, with any interested stockholder, defined as a stockholder who owns 15% or more of its outstanding voting stock, as well as affiliates and associates of any such persons, for three years following the date such stockholder became an interested stockholder unless: - the transaction in which the stockholder became an interested stockholder is approved by the board of directors prior to the date the interested stockholder attained that status; - upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of BigStar's voting stock outstanding at the time the transaction commenced, excluding shares owned by persons who are directors or officers and shares owned by employee stock plans; or - the business combination is approved by the board of directors and authorized by the affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder. Some of the provisions of our certificate of incorporation and bylaws could discourage, delay or prevent an acquisition of BigStar at a premium price. Our certificate of incorporation provides that any vacancy on the board of directors may be filled by a majority of the directors then in office, even if less than a quorum, or by a plurality of the votes cast at a meeting of stockholders. Our bylaws provide that special meetings of stockholders may be called only by a majority of the directors of our board or by a designated committee of the board of directors. Stockholders are not permitted to call a special meeting or to require that the board call a special meeting of stockholders. In addition, the certificate of incorporation also authorizes the board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of BigStar. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company, New York, New York. 47 49 SHARES ELIGIBLE FOR FUTURE SALE Before this offering, there has been no public market for our common stock. The market price of our common stock could drop due to sales of a large number of shares of our common stock or the perception that such sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. After this offering, shares of common stock will be outstanding, shares if the underwriters exercise their over-allotment option in full. Of these shares, the shares sold in this offering will be freely tradeable without restriction under the Securities Act except for any shares purchased by affiliates of BigStar. The remaining shares are restricted securities under the Securities Act and generally may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. Our officers, directors and principal stockholders have entered into lock-up agreements pursuant to which they have agreed not to offer or sell any shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of Prudential Securities, on behalf of the underwriters. Prudential Securities may, at any time and without notice, waive any of the terms of those lock-up agreements specified in the underwriting agreement. Following the lock-up period, these shares will not be eligible for sale in the public market without registration under the Securities Act unless such sales meet the conditions and restriction of Rule 144 as described below. In general, under Rule 144 as currently in effect, any person, including an affiliate, who has beneficially owned shares for a period of at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then-outstanding shares of common stock and (ii) the average weekly trading volume in the common stock during the four calendar weeks immediately preceding the date on which the notice of such sale on Form 144 is filed with the Securities and Exchange Commission. In addition, a person who has not been an affiliate of BigStar at any time during the 90 days immediately preceding a sale and who has beneficially owned the shares for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitations and other conditions described above. The foregoing summary of Rule 144 is not a complete description. As soon as practicable following the consummation of this offering, BigStar intends to file a registration statement under the Securities Act to register the shares of common stock available for issuance pursuant to its stock option and incentive plans. See "Management -- Stock Option Plans." Shares issued pursuant to these plans after the effective date of that registration statement will be available for sale in the open market subject to the lock-up period and, for affiliates of BigStar, subject to Rule 144. 48 50 UNDERWRITING We have entered into an underwriting agreement with the underwriters named below, for whom Prudential Securities Incorporated and are acting as representatives. We are obligated to sell, and the underwriters are obligated to purchase, all of the shares offered on the cover page of this prospectus, if any are purchased. Subject to the conditions of the underwriting agreement, each underwriter has severally agreed to purchase the shares indicated opposite its name:
NUMBER OF SHARES UNDERWRITERS --------- Prudential Securities Incorporated.......................... -------- Total.................................................. ========
The underwriters may sell more shares than the total number of shares offered on the cover page of this prospectus and they have, for a period of 30 days from the date of this prospectus, an over-allotment option to purchase up to additional shares from us. If any additional shares are purchased, the underwriters will severally purchase the shares in the same proportion as provided in the table above. The representatives of the underwriters have advised us that the shares will be offered to the public at the offering price indicated on the cover page of this prospectus. The underwriters may allow to selected dealers a concession not in excess of $ per share and these dealers may reallow a concession not in excess of $ per share to other dealers. After the shares are released for sale to the public, the representatives may change the offering price and the concessions. We have agreed to pay to the underwriters the following fees, assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares:
TOTAL FEES --------------------------------------------- FEE WITHOUT EXERCISE OF FULL EXERCISE OF PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION --------- --------------------- --------------------- Fees paid by BigStar........... $ $ $
In addition, we estimate that we will spend approximately $ in expenses for this offering. We have agreed to indemnify the underwriters against some liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may make in respect of these liabilities. We, our officers, directors and our principal stockholders have entered into lock-up agreements under which we and they have agreed not to offer or sell any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days from the date of this prospectus without the prior written consent of Prudential Securities, on behalf of the underwriters. Prudential Securities may, at any time and without notice, waive the terms of those lock-up agreements specified in the underwriting agreement. 49 51 Before this offering, there has been no public market for the common stock of BigStar. The public offering price, negotiated between BigStar and the representatives, is based upon various factors such as BigStar's financial and operating history and condition, its prospects, the prospects for the industry we are in and prevailing market conditions. Prudential Securities, on behalf of the underwriters, may engage in the following activities in accordance with applicable securities rules: - Over-allotments involving sales in excess of the offering size, creating a short position. Prudential Securities may elect to reduce this short position by exercising some or all of the over-allotment option. - Stabilizing and short covering; stabilizing bids to purchase the shares are permitted if they do not exceed a specified maximum price. After the distribution of shares has been completed, short covering purchases in the open market may also reduce the short position. These activities may cause the price of the shares to be higher than would otherwise exist in the open market. - Penalty bids permitting the representatives to reclaim concessions from a syndicate member for the shares purchased in the stabilizing of short covering transactions. These activities, which may be commenced and discontinued at any time, may be effected on the Nasdaq National Market, in the over-the-counter market or on any trading market. Each underwriter has represented that it has complied and will comply with all applicable laws and regulations in connection with the offer, sale or delivery of the shares and related offering materials in the United Kingdom, including: - the Public Offers of Securities Regulations 1995, - the Financial Services Act 1986, and - the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1996 (as amended). We have asked the underwriters to reserve share for sale at the same offering price directly to our officers, directors, employees and other business affiliates or related third parties. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. LEGAL MATTERS Orrick, Herrington & Sutcliffe LLP, New York, New York, will pass upon various legal matters for us with respect to the validity of the shares of common stock offered in this offering. Orrick, Herrington & Sutcliffe LLP beneficially owns 40,000 shares of common stock. Schulte Roth & Zabel LLP, New York, New York, will pass upon various legal matters for the underwriters. 50 52 EXPERTS The audited financial statements of BigStar as of December 31, 1998 and for the period from March 10, 1998 (date of inception) to December 31, 1998 included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto and are included herein in reliance upon the authority of said firm as experts in giving said report. WHERE YOU CAN FIND MORE INFORMATION BigStar has filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock being offered. This prospectus does not contain all of the information shown in the registration statement or in the exhibits to the registration statement. For further information with respect to BigStar and the shares to be sold in this offering, reference is made to the registration statement. You should not assume that the information in this prospectus and the applicable supplement is accurate as of any date other than the date on the front cover of this document. You may read and copy any document BigStar files at the Securities and Exchange Commission's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0300 for further information on the operation of its public reference rooms. In addition, we are required to file electronic versions of any document we file with the Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) System. These documents are available at the Securities and Exchange Commission's Internet site at http://www.sec.gov. As a result of the offering, the information and reporting requirements of the Securities Exchange Act of 1934, will apply to us. Therefore, under the Securities Exchange Act, we will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. We intend to furnish to our stockholders annual reports containing audited financial information for each of our fiscal years. 51 53 BIGSTAR ENTERTAINMENT, INC. INDEX TO FINANCIAL STATEMENTS PAGE --- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2 FINANCIAL STATEMENTS: Balance Sheet as of December 31, 1998..................... F-3 Statement of Operations for the Period March 10, 1998 (date of inception) to December 31, 1998............... F-4 Statement of Stockholders' Deficit for the Period March 10, 1998 (date of inception) to December 31, 1998...... F-5 Statement of Cash Flows for the Period March 10, 1998 (date of inception) to December 31, 1998............... F-6 NOTES TO FINANCIAL STATEMENTS............................... F-7
F-1 54 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To BigStar Entertainment, Inc.: We have audited the accompanying balance sheet of BigStar Entertainment, Inc. (a Delaware corporation) as of December 31, 1998, and the related statements of operations, stockholders' deficit and cash flows for the period from March 10, 1998 (date of inception) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BigStar Entertainment, Inc. as of December 31, 1998, and the results of its operations and its cash flows for the period from March 10, 1998 (date of inception) to December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, New York May 5, 1999 F-2 55 BIGSTAR ENTERTAINMENT, INC. BALANCE SHEET DECEMBER 31, 1998 ASSETS ASSETS: Current assets -- Cash................................................... $ 816,124 Accounts receivable, net of allowance of $5,000........ 61,121 Other current assets................................... 8,711 ----------- Total current assets................................. 885,956 Property and equipment, net............................... 452,134 ----------- Total assets......................................... $ 1,338,090 =========== LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES: Current liabilities -- Accounts payable....................................... $ 380,540 Accrued payroll costs.................................. 243,240 Accrued expenses....................................... 1,197,776 Current portion of capital lease obligation............ 2,226 ----------- Total current liabilities............................ 1,823,782 ----------- LONG-TERM PORTION OF CAPITAL LEASE OBLIGATION............... 8,805 COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' DEFICIT: Preferred stock, $.001 par value; 10,000,000 shares authorized, no shares issued and outstanding........... -- Common stock, $.001 par value; 40,000,000 shares authorized 6,231,560 issued and outstanding............ 6,232 Additional paid-in capital................................ 2,352,356 Subscribed stock.......................................... 453,000 Deferred compensation..................................... (64,414) Accumulated deficit....................................... (3,241,671) ----------- Total stockholders' deficit.......................... (494,497) ----------- Total liabilities and stockholders' deficit.......... $ 1,338,090 ===========
The accompanying notes are an integral part of this balance sheet. F-3 56 BIGSTAR ENTERTAINMENT, INC. STATEMENT OF OPERATIONS FOR THE PERIOD MARCH 10, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 NET SALES................................................... $ 789,107 COST OF SALES............................................... 693,831 ----------- Gross profit.............................................. 95,276 OPERATING EXPENSES: Sales and marketing....................................... 1,429,867 General and administrative................................ 963,081 Web site and software development......................... 951,153 ----------- Total operating expenses............................. 3,344,101 ----------- Loss from operations................................. (3,248,825) INTEREST INCOME............................................. 7,154 ----------- Net loss.................................................. $(3,241,671) =========== PER SHARE INFORMATION: Net loss per share -- Basic and diluted...................................... $ (0.60) =========== Weighted average common shares outstanding -- Basic and diluted...................................... 5,366,564 ===========
The accompanying notes are an integral part of this statement. F-4 57 BIGSTAR ENTERTAINMENT, INC. STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE PERIOD FROM MARCH 10, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
COMMON STOCK ADDITIONAL TOTAL ------------------ PAID-IN SUBSCRIBED DEFERRED ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCK COMPENSATION DEFICIT DEFICIT --------- ------ ---------- ---------- ------------ ----------- ------------- BALANCE, March 10, 1998 (date of inception)................ -- $ -- $ -- $ -- $ -- $ -- $ -- Issuance of common stock to founders................... 4,000,000 4,000 6,000 -- -- -- 10,000 Issuance of common stock for services................... 40,000 40 60 -- -- -- 100 Issuance of common stock, net of $23,000 of issuance costs...................... 1,937,560 1,938 1,946,270 -- -- -- 1,948,208 Subscribed stock............. -- -- -- 453,000 -- -- 453,000 Issuance of stock options for services................... -- -- 117,000 -- -- -- 117,000 Issuance of warrants for services................... -- -- 54,300 -- -- -- 54,300 Employee stock option compensation............... -- -- 14,706 -- -- -- 14,706 Deferred employee stock option compensation........ -- -- 64,414 -- (64,414) -- -- Exercise of warrants......... 254,000 254 149,606 -- -- -- 149,860 Net loss..................... -- -- -- -- -- (3,241,671) (3,241,671) --------- ------ ---------- -------- -------- ----------- ----------- BALANCE, December 31, 1998..... 6,231,560 $6,232 $2,352,356 $453,000 $(64,414) $(3,241,671) $ (494,497) ========= ====== ========== ======== ======== =========== ===========
The accompanying notes are an integral part of this statement. F-5 58 BIGSTAR ENTERTAINMENT, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD MARCH 10, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(3,241,671) Adjustments to reconcile net loss to net cash used in operating activities -- Depreciation and amortization............................. 30,208 Allowance for doubtful accounts........................... 5,000 Non-cash common stock option and warrant expenses......... 186,006 Changes in assets and liabilities -- Accounts receivable.................................... (66,121) Other current assets................................... (8,711) Accounts payable, accrued payroll costs and accrued expenses.............................................. 1,821,556 ----------- Net cash used in operating activities................ (1,273,733) ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (470,342) ----------- Net cash used in investing activities................ (470,342) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... 2,108,168 Proceeds from subscribed stock............................ 453,000 Repayment of capital lease obligations.................... (969) ----------- Net cash provided by financing activities............ 2,560,199 ----------- Net increase in cash................................. 816,124 CASH, beginning of period................................... -- ----------- CASH, end of period......................................... $ 816,124 =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 2,300 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Capital lease obligations incurred........................ $ 12,000
The accompanying notes are an integral part of this statement. F-6 59 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization BigStar Entertainment, Inc. ("the Company") is an online filmed entertainment superstore that sells video cassettes, digital video discs, or DVDs, and laserdiscs. The Company has four web sites that target purchasers of filmed entertainment products. The Company's main web site, BigStar.com, offers approximately 34,000 filmed entertainment products, including feature films and educational, health and fitness and instructional videos. The Company's other web sites are abcBigStar.com, which targets the children's filmed entertainment market, BigStarDVD.com, which focuses on DVD enthusiasts, and Astrophile.com, a content-only web site designed to attract customers to the Company's product web sites. The Company operates in the online retail industry, which is new, rapidly evolving and intensely competitive. The Company competes primarily with traditional retail outlets and other entities that maintain similar commercial web sites. Cash At December 31, 1998, $453,000 is included in the Company's cash balance representing cash held in escrow for shares of the Company's Common Stock which were issued in January 1999. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Online revenue consists of sales of filmed entertainment in popular formats, primarily video cassettes and DVDs, over the Company's web sites. The Company recognizes revenue from its web sites when the products are shipped to customers. Outbound shipping and handling charges are also included in net sales. Revenue from gift certificates is recognized upon product shipment following redemption. Provision is made for the estimated effect of sales returns where right-of-return privileges exist. Returns of product from customers are accepted in accordance with standard industry practice. The Company provides an allowance for sales returns based on standard industry practice. F-7 60 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Cost of Sales Cost of sales includes the cost of the filmed entertainment, as well as related shipping and handling costs. Dependence on Supplier The Company's primary provider of filmed entertainment and related order fulfillment services is Baker & Taylor, Inc. ("B&T"). Although the Company has agreements with several order fulfillment providers, it has no fulfillment operation or warehouse facility of its own and, accordingly, is dependent on maintaining its existing fulfillment relationships. There can be no assurance that the Company will maintain its relationship with B&T beyond the term of its existing strategic marketing agreement. Further, should the Company terminate its relationship with B&T, or its other providers of filmed entertainment products and related fulfillment services, it may not be able to find an alternative, comparable vendor capable of providing fulfillment services on satisfactory terms to the Company. Web Site and Software Development Web site and software development expenses consist primarily of payroll and related expenses for web site development, systems and telecommunications operations personnel and consultants, systems and telecommunications infrastructure related to the web sites. To date, all web site and software development costs have been expensed as incurred. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of those assets. Computer equipment, office equipment and furniture are depreciated over estimated useful lives of 3 years. Leasehold improvements and equipment held under capital lease are amortized utilizing the straight-line method over the lesser of the estimated useful life of the asset or the term of the lease. Accounting for Long-Lived Assets The Company accounts for long-lived assets under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement establishes financial accounting and reporting standards for the impairment of long-lived assets and for long-lived assets to be disposed of. Management has performed a review of all long-lived assets and has determined that no impairment of the respective carrying value has occurred as of December 31, 1998. Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax F-8 61 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that includes the enactment date. Because of the uncertainty regarding the Company's future profitability, the future tax benefits of its losses have been fully reserved for. Therefore, no benefit for the net operating loss has been recorded in the accompanying financial statements. Advertising Expense Advertising and promotional costs are expensed as incurred and include the costs, both product costs and shipping and handling charges, of promotional items. These promotional items are primarily video cassettes distributed to customers who agree to receive notification of future promotions. Advertising expense was approximately $619,000 for the period from March 10, 1998 (date of inception) to December 31, 1998 and is included in sales and marketing expense in the accompanying statement of operations. Stock-Based Compensation The Company accounts for its employee stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Compensation expense related to employee stock options is recorded only if, on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company adopted the disclosure-only requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma net income and pro forma earnings per share disclosures for employee stock options as if the fair value based method of accounting in SFAS No. 123 had been applied to these transactions. The Company accounts for nonemployee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more readily determinable. Basic and Diluted Net Loss Per Common Share The Company accounts for net loss per common share in accordance with the provisions of SFAS No. 128, "Earnings Per Share." In accordance with SFAS No. 128 and the Securities and Exchange Commission Staff Accounting Bulletin No. 98, basic earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon F-9 62 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the exercise of stock options and warrants (using the Treasury Stock method); common equivalent shares are excluded from the calculation if their effect is anti-dilutive. Diluted loss per share does not include the impact of common stock options and warrants then outstanding, as the effect of their inclusion would be anti-dilutive. RECENT ACCOUNTING PRONOUNCEMENTS During 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The adoption of this standard has had no impact on the Company's financial statements. Accordingly, the Company's comprehensive net loss is equal to its net loss for the period from March 10, 1998 (date of inception) to December 31, 1998. In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. Management has determined that it does not have any separately reportable business segments. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company does not expect the adoption of SOP 98-1 to have a material effect on its financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement is not expected to affect the Company since it does not currently engage in derivative instruments or hedging activities. 2. BUSINESS AND CREDIT CONCENTRATIONS Financial instruments, which subject the Company to concentrations of credit risk, consist primarily of cash, accounts receivable, accounts payable and accrued liabilities. F-10 63 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The carrying amounts of these instruments approximate fair value. The carrying amount of the Company's capital lease approximates the fair value of this instrument based upon management's best estimate of interest rates. The Company maintains cash with a domestic financial institution. The Company performs periodic evaluations of the relative credit standing of this institution. From time to time, the Company's cash balances with this financial institution may exceed Federal Deposit Insurance Corporation insurance limits. The Company's customers are primarily concentrated in the United States. The Company performs credit card authorizations before products are shipped to reduce the risk of fraudulent credit card use. For the period from March 10, 1998 (date of inception) to December 31, 1998, there were no customers that accounted for over 10% of total revenues generated by the Company, or of gross accounts receivable at December 31, 1998. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1998: Computer equipment.......................................... $449,548 Office equipment and furniture.............................. 32,794 -------- 482,342 Less -- Accumulated depreciation and amortization........... 30,208 -------- $452,134 ========
4. ACCRUED EXPENSES Accrued expenses consist of the following at December 31, 1998: Accrued video purchase costs............................... $ 449,548 Web advertising............................................ 364,586 Site hardware costs........................................ 141,794 Consulting costs........................................... 78,025 Other...................................................... 163,823 ---------- Total............................................ $1,197,776 ==========
5. INCOME TAXES No provision for U.S. federal or state income taxes has been recorded for the period from March 10, 1998 (date of inception) to December 31, 1998 as the Company has incurred an operating loss. F-11 64 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows: Deferred tax assets, net: Net operating loss carryforwards........................ $ 1,102,000 Allowance for sales returns and bad debt................ 10,200 Deferred compensation................................... 5,000 Less -- Valuation allowance............................. (1,117,200) ----------- Deferred tax assets, net............................. $ -- ===========
Realization of deferred tax assets is dependent upon available future earnings. The Company has recorded a full valuation allowance against its deferred tax assets since management believes that it is not more likely than not that these assets will be realized. No income tax benefit has been recorded for all periods presented because of the valuation allowance. As of December 31, 1998, the Company had net operating loss carryforwards ("NOLs") for federal income tax purposes of approximately $3,242,000. There can be no assurance that the Company will realize the benefit of the NOLs. The federal NOLs are available to offset future taxable income and expire in 2019 if not utilized. Under Section 382 of the Internal Revenue Code, these NOLs may be limited due to ownership changes. 6. CAPITAL LEASE OBLIGATIONS At December 31, 1998 the Company was committed under a capital lease agreement for office equipment. The asset and liability under the capital lease is recorded at the lower of the present value of minimum lease payments or the fair market value of the asset. The interest rate on the capital lease was 8% at December 31, 1998. F-12 65 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Future minimum payments under the capital lease agreements are as follows: Year ending December 31: 1999...................................................... $ 3,011 2000...................................................... 3,011 2001...................................................... 3,011 2002...................................................... 3,011 2003...................................................... 753 ------- Total minimum lease payments...................... 12,797 Less -- Amounts representing interest.......................... 1,766 ------- Total minimum lease payments excluding interest........ $11,031 ======= Current portion........................................ $ 2,226 ======= Long-term portion...................................... $ 8,805 =======
7. STOCKHOLDERS' DEFICIT Upon incorporation in March 1998, the Company issued 4,000,000 shares of its Common Stock to its founders at $0.0025 per share. In addition, 40,000 shares of Common Stock were issued for legal services, which the Company valued at $0.0025 per share. From March through May 1998, the Company entered into Stock Purchase Agreements with several investors pursuant to which the Company sold 974,592 shares of its Common Stock at $0.59 per share for net proceeds of $575,008. From July through October 1998, the Company entered into Stock Purchase Agreements with several investors pursuant to which the Company sold 962,968 shares of its Common Stock at $1.45 per share for net proceeds of $1,373,200. In addition, warrants to purchase 94,320 shares of the Company's Common stock at $1.45 per share were issued for investment advisory services. Warrants During 1998, in connection with certain stock purchase agreements, the Company issued an aggregate of 399,200 warrants, each to purchase one share of Common Stock at an exercise price of $0.59. During April 1998, a director of the Company provided investment advisory services to the Company and received 100,000 warrants to purchase common stock, exercisable at $0.59 per share. In addition, the Company issued 420,000 warrants to purchase common stock at purchase prices between $1.45 and $1.81 for services rendered in lieu of cash payments. As such, the Company recorded a charge of $54,300 in the accompanying statement of operations based upon a valuation of the fair market value of the warrants on the date of grant. F-13 66 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of all warrants granted for the period from March 10, 1998 (date of inception) to December 31, 1998:
WEIGHTED AVERAGE WARRANTS EXERCISE GRANTED PRICE --------- -------- Outstanding at March 10, 1998............................ -- $ -- Granted................................................ 1,013,520 1.07 Exercised.............................................. (254,000) 0.59 Canceled............................................... -- -- --------- ----- Outstanding at December 31, 1998......................... 759,520 $1.22 ========= =====
All warrants were vested upon issuance and have expiration dates ranging from 7 to 51 months from the date of grant. As of December 31, 1998, the following number of warrants to purchase common stock remain outstanding: 285,200 warrants at $0.59 per share; 274,320 warrants at $1.45 per share and 200,000 warrants at $1.81 per share. Subsequent to December 31, 1998, an additional 145,200 warrants were exercised at a purchase price of $0.59 per share. 8. STOCK OPTION PLANS In 1998, the Company adopted the 1998 Stock Option and Incentive Plan ("1998 Plan") pursuant to which an aggregate of 1,000,000 shares of Common Stock was reserved for issuance to directors, officers, employees and consultants of the Company. The 1998 Plan provides for awards of both non-qualified stock options and incentive stock options within the meaning of Section 422A of the Internal Revenue Code, stock appreciation rights, restricted stock subject to forfeiture and restrictions on transfer, and performance awards entitling the recipient to receive cash or Common Stock in the future following the attainment of performance goals determined by the board of directors. The 1998 Plan is administered by the Board of Directors, which has the sole discretion to select the employees, officers and consultants to whom awards are made, to determine the nature and amounts of such awards and to interpret, construe and implement the 1998 Plan. As of December 31, 1998, options to purchase 992,200 shares of the Company's Common Stock have been granted under the 1998 Plan. In October 1998, the Company adopted the 1999 Stock Option and Incentive Plan ("1999 Plan") pursuant to which an aggregate of 600,000 shares of Common Stock were reserved for issuance to directors, officers, employees and consultants of the Company. This number of shares was increased to 2,000,000 shares in March 1999. The 1999 Plan provides for awards of both non-qualified stock options and incentive stock options within the meaning of Section 422A of the Internal Revenue Code, stock appreciation rights, restricted stock subject to forfeiture and restrictions on transfer, and performance awards entitling the recipient to receive cash or common F-14 67 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) stock in the future following the attainment of performance goals determined by the Board of Directors. The 1999 Plan is administered by the Board of Directors, which has the sole discretion to select the employees, officers and consultants to whom awards are made, to determine the nature and amounts of such awards and to interpret, construe and implement the 1999 Plan. Incentive options granted to stockholders who own more than 10% of the outstanding stock of the Company must be issued at 110% of the fair market value of the stock on the date that the options are granted. As of December 31, 1998, options to purchase 166,000 of the Company's Common Stock have been granted to employees under the 1999 Plan. Had compensation under the 1998 and 1999 Stock Option Plans been determined consistent with the provisions of SFAS No. 123, the effect on the Company's net loss and basic and diluted loss per share would have been changed to the following pro forma amounts for the period from March 10, 1998 (date of inception) to December 31, 1998: Net loss, as reported..................................... $(3,241,671) Net loss, pro forma....................................... (3,274,424) Basic and diluted loss per share, as reported............. (0.60) Basic and diluted loss per share, pro forma............... (0.61)
Stock option activity under the 1998 and 1999 Plans during the periods indicated is as follows:
WEIGHTED OPTIONS AVERAGE GRANTED EXERCISE PRICE --------- -------------- Options outstanding at March 10, 1998................. -- $ -- Granted............................................. 1,158,200 0.71 Canceled and Exercised.............................. -- -- --------- ----- Outstanding at December 31, 1998...................... 1,158,200 $0.71 ========= ===== Exerciseable at December 31, 1998..................... 889,008 $0.59 ========= =====
The fair market value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model based upon expected option lives of 5 years; risk free interest rate of between 4.49% and 5.49%; expected volatility of 0% and a dividend yield of 0%. The weighted-average remaining life of the options outstanding at December 31, 1998 is 5.67 years. For the period from March 10, 1998 (date of inception) to December 31, 1998, the Company recorded compensation expense and deferred compensation expense of $14,706 and $64,414, respectively, in connection with the grant of 92,000 options to employees, representing the difference between the fair value of the Company's Common Stock at the date of grant and the exercise price of the related options. F-15 68 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred compensation is presented as a reduction of stockholders' deficit and amortized over the vesting period, typically two years, of the applicable options. 9. COMMITMENTS AND CONTINGENCIES Effective February 1, 1999, the Company entered into a lease for its facilities, which expires on September 30, 2002. In addition, the Company maintains operating leases on certain equipment. Future minimum obligations under noncancellable operating leases at December 31, 1998 are as follows: For the year ending: 1999...................................................... $165,550 2000...................................................... 180,600 2001...................................................... 180,600 2002...................................................... 135,450 -------- $662,200 ========
Rent expense under its operating lease for its facilities for the period from March 10, 1998 (date of inception) to December 31, 1998 was $8,000 and includes the fair market value of warrants issued to purchase 40,000 shares of the Company's Common Stock at $0.59 per share in lieu of cash payments. As of December 31, 1998, the Company had entered into various marketing agreements with third parties whereby the third parties provide advertising services and database links to the Company's web sites. Fees to be paid by the Company under these agreements, which are generally cancellable with 60 days notice, are determined as fixed monthly payments, or are calculated on a per "click-through" basis, or as a percentage of net revenues, as defined in the related agreements. As of December 31, 1998, the Company had committed to approximately $456,000 in minimum payments under these agreements. Employment Agreement During 1999 the Company entered into an employment agreement with its Chairman and Chief Executive Officer. The agreement obligates the Company to pay an annual salary of $160,000 in 1999, $200,000 in 2000 and $250,000 in 2001. The Company will also pay a guaranteed bonus of $90,000 in 1999, $20,000 in 2000 ($40,000 if the Company has publicly traded shares) and $75,000 in 2001 ($150,000 if the Company has publicly traded shares). In addition, the Chairman and Chief Executive Officer was granted options to purchase 400,000 shares of Common Stock at an exercise price of $2.00 per share pursuant to the 1999 Plan. The shares vest in equal installment over 48 months and are exercisable until the earlier of five years or 90 days from the Chairman and Chief Executive Officer's termination of employment with the Company. F-16 69 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Legal Proceedings From time to time, the Company may be involved in various legal proceedings and other matters arising in the normal course of business. The Company currently has no outstanding legal proceedings. 10. SUBSEQUENT EVENTS Initial Public Offering The Company is pursuing an initial public offering of its Common Stock. The offering contemplates the sale of shares of Common Stock at an offering price to be determined before underwriting commissions and offering expenses. Facility Lease As discussed in Note 9, effective February 1, 1999, the Company entered into a 44 month lease for office space. Pursuant to the terms of the lease, the Company entered into a Standby Letter of Credit for $180,600 and deposited funds of $180,600 in a Certificate of Deposit as collateral. The Company's Chief Executive Officer is a partial guarantor for the lease. Issuance of Common Stock In January and February 1999, the Company sold 3,205,788 shares of its Common Stock at $1.81 per share for total proceeds of $5,395,000, net of issuance costs of $415,000. In addition, warrants to purchase 292,064 shares of the Company's Common Stock at $1.81 per share were issued to placement agents as part of these transactions. During April 1999, the Company sold 1,655,172 shares of common stock at a price of $1.81 per share for total proceeds of $2,850,000, net of issuance costs of $150,000. In addition, warrants to purchase 144,000 shares of the Company's Common Stock at $3.13 per share were distributed to the placement agent. In addition, during April 1999, the Company sold 1,220,656 shares of Common Stock at a price of $3.00 per share for total proceeds of $3,361,968. Stock Split On May 3, 1999, the Company enacted a four-for-one stock split of its Common Stock. Accordingly, all share and per share information in the accompanying financial statements has been retroactively restated to reflect the effect of the stock split. F-17 70 BIGSTAR ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Supplier Agreement In May 1999, the Company entered into a Strategic Marketing Agreement ("Supplier Agreement") with B&T. The Supplier Agreement expires in December 2000, but has an automatic renewal option for 24 months unless cancelled in writing by either party with ninety days notice prior to the end of the preceding term, and includes specific credit terms as defined in the agreement. In addition, the Company issued warrants to purchase 60,000 shares of the Company's Common Stock at a price of $4.00 per share, exercisable at any time over the next three years. F-18 71 - -------------------------------------------------------------------------------- Until , 1999, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- BIGSTAR.COM LOGO PRUDENTIAL SECURITIES - -------------------------------------------------------------------------------- 72 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by BigStar in connection with the sale of the securities being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq/NMS listing fee. SEC Registration Fee........................................ $12,788 NASD Filing Fee............................................. 5,100 Nasdaq/NMS Listing Fee...................................... * Printing Expenses........................................... * Legal Fees and Expenses..................................... * Accounting Fees and Expenses................................ * Blue Sky Fees and Expenses.................................. * Transfer Agent and Registrar Fees........................... * Miscellaneous............................................... * Total....................................................... $ * =======
- ------------------------- * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the Registrant. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The Registrant's Bylaws provides for indemnification by the Registrant of its directors, officers and employees in connection with any proceeding to the fullest extent permitted by the Delaware General Corporation Law. Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or (iv) for any transaction from which II-1 73 the director derived an improper personal benefit. The Registrant's certificate of incorporation provides for such limitation of liability. The Registrant intends to obtain directors and officers, insurance providing indemnification for the Registrant's directors, officers and employees for certain liabilities. Reference is also made to the underwriting agreement to be filed as Exhibit 1.1 to the registration statement for information concerning the underwriters' obligation to indemnify the Registrant and its officers and directors in certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following is a summary of the transactions by the Registrant during the past three years involving sales of the Registrant's securities that were not registered under the Securities Act: 1. In March 1998, in connection with our formation, we issued and sold (i) 2,200,000 shares of common stock at a purchase price of $0.0025 per share to David Friedensohn, (ii) 1,800,000 shares of common stock at a purchase price of $0.0025 per share to David Levitsky and (iii) 40,000 shares of common stock to Orrick, Herrington & Sutcliffe LLP for legal services performed in connection with our formation and $100.00 in consideration. 2. In March 1998, we issued and sold 325,200 shares of common stock to CounterPoint Capital Management, L.L.C. ("CounterPoint Capital Management"), CounterPoint Master L.L.C. and AJD Ventures, L.L.C. ("AJD") at a purchase price of $0.59 per share. 3. In March 1998, we issued a warrant to each of CounterPoint Capital Management and AJD to purchase 100,000 and 45,200 shares of common stock, respectively, at a price per share of $0.59, exercisable at any time prior to January 31, 1999. 4. In March 1998, we issued and sold 254,000 shares of common stock at a purchase price of $0.59 per share to Morton H. Meyerson. We also issued a warrant to Mr. Meyerson to purchase 254,000 shares of common stock at a price per share of $0.59, exercisable at any time prior to December 31, 1998. 5. In March 1998, we issued a warrant to Andrew J. Pickup to purchase 40,000 shares of common stock at a price per share of $0.59, exercisable at any time prior to December 31, 1999. 6. In March 1998, we issued and sold 243,392 shares of common stock at a purchase price of $0.59 per share to the following entities: Oscar Friedensohn Revocable Trust, Adele Friedensohn Revocable Trust, Richard A. Horsch, Jane Friedensohn and Herbert Levitsky. 7. In April 1998, we issued a warrant to D. Jonathan Merriman to purchase 100,000 shares of common stock at a price per share of $0.59, exercisable at any time prior to January 31, 2000. 8. In May 1998, we issued and sold 152,000 shares of common stock at a purchase price of $0.59 per share to Morton H. Meyerson. II-2 74 9. In July 1998, we issued a warrant to Paul Kagan to purchase 40,000 shares of common stock at a price per share of $1.45, exercisable at any time prior to December 31, 1999. 10. In July and August 1998, we issued and sold 894,968 shares of common stock at a purchase price of $1.45 per share to the following entities: Paul Kagan, Trinkaus & Burkhardt, B.F. & W. Realty Company, The Levitin Family Charitable Trust, Marshall M. Becker, IRA f/b/o Stanley S. Becker, DLJSC as Custodian, Kenneth R. Levine, BT Holdings, Inc., Howard Balter and Rachel Ben Simon. 11. In September 1998, we issued a warrant to each of Kenneth R. Levine and Marshall M. Becker to purchase 56,592 and 37,728 shares of common stock, respectively, at a price per share of $1.45. 12. In September 1998, we issued a warrant to purchase 140,000 shares of common stock to MovieFone, Inc. at a price per share of $1.45, exercisable at any time prior to September 22, 2001 and a warrant to purchase 200,000 shares of common stock at a price per share of $1.81, exercisable at any time prior to September 22, 2001. 13. In October 1998, we issued and sold 68,000 shares of common stock at a purchase price of $1.45 per share to Stephen J. Clearman. 14. In December 1998, we issued and sold 254,000 shares of common stock at a purchase price of $0.59 per share to Morton H. Meyerson upon Mr. Meyerson's exercise of his warrant to purchase common stock. 15. In January 1999, we issued a warrant to D. Jonathan Merriman to purchase 100,000 shares of common stock at a price per share of $1.81, exercisable at any time prior to January 1, 2002. 16. In January 1999, we issued and sold 100,000 and 45,200 shares of common stock at a purchase price of $0.59 per share to CounterPoint Capital Management and AJD, respectively, upon each entity's exercise of a warrant to purchase common stock. 17. In January 1999, we issued and sold 623,672 shares of common stock at a purchase price of $1.81 per share to the following entities: The Arel Company, Profit Sharing Plan & Trust of Samuel E. Benjamin, MD, Four Square Investments, LLC, Rentrak, Jeffrey Greenberg, Robert H. Kriessman, James G. Kreissman, Douglas M. McGraime, James R. Eddings, Kiam Interests, Ltd., Steven Stickler, Roger C. Dickinson, David G. Sandelovsky, Dryden Advisory Group LLC, Brivis Investments, Ltd., Andrew Gershon, Ted. M. Goldberg, Jonathan Merriman, David G. Catlin, John A. Johnson IRA, Nazareth Festekjian and Andrew Fleiss. 18. In January 1999, we issued a warrant to Andrew J. Pickup to purchase 40,000 shares of common stock at a price per share of $1.81, exercisable at any time prior to January 1, 2002. 19. In January 1999, we issued warrants to purchase 53,068 shares of common stock for services rendered at a price per share of $1.81, exercisable at any time prior to January 29, 2003 to the following entities: First Equity II-3 75 Capital Securities, Inc. ("First Equity"), Kenneth R. Levine and Marshall M. Becker. 20. In February 1999, we issued warrants to purchase 238,996 shares of common stock for services rendered at a price per share of $1.81, exercisable at any time prior to February 18, 2003 to the following entities: First Equity, Kenneth R. Levine, Marshall M. Becker, Van Kasper & Company and Yee Desmond Schroeder & Allen, Inc. 21. In February 1999, we issued and sold 2,582,116 shares of common stock at a purchase price of $1.81 per share to the following entities: Steven Glassman, Harald A. Kennedy, Barry Plost, George Furla, Thomas A. Biebel Living Trust U/A/O 7/1/92 as amended, Herbert B. Weaver Jr., Paul Kagan, Magnus J. Le'Vicki, John O. Harry, Gabelli Funds, Inc., Hans Ullmark & Marie-Louise Ullmark, Mats H. Nilsson, Beth Glassman IRA Delaware Charter Custodian, Emerging Technology Limited, Howard Schraub, Herman O. Haenert IRA Delaware Charter Trust, Thomas N. Barreca, Thomas Glendahl, Nordiska Fondkommission AB, Mans Palmstierna, Michael Texido, Brian Kucich, Jack Malinow, Talisman Capital Inc., Talisman Capital Opportunity Fund Ltd., Ronald Altbach & Elka Altbach, Global Undervalued Securities Fund, L.P., Guarantee & Trust Co. TTEE FBO Brian M. Kucich, Todd Jadwin, Global Strategic Holdings Limited, Ocean Strategic Holdings Limited, Wangary Associates S.A., Zebra Strategic Holdings Limited, Barbara Miller, Gem Management Limited, Gary Najarian, CommVest LLC, John Mitnick, Herbert Levitsky, Joseph F. Wayland, Michael V. DeFelice, Scot Powell French, Vanderlip Children's 1998 Trust, Henrik N. Vanderlip, Ibra B. Morales, Peter N. Friedensohn, MD, Lance Stuart Korman, I. Douglas Sherman, DLJ & P Limited Partnership, Lars Enochson, Successway Holdings Ltd., Ronald Nash, Herbert Lapidus, Gaynor Limited, Marvin S. Rosen, Charles Schwab & Co. Inc. FBO Carolyn Scanlan IRA, Stephen Besen, Chatterjee Fund Management L.P., Gem Singapore Pte. Ltd., Richard Cohen and Michael Groveman. 22. In April 1999, we issued a warrant to Icon International, Inc. to purchase 250,000 shares of common stock at a price per share of $2.50, exercisable at any time prior to March 31, 2001. 23. In April 1999, we issued and sold 1,655,172 shares of common stock at a purchase price of $1.81 per share to Storie Partners, L.P. ("Storie") and issued a warrant to Storie to purchase an additional 240,000 shares of common stock at a price per share of $2.50, exercisable anytime prior to April 1, 2003. 24. In April 1999, we issued a warrant to William Lansing to purchase 50,000 shares of common stock at a price per share of $2.00, exercisable at any time prior to April 20, 2003. 25. In April 1999, we issued and sold 1,220,656 shares of common stock at a purchase price of $3.00 per share to the following entities: JJJ Investment Company, Jan Carlzon, Stephen Cyrus Freidheim, Carl Palmstierna, Randi II-4 76 Slifka, Paul Kagan, Jih-Forg Kao, Robert London, Dennis Mykytyn and Peter Tornquist. 26. In April 1999, we issued a warrant to First Security Van Kasper & Company to purchase 144,000 shares of common stock at a price per share of $3.125, exercisable at any time prior to April 20, 2002. 27. In May 1999, we issued a warrant to Baker & Taylor, Inc. to purchase 60,000 shares of common stock at a price per share of $4.00, exercisable at any time prior to May 3, 2002. 28. In May 1999, we issued to Earthlink Network, Inc. warrants to purchase 70,000 shares of common stock at a price per share of $10.00. Exemption from registration for the transactions described above was claimed pursuant to Section 4(2) of the Securities Act of 1933, as amended, regarding transactions by the issuer not involving a public offering, in that these transactions were made, without general solicitation or advertising, to sophisticated investors with access to all relevant information necessary to evaluate these investments and who represented the Registrant to that the shares were being acquired for investment. ITEM 16. EXHIBITS. (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 Certificate of Amendment to Certificate of Incorporation. 3.3 Bylaws of the Registrant. 4.1 Form of Registrant's Common Stock Certificate.* 5.1 Opinion of Orrick, Herrington & Sutcliffe LLP.* 10.1 Form of Indemnification Agreement. 10.2 1998 Stock Option and Incentive Plan. 10.3 1999 Stock Option and Incentive Plan. 10.4 Employment Agreement, dated March 15, 1999 by and between David Friedensohn and the Registrant. 10.5 Distribution Agreement dated February 18, 1998 by and between Baker & Taylor and the Registrant.+ 10.6 Strategic Marketing Agreement dated as of May 1999 by and between Baker & Taylor and the Registrant.+ 10.7 Rights Agreement among the Registrant and each of the stockholders identified therein.
II-5 77
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.8 Agreement of Lease dated February, 1999 between Seaport Associates, LP and the Registrant. 23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit 5).* 23.2 Consent of Arthur Andersen LLP, Independent Public Accountants. 24 Power of Attorney (included on page II-7). 27 Financial Data Schedule.
- ------------------------- * To be filed by amendment. + Confidential treatment has been requested for certain portions of these exhibits. Omitted portions have been filed separately with the Commission. (b) FINANCIAL STATEMENT SCHEDULES Schedules not listed above have been omitted because the information required to be shown therein is not applicable or is shown in the financial statements or notes. II-6 78 ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. If 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 of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant undertakes that: (1) For purposes of determining any liability under the 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 Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the 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. (3) It will provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-7 79 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 6th day of May 1999. BIGSTAR ENTERTAINMENT, INC. By: /s/ DAVID FRIEDENSOHN ----------------------------------- David Friedensohn Chairman of the Board and Chief Executive Officer II-8 80 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures appear below each severally constitutes and appoints David Friedensohn and David Levitsky, and each of them, as true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for them in their name, place and stead, in any and all capacities, to sign any and all amendments (including pre-effective and post-effective amendments) to this registration statement and to sign any registration statement (and any post-effective amendments) relating to the same offering as this registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all which said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do, or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ---- ----- ---- /s/ DAVID FRIEDENSOHN Chairman and Chief Executive May 6, 1999 - --------------------------------------------------- Officer (principal executive David Friedensohn officer) /s/ DAVID LEVITSKY Executive Vice President, General May 6, 1999 - --------------------------------------------------- Manager and Director David Levitsky /s/ ROBERT YINGLING Chief Financial Officer May 6, 1999 - --------------------------------------------------- (principal accounting officer) Robert Yingling /s/ D. JONATHAN MERRIMAN Director May 6, 1999 - --------------------------------------------------- D. Jonathan Merriman /s/ WILLIAM LANSING Director May 6, 1999 - --------------------------------------------------- William Lansing /s/ STEVEN A. LEDGER Director May 6, 1999 - --------------------------------------------------- Steven A. Ledger
II-9 81 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE I To BigStar Entertainment, Inc: We have audited, in accordance with generally accepted auditing standards, the financial statements of BigStar Entertainment, Inc. included in this registration statement and have issued our report thereon dated May 5, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. This schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York May 5, 1999 S-1 82 SCHEDULE II BIGSTAR ENTERTAINMENT, INC. SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BEGINNING OF COSTS AND OTHER BALANCE AT PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD ------------ ---------- ---------- ---------- ------------- For the period March 10, 1998 (date of inception) to December 31, 1998 Allowance for sales returns................. $ -- $25,000 $ -- $ -- $25,000 ======= ======= ======= ======= ======= Allowance for bad debt..... $ -- $ 5,000 $ -- $ -- $ 5,000 ======= ======= ======= ======= =======
S-2 83 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 Certificate of Amendment to Certificate of Incorporation. 3.3 Bylaws of the Registrant. 4.1 Form of Registrant's Common Stock Certificate.* 5.1 Opinion of Orrick, Herrington & Sutcliffe LLP.* 10.1 Form of Indemnification Agreement. 10.2 1998 Stock Option and Incentive Plan 10.3 1999 Stock Option and Incentive Plan. 10.4 Employment Agreement, dated March 15, 1999 by and between David Friedensohn and the Registrant. 10.5 Distribution Agreement by and between Baker & Taylor and the Registrant.+ 10.6 Strategic Marketing Agreement dated as of May 1999 by and between Baker & Taylor and the Registrant.+ 10.7 Rights Agreement among the Registrant and each of the stockholders identified therein. 10.8 Agreement of Lease dated February, 1999 between Seaport Associates, LP and the Registrant. 23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit 5).* 23.2 Consent of Arthur Andersen LLP, Independent Public Accountants. 24 Power of Attorney (included on page II-9). 27 Financial Data Schedule.
- ------------------------- * To be filed by amendment. + Confidential treatment has been requested for certain portions of these exhibits. Omitted portions have been filed separately with the Commission. S-3 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 BIGSTAR ENTERTAINMENT, INC. _______Shares(1) Common Stock FORM OF UNDERWRITING AGREEMENT __________ __, 1999 PRUDENTIAL SECURITIES INCORPORATED [insert names of any co-managers] As Representative[s] of the several Underwriters [c/o Prudential Securities Incorporated] One New York Plaza New York, New York 10292 Dear Sirs: BigStar Entertainment, Inc., a Delaware corporation (the "Company"), hereby confirms its agreement with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly authorized to act as representatives (in such capacities, the "Representatives"), as set forth below. If you are the only Underwriters, all references herein to the Representatives shall be deemed to be to the Underwriters. 1. Securities. Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the several Underwriters an aggregate of ___ shares (the "Firm Securities") of the Company's Common Stock, par value $.001 per share ("Common Stock"). The Company also proposes to issue and sell to the several Underwriters not more than _______________ additional shares of Common Stock if requested by the Representatives as provided in Section 3 of this Agreement. Any and all shares of Common Stock to be purchased by the Underwriters pursuant to such option are referred to herein as the "Option Securities", and the Firm Securities and any Option Securities are collectively referred to herein as the "Securities". 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the several Underwriters that: (a) A registration statement on Form S-1 (File No. 333-_________) with respect to - -------- (1) Plus an option to purchase from BigStar Entertainment, Inc. up to _____________ additional shares to cover over-allotments. 2 the Securities, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the Securities, that shall identify the Preliminary Prospectus (as hereinafter defined) that it supplements containing such information as is required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not rely on Rule 434 under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of this sentence as have been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional Securities, which registration shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means the registration statement initially filed relating to the Securities, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act (including the Registration Statement and any Preliminary Prospectus or Prospectus incorporated therein at the time such Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means: (A) if the Company relies on Rule 434 under the Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act; or (C) if the Company does not rely on Rule 434 under the Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Act, the prospectus included in the Registration Statement; and the term "Term Sheet" means any term sheet that satisfies the requirements of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. 2 3 (b) The Commission has not issued any order preventing or suspending use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (b) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. (c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has not been declared effective (i) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. (d) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth or results of operations of the Company (a "Material Adverse Effect"). The Company does not have any subsidiaries. (e) The Company has full power (corporate and other) to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus; and the Company has full power (corporate and other) to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. 3 4 (f) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Firm Securities and the Option Securities have been duly authorized and at the Firm Closing Date or the related Option Closing Date (as the case may be), after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable. No holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities, and no holder of securities of the Company has any right which has not been fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Act in the public offering contemplated by this agreement. (g) The capital stock of the Company conforms to the description thereof contained in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (h) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding (i) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (ii) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations, or (iii) obligations of the Company to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (i) The financial statements and schedules of the Company included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the financial position of the Company and the results of operations and changes in financial condition as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein). The selected financial data set forth under the caption "Selected Financial Data" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present, on the basis stated in the Prospectus (or such Preliminary Prospectus), the information included therein. (j) Arthur Andersen LLP ("Andersen"), who have certified certain financial statements of the Company and delivered their report with respect to the audited financial statements and schedules included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence the most recent Preliminary Prospectus) are independent public accountants as required by the Act and the applicable rules and regulations thereunder. (k) The execution and delivery of this Agreement have been duly authorized by the Company and this Agreement has been duly executed and delivered by the Company, and is the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. (l) No legal or governmental proceedings are pending to which the Company is a party or to which the property of the Company is subject that is required to be described in the Registration Statement or the Prospectus and is not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and no such proceedings have been threatened against the Company with respect to any of its properties; and no contract or other 4 5 document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or filed as required. (m) The issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or blue sky laws and, if the registration statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company is a party or by which the Company or any of its properties are bound, or the charter documents or by-laws of the Company, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company. (n) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the Company has not sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding and there has not been any Material Adverse Effect, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (o) The Company has not, directly or indirectly, (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (p) The Company has not distributed and, prior to the later of (i) the Closing Date and (ii) the completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or other materials, if any permitted by the Act. (q) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (i) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). 5 6 (r) The Company has good and marketable title to all items of real property and marketable title to all personal property owned by it, in each case free and clear of any security interests, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company, and any real property and buildings held under lease by the Company are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company, in each case except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (s) No labor dispute with the employees of the Company exists or is threatened or imminent that could result in a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (t) The Company owns and has the unrestricted right to use all material patents, patent applications, trademarks, service marks, trade names, licenses, copyrights, trade secrets, know-how (including all other unpatented and/or unpatentable proprietary or conditional information, systems or procedures), inventions, designs, processes, works of authorship, computer programs and technical data and information (collectively herein "intellectual property") that are necessary for the development, manufacture, operation, sale or use of products or services sold or provided or proposed to be sold or provided by the Company, free and clear of and without violating any right, lien, or claim of others, including without limitation, former employers of its employees, and the Company has not received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect, except as described in or contemplated by the Prospectus and any Integrated Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (u) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which it is engaged; the Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (v) The Company will conduct its operations in a manner that will not subject it to registration as an investment company under the Investment Company Act of 1940, as amended, and this transaction will not cause the Company to become an investment company subject to registration under such Act. (w) The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect, except as described in or contemplated by the (or, if the Prospectus is not in 6 7 existence, the most recent Preliminary Prospectus). (x) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a Material Adverse Effect on the Company) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (y) The statistical and market-related data included in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) are derived from sources which the Company believes to be reliable and accurate in all material respects or represents the Company's good faith estimates that are made on the basis of data derived from such sources. (z) Each certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (aa) The Company does not own any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (bb) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (cc) No default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default in the due performance of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company is a party or by which the Company or any of its properties are bound or may be affected. 3. Purchase, Sale and Delivery of the Securities. (a) On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase from the Company, at a purchase price of $________ per share, the number of Firm Securities set forth opposite the name of such Underwriter in Schedule 1 hereto. One or more certificates in definitive form for the Firm Securities that the several Underwriters have agreed to purchase hereunder, and in such denomination or denominations and registered in such name or names as the Representatives request upon notice to the Company at least 48 hours prior to the Firm Closing Date, shall be delivered by or on behalf of the Company to the Representatives for the respective accounts of the Underwriters, against payment by or on behalf of the Underwriters of the purchase price therefor by wire transfer in same-day funds (the "Wired Funds") to the 7 8 account of the Company. Such delivery of and payment for the Firm Securities shall be made at the offices of Schulte Roth & Zabel LLP, 900 Third Avenue, New York, New York 10022 at 9:30 A.M., New York time, on __________, 1999, or at such other place, time or date as the Representatives and the Company may agree upon or as the Representatives may determine pursuant to Section 9 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date". The Company will make such certificate or certificates for the Firm Securities available for checking and packaging by the Representatives at the offices in New York, New York of the Company's transfer agent or registrar or of Prudential Securities Incorporated at least 24 hours prior to the Firm Closing Date. (b) For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Securities as contemplated by the Prospectus, the Company hereby grants to the several Underwriters an option to purchase, severally and not jointly, the Option Securities. The purchase price to be paid for any Option Securities shall be the same price per share as the price per share for the Firm Securities set forth above in paragraph (a) of this Section 3. The option granted hereby may be exercised as to all or any part of the Option Securities from time to time within thirty (30) days after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading). The Underwriters shall not be under any obligation to purchase any of the Option Securities prior to the exercise of such option. The Representatives may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Company setting forth the aggregate number of Option Securities as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Securities. Any such date of delivery shall be determined by the Representatives but shall not be earlier than two business days or later than five business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representatives and Company may agree upon or as the Representatives may determine pursuant to Section 9 hereof, is herein called the "Option Closing Date" with respect to such Option Securities. Upon exercise of the option as provided herein, the Company shall become obligated to sell to each of the several Underwriters, and, subject to the terms and conditions herein set forth, each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company, the same percentage of the total number of the Option Securities as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Securities, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Securities, one or more certificates in definitive form for such Option Securities, and payment therefor, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in paragraph (a) of this Section 3, except that reference therein to the Firm Securities and the Firm Closing Date shall be deemed, for purposes of this paragraph (b), to refer to such Option Securities and Option Closing Date, respectively. (c) The Company hereby acknowledges that the wire transfer by or on behalf of the Underwriters of the purchase price for any Shares does not constitute closing of a purchase and sale of the Shares. Only execution and delivery of a receipt for Shares by the Underwriters indicates completion of the closing of a purchase of the Shares from the Company. Furthermore, in the event that the Underwriters wire funds to the Company prior to the completion of the closing of a purchase of Shares, the Company hereby acknowledges that until the Underwriters execute and deliver a receipt for the Shares, by facsimile or otherwise, the Company will not be entitled to the wired funds and shall return the wired funds to the 8 9 Underwriters as soon as practicable (by wire transfer of same-day funds) upon demand. In the event that the closing of a purchase of Shares is not completed and the wire funds are not returned by the Company to the Underwriters on the same day the wired funds were received by the Company, the Company agrees to pay to the Underwriters in respect of each day the wire funds are not returned by it, in same-day funds, interest on the amount of such wire funds in an amount representing the Underwriters' cost of financing as reasonably determined by Prudential Securities Incorporated. (d) It is understood that any of you, individually and not as one of the Representatives, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Securities to be purchased by such Underwriter or Underwriters. No such payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. 4. Offering by the Underwriters. Upon your authorization of the release of the Firm Securities, the several Underwriters propose to offer the Firm Securities for sale to the public upon the terms set forth in the Prospectus. 5. Covenants of the Company. The Company covenants and agrees with each of the Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto to become effective as promptly as possible. If required, the Company will file the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act. During any time when a prospectus relating to the Securities is required to be delivered under the Act, the Company (i) will comply with all requirements imposed upon it by the Act and the rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (ii) will not file with the Commission the prospectus, Term Sheet or the amendment referred to in the second sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus, Term Sheet or any amendment to the Registration Statement or any Rule 462(b) Registration Statement of which the Representatives previously have been advised and furnished with a copy for a reasonable period of time prior to the proposed filing and as to which filing the Representatives shall not have given their consent. The Company will prepare and file with the Commission, in accordance with the rules and regulations of the Commission, promptly upon request by the Representatives or counsel for the Underwriters, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Securities by the several Underwriters, and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representatives of each such filing or effectiveness. (b) The Company will advise the Representatives, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Original Registration Statement or any Rule 462(b) 9 10 Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding for any such purpose or (iv) any request made by the Commission for amending the Original Registration Statement or any Rule 462(b) Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c) The Company will arrange for the qualification of the Securities for offering and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Securities, provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. (d) If, at any time prior to the later of (i) the final date when a prospectus relating to the Securities is required to be delivered under the Act or (ii) the Option Closing Date, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the rules or regulations of the Commission thereunder, the Company will promptly notify the Representatives thereof and, subject to Section 5(a) hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. (e) The Company will, without charge, provide (i) to the Representatives and to counsel for the Underwriters a signed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto) a conformed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto) or any Rule 462(b) Registration Statement, certified by the Secretary or an Assistant Secretary of the Company to be true and complete copies thereof as filed with the Commission by electronic transmission, (ii) to each other Underwriter, a conformed copy of such registration statement or any Rule 462(b) Registration Statement and each amendment thereto (in each case without exhibits thereto) and (iii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request; without limiting the application of clause (iii) of this sentence, the Company, not later than (A) 6:00 PM, New York City time, on the date of determination of the public offering price, if such determination occurred at or prior to 10:00 A.M., New York City time, on such date or (B) 2:00 PM, New York City time, on the business day following the date of determination of the public offering price, if such determination occurred after 10:00 A.M., New York City time, on such date, will deliver to the Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as the Representatives may reasonably request for purposes of confirming orders that are expected to settle on the Firm Closing Date. (f) The Company, as soon as practicable, will make generally available to its 10 11 securityholders and to the Representatives a consolidated earnings statement of the Company that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (g) The Company will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Prospectus. (h) The Company will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date hereof, except (i) pursuant to this Agreement, (ii) for issuances pursuant to the exercise of employee stock options outstanding on the date hereof, (iii) pursuant to the Company's dividend reinvestment plan or (iv) pursuant to the terms of convertible securities of the Company outstanding on the date hereof. (i) The Company will not, directly or indirectly, (i) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (j) The Company will obtain the agreements described in Section 7(f) hereof prior to the Firm Closing Date. (k) If at any time during the 25-day period after the Registration Statement becomes effective or the period prior to the Option Closing Date, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (m) The Company will cause the Securities to be duly included for quotation on the Nasdaq Stock Market's National Market (the "Nasdaq National Market") prior to the Firm Closing Date. The Company will ensure that the Securities remain included for quotation on the Nasdaq National Market following the Firm Closing Date. 6. Expenses. The Company will pay all costs and expenses incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 11 11 12 hereof, including all costs and expenses incident to (i) the printing or other production of documents with respect to the transactions, including any costs of printing the registration statement originally filed with respect to the Securities and any amendment thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company, (iv) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, including transfer agent's and registrar's fees, (v) the qualification of the Securities under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters relating thereto, (vi) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities, (vii) any quotation of the Securities on the Nasdaq National Market, (viii) any meetings with prospective investors in the Securities (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters) and (ix) advertising relating to the offering of the Securities (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters). If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied, because this Agreement is terminated pursuant to Section 11 hereof or because of any failure, refusal or inability on the part of the Company to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. The Company shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. 7. Conditions of the Underwriters' Obligations. The obligations of the several Underwriters to purchase and pay for the Firm Securities shall be subject, in the Representatives' sole discretion, to the accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company of its covenants and agreements hereunder and to the following additional conditions: (a) If the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Original Registration Statement or such amendment and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been declared effective not later than the earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to the registration statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2), or with respect to the Original Registration Statement, or such later time and date as shall have been consented to by the Representatives; if required, the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the 12 13 knowledge of the Company or the Representatives, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b) The Representatives shall have received an opinion, dated the Firm Closing Date, of Orrick, Herrington & Sutcliffe, LLP, counsel for the Company, to the effect that: (i) the Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a Material Adverse Effect; (ii) the Company has corporate power to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus, and the Company has the corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it; (iii) the Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus; all of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities; the Firm Securities have been duly authorized by all necessary corporate action of the Company and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable; the Securities have been duly included for trading on the Nasdaq National Market; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities; and no holders of securities of the Company are entitled to have such securities registered under the Registration Statement; (iv) the statements set forth under the headings "Description of Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such statements purport to summarize certain provisions of the capital stock of the Company, provide a fair summary of such provisions; and the statements set forth under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Management," "Certain Transactions," "Principal Stockholders" and "Legal Proceedings" in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, provide a fair summary of such legal matters, documents and proceedings; (v) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement has been duly executed and delivered by the Company; (vi) (A) no legal or governmental proceedings are pending to which the Company is a party or to which the property of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not described 13 14 therein, and, to the best knowledge of such counsel, no such proceedings have been threatened against the Company or with respect to any of its properties and (B) no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (vii) the issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under the Federal securities laws, state securities or blue sky laws, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, known to such counsel, to which the Company is a party or by which the Company or any of its properties are bound, or the charter documents or by-laws of the Company, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company; (viii) the Registration Statement is effective under the Act; any required filing of the Prospectus, or any Term Sheet that constitutes a part thereof, pursuant to Rules 434 and 424(b) has been made in the manner and within the time period required by Rules 434 and 424(b); and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best knowledge of such counsel, are contemplated by the Commission; (ix) the Registration Statement originally filed with respect to the Securities and each amendment thereto, any Rule 462(b) Registration Statement and the Prospectus (in each case, other than the financial statements and other financial information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the rules and regulations of the Commission thereunder; (x) if the Company elects to rely on Rule 434, the Prospectus is not "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time of its effectiveness or an effective post-effective amendment thereto (including such information that is permitted to be omitted pursuant to Rule 430A); (xi) the Company is not an investment company, as such term is defined in the Investment Company Act of 1940, as amended, and this transaction will not cause the Company to become an investment company, subject to registration under such Act; (xii) the form of stock certificate for the Company's Firm Securities conforms to the requirements of the Delaware General Corporation Law, the Company's Certificate of Incorporation and ByLaws and applicable Nasdaq requirements and has been duly authorized and approved by the Board of Directors of the Company. Such counsel shall also state that they have no reason to believe that the Registration 14 15 Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. (c) The Representatives shall have received an opinion, dated the Firm Closing Date, of Schulte Roth & Zabel LLP, counsel for the Underwriters, with respect to the issuance and sale of the Firm Securities, the Registration Statement and the Prospectus, and such other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (d) The Representatives shall have received from Andersen a letter or letters dated, respectively, the date hereof and the Firm Closing Date, in form and substance satisfactory to the Representatives, to the effect that: (i) they are independent accountants with respect to the Company within the meaning of the Act and the applicable rules and regulations thereunder; (ii) in their opinion, the audited financial statements and schedules examined by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iii) on the basis of carrying out certain specified procedures (which do not constitute an examination made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (iii), a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company and inquiries of certain officials of the Company who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that (a) at a specific date not more than five business days prior to the date of such letter, there was any change in the capital stock, increase in long-term debt or decrease in net current assets or stockholders' equity of the Company, in each case compared with amounts shown on the December 31, 1998 balance sheet included in the Registration Statement and the Prospectus, or for the period from January 1, 1999 to such specified date there were any decreases, as compared with the corresponding period in the prior year, in revenues, net income, net income before income taxes or total or per share amounts of net income of the Company, except in all instances for changes, decreases or increases set forth in such letter; and (iv) they have carried out certain specified procedures, not constituting an 15 16 audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and are included in the Registration Statement and the Prospectus under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Capitalization," "Dilution," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Management," "Principal Stockholders," "Certain Transactions," and "Shares Eligible for Future Sale" and have compared such amounts, percentages and financial information with such records of the Company and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation. In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that (A) such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary, and (B) such changes, decreases or increases do not, in the sole judgment of the Representatives, make it impractical or inadvisable to proceed with the purchase and delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this paragraph (d) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. (e) The Representatives shall have received a certificate, dated the Firm Closing Date, of David Friedensohn and Robert Yingling, to the effect that: (i) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of the Company's knowledge, are contemplated by the Commission; and (iii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any Material Adverse Effect, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). (f) The Representatives shall have received from each person who is a director or 16 17 officer of the Company or who owns outstanding shares of Common Stock an agreement to the effect that such person will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of an option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date of this Agreement. (g) On or before the Firm Closing Date, the Representatives and counsel for the Underwriters shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. (h) Prior to the commencement of the offering of the Securities, the Securities shall have been included for trading on the Nasdaq National Market. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representatives and counsel for the Underwriters. The Company shall furnish to the Representatives such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representatives and counsel for the Underwriters shall reasonably request. The respective obligations of the several Underwriters to purchase and pay for any Option Securities shall be subject, in their discretion, to each of the foregoing conditions to purchase the Firm Securities, except that all references to the Firm Securities and the Firm Closing Date shall be deemed to refer to such Option Securities and the related Option Closing Date, respectively. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company in Section 2 of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Securities under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"), (iii) the omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any 17 18 amendment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading or (iv) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials provided by the Company or based upon written information furnished by or on behalf of the Company including, without limitation, slides, videos, films, tape recordings, used in connection with the marketing of the Securities, including without limitation, statements communicated to securities analysts employed by the Underwriters, and will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein; and provided, further, that the Company will not be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5(d) and (e) of this Agreement. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company will not, without the prior written consent of the Underwriter or Underwriters purchasing, in the aggregate, more than fifty percent (50%) of the Securities, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Underwriter or any person who controls any such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary 18 19 Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein: and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or any action in respect thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representatives in the case of paragraph (a) of this Section 8, representing the indemnified parties under such paragraph (a) who are parties to such action or actions) or (ii) the indemnifying party does not promptly retain counsel satisfactory to the indemnified party or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, 19 20 claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (d). Notwithstanding any other provision of this paragraph (d), no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the total public offering price of the Securities purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed by the provisions of the Prudential Securities Incorporated Master Agreement Among Underwriters. For purposes of this paragraph (d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company. 9. Default of Underwriters. If one or more Underwriters default in their obligations to purchase Firm Securities or Option Securities hereunder and the aggregate number of such Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Securities or Option Securities to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Securities by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Securities or Option Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Securities that is more than ten percent of the aggregate number of Firm Securities or Option Securities, as the case may be, to be purchased by all of the Underwriters at such time 20 21 hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives) of the Securities with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 10 hereof. In the event of any default by one or more Underwriters as described in this Section 9, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 3 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Securities or Option Securities, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 10. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Securities. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 11. Termination. (a) This Agreement may be terminated with respect to the Firm Securities or any Option Securities in the sole discretion of the Representatives by notice to the Company given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing Date or such Option Closing Date, respectively, (i) the Company shall have, in the sole judgment of the Representatives, sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any material adverse change, or any development involving a prospective material adverse change (including without limitation a change in management or control of the Company), in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (ii) trading in the Common Stock shall have been suspended by the Commission or the Nasdaq National Market or trading in securities generally on the New York Stock Exchange or Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on either such exchange or market system; (iii) a banking moratorium shall have been declared by New York or United States authorities; or (iv) there shall have been (A) an outbreak or escalation of hostilities between 21 22 the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the sole judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. (b) Termination of this Agreement pursuant to this Section 11 shall be without liability of any party to any other party except as provided in Section 10 hereof. 12. Information Supplied by Underwriters. The statements set forth under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter through the Representatives to the Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters confirm that such statements (to such extent) are correct. 13. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to Prudential Securities Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity Transactions Group; and if sent to the Company, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to the Company at 19 Fulton Street, 5th Floor, New York, New York 10038, Attention: Robert Yingling. 14. Successors. This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a successor because of such purchase. 15. Applicable Law. The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any provisions relating to conflicts of laws. 16. Consent to Jurisdiction and Service of Process. All judicial proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of New York, and by execution and delivery of this Agreement, the Company accepts for itself and in connection with its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. The Company designates and appoints ____________, 19 22 23 Fulton Street, 5th Floor, New York, New York 10038, and such other persons as may hereafter be selected by the Company irrevocably agreeing in writing to so serve, as its agent to receive on its behalf, service of all process in any such proceedings, in any such court, such service being hereby acknowledged by the Company to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to the Company at its address provided in Section 13 hereof; provided, however, that, unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Company refuses to accept service, the Company hereby agrees that service of process sufficient for personal jurisdiction in any action against the Company in the State of New York may be made by registered or certified mail, return receipt requested, to the Company at its address provided in Section 13 hereof, and the Company hereby acknowledges that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Underwriter to bring proceedings against the Company in the courts of any other jurisdiction. 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company and each of the several Underwriters. Very truly yours, BIGSTAR ENTERTAINMENT INC. By Name: Title: 23 24 The foregoing Agreement is hereby confirmed and accepted as of the date first above written. PRUDENTIAL SECURITIES INCORPORATED [Insert names of any co-managers] By PRUDENTIAL SECURITIES INCORPORATED By Name: Jean-Claude Canfin Title: Managing Director For itself and on behalf of the Representatives. 24 25 SCHEDULE 1 UNDERWRITERS
Underwriter Number of Firm Securities to be Purchased ------------ Prudential Securities Incorporated....... [insert names of other Underwriters] --------------- Total ..............
25 EX-3.1 3 CERTIFICATE OF INCORPORATION OF THE REGISTRANT 1 CERTIFICATE OF INCORPORATION OF BIGSTAR ENTERTAINMENT, INC. ARTICLE I The name of the corporation is BigStar Entertainment, Inc. ARTICLE II The address of the registered office of the corporation in the State of Delaware is 15 East North Street, Dover, Delaware 19901. The name of its registered agent at that address is Incorporating Services, Ltd. ARTICLE III The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV The total number of shares of all classes of stock which the corporation has authority to issue is Fifteen Million (15,000,000) shares, consisting of two classes: Ten Million (10,000,000) shares of Common Stock, $0.001 par value per share, and Five Million (5,000,000) shares of Preferred Stock, $0.001 par value per share. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article IV, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series and the voting powers thereof, full or limited, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights to priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and if so, the terms of such voting rights; 2 (d) Whether that series shall have conversion privileges, and if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences and limitations of that series. Except as otherwise expressly provided in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article IV, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board of Directors without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, including, without limitation, voting rights, dividend rights, liquidation rights, redemption rights and conversion rights, senior to, junior to or pari passu with the rights of the Common Stock, the Preferred Stock, or any future class or series of Preferred Stock or Common Stock. ARTICLE V The Board of Directors of the corporation shall have the power to adopt, amend or repeal Bylaws of the corporation, but the stockholders may make additional Bylaws and may alter or repeal any Bylaw whether adopted by them or otherwise. ARTICLE VI Election of directors need not be by written ballot except and to the extent the Bylaws of the corporation shall so provide. ARTICLE VII To the fullest extent permitted by law, no director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Without limiting the effect of the preceding sentence, if the Delaware General Corporation Law is hereafter amended to authorized the further elimination or limitation of the liability of a director, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. 2 3 Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VII, shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision. ARTICLE VIII The name and mailing address of the incorporator is as follows: Mr. David Friedensohn 201 West 92nd Street, Apt. 3B New York, NY 10025 The undersigned incorporator hereby acknowledges that the foregoing certificate is his act and deed and that the facts stated herein are true. Dated: February 26, 1998 /s/ David Friedensohn --------------------------------- David Friedensohn, Incorporator 3 EX-3.2 4 CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORP. 1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF BIGSTAR ENTERTAINMENT, INC. The undersigned, for the purpose of increasing the authorized capital stock of BIGSTAR ENTERTAINMENT, INC., a Delaware corporation (the "Corporation"), and effectuating a four-for-one stock split of the capital stock of the Corporation, does hereby certify that this Certificate of Amendment of Certificate of Incorporation has been made and effected in accordance with Section 242 of the General Corporation Law of the State of Delaware and that: FIRST: The name of the corporation is BIGSTAR ENTERTAINMENT, INC. SECOND: Effective immediately, the first paragraph of Article IV of the Corporation's Certificate of Incorporation is hereby amended and restated as follows: The total number of shares of stock which the corporation has authorized to issue is 50,000,000 shares, consisting of two classes: 40,000,000 shares of Common Stock, $0.001 par value per share, and 10,000,000 shares of Preferred Stock, $0.001 par value per share. Upon amendment of this article to read as herein set forth, each outstanding share is split and converted into four (4) shares. * * * * * 2 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment of Certificate of Incorporation to be signed as of the 30th day of April, 1999, by its Chief Executive Officer, who hereby affirms and acknowledges, under penalty of perjury, that this Certificate is the act and deed of the Corporation and that the facts stated herein are true. BIGSTAR ENTERTAINMENT, INC. By: /s/ David Friedensohn -------------------------- David Friedensohn Chief Executive Officer 3 CERTIFICATION OF BYLAWS OF BIGSTAR ENTERTAINMENT, INC. (A DELAWARE CORPORATION) KNOW ALL BY THESE PRESENTS: I, David Levitsky, certify that I am Secretary of BigStar Entertainment, Inc., a Delaware corporation (the "Company"), that I am duly authorized to make and deliver this certification, that the attached Bylaws are a true and correct copy of the Bylaws of the Company in effect as of the date of this certificate. Dated: March 3, 1998 /s/ David Levitsky -------------------------------- David Levitsky, Secretary EX-3.3 5 BYLAWS OF THE REGISTRANT 1 BYLAWS OF BIGSTAR ENTERTAINMENT, INC. ARTICLE I STOCKHOLDERS SECTION 1.1 Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. SECTION 1.2 Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by the Board of Directors, or by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority include the power to call such meetings, but such special meetings may not be called by any other person or persons. SECTION 1.3 Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by applicable law or the Certificate of Incorporation, the written notice of any meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his or her address as it appears on the records of the Corporation. SECTION 1.4 Adjournments. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 1.5 Quorum. At each meeting of stockholders, except where otherwise provided by law or the Certificate of Incorporation or these Bylaws, the holders of a majority of the outstanding shares of stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum. In the absence of a quorum, the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 1.4 of these Bylaws until a quorum shall attend. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of any corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. 2 SECTION 1.6 Organization. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in the absence of such person, the President, or in his or her absence by a Vice President, or in the absence of the foregoing persons, by a chairman designated by the Board of Directors, or in the absence of such designation, by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. SECTION 1.7 Voting; Proxies. Unless otherwise provided by law or the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by him which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Unless otherwise required by law, voting at meetings of stockholders need not be by written ballot and need not be conducted by inspectors unless the Board of Directors, or holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting shall so determine. At all meetings of stockholders for the election of directors a plurality of the votes cast shall be sufficient to elect. All other elections and questions shall, unless otherwise provided by law or by the Certificate of Incorporation or these Bylaws, be decided by the vote of the holders of a majority of the outstanding shares of stock entitled to vote thereon present in person or by proxy at the meeting. SECTION 1.8 Fixing Date for Determination of Stockholders of Record. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not precede the date such record date is fixed and shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given. The record date for any other purpose other than stockholder action by written consent shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. 2 3 The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. SECTION 1.9 List of Stockholders Entitled to Vote. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 1.10 Inspectors of Elections; Opening and Closing the Polls. (a) If required by the Delaware General Corporation Law, the Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation, to act at the meeting and make a written report thereof. The procedures, oath, duties, and determinations with respect to inspectors shall be as provided under the Delaware General Corporation Law. (b) The chairman of any meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. SECTION 1.11 Action by Written Consent of Stockholders. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 3 4 ARTICLE II BOARD OF DIRECTORS SECTION 2.1 Number; Qualifications. The Board of Directors shall consist of one or more members, the number thereof to be determined from time to time by resolution of the Board of Directors. The initial number of directors shall be three (3), and thereafter shall be fixed from time to time by resolution of the Board of Directors. Directors need not be stockholders. SECTION 2.2 Election; Resignation; Removal; Vacancies. The Board of Directors shall initially consist of the persons elected as such by the incorporator or named in the Corporation's Certificate of Incorporation. At the first annual meeting of stockholders and at each annual meeting thereafter, the stockholders shall elect Directors to replace those Directors whose terms then expire. Any Director may resign at any time upon written notice to the Corporation. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the Board, although such majority is less than a quorum, or by a plurality of the votes cast at a meeting of stockholders, and each Director so elected shall hold office until the expiration of the term of office of the Director whom he or she has replaced. SECTION 2.3 Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board of Directors. SECTION 2.4 Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or a majority of the members of the Board of Directors then in office and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally or in writing, by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, mailgram, facsimile or similar communication method. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting. SECTION 2.5 Telephonic Meetings Permitted. Members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this bylaw shall constitute presence in person at such meeting. SECTION 2.6 Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the whole Board shall constitute a quorum for the transaction of business. Except as otherwise provided in these Bylaws, or in the Certificate of Incorporation or required by law, the vote of a majority of the directors present shall be the act of the Board of Directors. SECTION 2.7 Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in his or her absence by the Vice Chairman of the Board, if any, or in his or her absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. 4 5 SECTION 2.8 Written Action by Directors. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 2.9 Powers. The Board of Directors may, except as otherwise required by law or the Certificate of Incorporation, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. SECTION 2.10 Compensation of Directors. Directors, as such, may receive, pursuant to a resolution of the Board of Directors, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board of Directors. ARTICLE III COMMITTEES SECTION 3.1 Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law, fix any of the preferences or rights of such shares, except voting rights of the shares), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, or amending these Bylaws; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. SECTION 3.2 Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may make, alter and repeal rules for conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws. ARTICLE IV OFFICERS SECTION 4.1 Executive Officers; Election; Qualifications; Term of Office; Resignation; Removal; Vacancies. The Board of Directors shall choose a President and Secretary, and it may, if it 5 6 so determines, choose a Chairman of the Board and a Vice Chairman of the Board from among its members. The Board of Directors may also choose one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next succeeding this election, and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The Board of Directors may remove any officer with or without cause at any time, but such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. Any number of offices may be held by the same person. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. SECTION 4.2 Powers and Duties of Executive Officers. The officers of the Corporation shall have such powers and duties in the management of the Corporation as may be prescribed by the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors. The Board of Directors may require any officer, agent or employee to give security for the faithful performance of his or her duties. SECTION 4.3 Compensation. The salaries of all officers and agents of the Corporation shall be fixed from time to time by the Board of Directors or by a committee appointed or officer designated for such purpose, and no officer shall be prevented from receiving such compensation by reason of the fact that he is also a director of the Corporation. ARTICLE V STOCK SECTION 5.1 Certificates. Every holder of stock shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by him or her in the Corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue. SECTION 5.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his or her legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 5.3 Other Regulations. The issue, transfer, conversion and registration of stock certificates shall be governed by such other regulations as the Board of Directors may establish. 6 7 ARTICLE VI INDEMNIFICATION SECTION 6.1 Right to Indemnification. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended in a manner more favorable to indemnitees, any person (an "Indemnitee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in Section 6.3, the Corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board of Directors of the Corporation. SECTION 6.2 Prepayment of Expenses. The Corporation shall pay the expenses (including attorneys' fees) incurred by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should ultimately be determined that the Indemnitee is not entitled to be indemnified under this Article VI or otherwise; and provided, further, that the Corporation shall not be required to advance any expenses to a person against whom the Corporation directly brings a claim, in a proceeding, alleging that such person has breached his or her duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction. SECTION 6.3 Claims. If a claim for indemnification or payment of expenses under this Article VI is not paid in full within sixty (60) days after a written claim therefor by the Indemnitee has been received by the Corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or payment of expenses under applicable law. SECTION 6.4 Nonexclusivity of Rights. The rights conferred on any Indemnitee by this Article VI shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI. SECTION 6.5 Other Sources. The Corporation's obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit 7 8 entity shall be reduced by any amount such Indemnitee may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise. SECTION 6.6 Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification. SECTION 6.7 Other Indemnification and Prepayment of Expenses. This Article VI shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action. SECTION 6.8 Indemnification Contracts. The Board of Directors is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification rights to such person. Such rights may be greater than those provided in this Article VI. SECTION 6.9 Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VI shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification. SECTION 6.10 Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her or on his or her behalf in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article VI. SECTION 6.11 Savings Clause. If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director and officer of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article VI that shall not have been invalidated and to the full extent permitted by applicable law. ARTICLE VII MISCELLANEOUS SECTION 7.1 Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. 8 9 SECTION 7.2 Seal. The corporate seal shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. SECTION 7.3 Waiver of Notice of Meetings of Stockholders, Directors and Committees. Any written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. SECTION 7.4 Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or her or their votes are counted for such purpose, if: (1) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. SECTION 7.5 Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of any information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. SECTION 7.6 Reliance Upon Books and Records. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall, in the performance of his or her duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. SECTION 7.7 Certification of Incorporation Governs. In the event of any conflict between the provisions of the Corporation's Certificate of Incorporation and these Bylaws, the provisions of the Certificate of Incorporation shall govern. 9 10 SECTION 7.8 Severability. If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Corporation's Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation, that are not themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation) shall remain in full force and effect. SECTION 7.9 Amendments. Stockholders of the Corporation holding a majority of the Corporation's outstanding voting stock shall have power to adopt, amend or repeal Bylaws. To the extent provided in the Corporation's Certificate of Incorporation, the Board of Directors of the Corporation shall also have the power to adopt, amend or repeal Bylaws of the Corporation, except insofar as Bylaws adopted by the stockholders shall otherwise provide. 10 EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT 1 BIGSTAR ENTERTAINMENT, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of this -- day of ---------, 1999, by and between BigStar Entertainment, Inc., a Delaware corporation (the "Company") and ----------------------- ("Indemnitee"). WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for its directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, the Indemnitee, as a director of the Company, does not regard the current protection available as adequate under the present circumstances, and the Indemnitee and other directors, officers, employees, agents and fiduciaries of the Company may not be willing to continue to serve in such capacities without additional protection; WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and, in part, in order to induce Indemnitee to continue to provide services to the Company, wishes to provide for the indemnification and advancing of expenses to Indemnitee to the maximum extent permitted by law; and WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified by the Company as set forth herein. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. Indemnification. (a) Indemnification of Expenses. The Company shall indemnify Indemnitee to the fullest extent provided under the provisions of the Company's Certificate of Incorporation, the Company's Bylaws, and to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, claim, hearing, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, claim, hearing, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a ""Claim") by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of 2 another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity (hereinafter an "Indemnifiable Event") against any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than thirty (30) days after written demand by Indemnitee therefor is presented to the Company. (b) Reviewing Party. Indemnitee shall initially be presumed in all cases to be entitled to indemnification pursuant to the terms hereof, and Indemnitee may establish a conclusive presumption of any fact necessary to such a determination by delivering to the Company a declaration made under penalty or perjury that such fact is true and that, unless the Reviewing Party shall deliver to Indemnitee, in accordance with the provisions of this Section 1(b), written notice that Indemnitee is not entitled to indemnification within twenty (20) calendar days of the Company's receipt of Indemnitee's initial request for Indemnification, such determination shall conclusively be deemed to have been made in favor of the Indemnitee's request for indemnification. Notwithstanding the foregoing, (i) the obligations of the Company under Section 1(a) shall be subject to the condition that the Reviewing Party (as described in Section 10(f) hereof) shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense Advance") shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 10(c) hereof), the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 1(c) hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be 2 3 indemnified in whole or in part under applicable law, Indemnitee shall the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. (c) Change in Control. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses and Expense Advances under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, the Company shall seek legal advice only from Independent Legal Counsel (as defined in Section 10(d) hereof) selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of any Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (d) Establishment of Trust. In the event of a Potential Change in Control (as defined in Section 10(e) hereof), the Company shall, upon written request by Indemnitee, create a trust for the benefit of Indemnitee and, from time to time upon written request of Indemnitee, shall fund such trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for and defending any Claim relating to an Indemnifiable Event, and any and all judgments, fines, penalties and settlement amounts of any and all Claims relating to an Indemnifiable Event from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The amount or amounts to be deposited in the trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Party, in any case in which the Independent Legal Counsel referred to above is involved. The terms of the trust shall provide that upon a Change in Control (i) the trust shall not be revoked or the principal thereof invaded, without the written consent of Indemnitee, (ii) the trustee shall advance, within five (5) business days of a request by Indemnitee, any and all Expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the trust under the circumstances under which Indemnitee would be required to reimburse the Company under Section 1(b) of this Agreement), (iii) the trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, (iv) the trustee shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such trust shall revert to the Company upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that Indemnitee has been fully indemnified under the terms of this Agreement. The trustee shall be chosen by Indemnitee. Nothing in this Section 1(d) shall relieve the Company of any of its obligations under this Agreement. 3 4 (e) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 9 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit, proceeding, inquiry or investigation referred to in Section (1)(a) hereof or in the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. (f) Written Assurance. Notwithstanding anything to the contrary contained herein, the Company shall not effect any Change in Control of the Company, unless the surviving entity agrees in writing to assume all of the Company's obligations under this Agreement. 2. Expenses; Indemnification Procedure. (a) Advancement of Expenses. The Company shall advance all Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than five (5) days after written demand by Indemnitee therefor to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. 4 5 (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to pay the Expenses of any action, suit, proceeding, inquiry or investigation, the Company, if appropriate, shall be entitled to assume the defense of such action, suit, proceeding, inquiry or investigation with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same action, suit, proceeding, inquiry or investigation; provided that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any such action, suit, proceeding, inquiry or investigation at Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such action, suit, proceeding, inquiry or investigation, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 3. Additional Indemnification Rights; Nonexclusivity. (a) Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statue or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity. 5 6 4. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any action, suit, proceeding, inquiry or investigation made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any Company insurance policy, the Company's Certificate of Incorporation, its Bylaw or otherwise from a Company source) of the amounts otherwise indemnifiable hereunder. 5. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses in the investigation, defense, appeal or settlement of any civil or criminal action, suit, proceeding, inquiry or investigation, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify Indemnitee for acts, omissions or transactions from which Indemnitee may not be relieved of liability under applicable law. (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to proceedings brought to establish or enforce 6 7 a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such suit, or (iii) as otherwise as required under Section 145 of the General Corporation Law of the State of Delaware, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of one year from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such one-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 10. Construction of Certain Phrases. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the 7 8 Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries. (c) For purposes of this Agreement a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all of substantially all of the Company's assets. (d) For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 1(c) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (e) For purposes of this Agreement, a "Potential Change in Control" shall be deemed to have occurred if: (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control, (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control, or (iii) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his or her beneficial ownership of such securities by five percentage points (5%) or more over the percentage so owned by such person; or (iv) the Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 8 9 (f) For purposes of this Agreement, a "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel. (g) For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director or officer of the Company or of any other enterprise at the Company's request. 13. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action, regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless as a part of such action the court of competent jurisdiction over such action determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), and shall be entitled to the advancement Expenses with respect to such action, unless as a part of such action the court having jurisdiction over such action determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by 9 10 the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the courts of the State of Delaware, which shall be the exclusive and only proper forum for adjudicating such a claim. 16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents, entered into and to be performed entirely within the State of Delaware, without regard to the conflict of laws principles thereof. 18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 10 11 20. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supercedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. 22. Specific Performance The Company and Indemnitee agree that a monetary remedy for breach of this Agreement, at some later date, will be inadequate, impracticable and difficult to prove, and the Company and the Indemnitee further agree that such breach would cause Indemnitee irreparable harm. Accordingly, the Company and Indemnitee agree that Indemnitee shall be entitled to temporary and permanent injunctive relief to enforce this Agreement without the necessity of proving actual damages or irreparable harm. The Company and Indemnitee further agree that Indemnitee shall be entitled to such injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bond or other undertaking in connection therewith. The Company hereby waives any such requirement of bond or undertaking. 11 12 IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. BIGSTAR ENTERTAINMENT, INC. By:____________________________ Title:_________________________ 19 Fulton Street New York, New York 10038 AGREED TO AND ACCEPTED INDEMNITEE:____________________ 12 EX-10.2 7 1998 STOCK OPTION AND INCENTIVE PLAN 1 BIGSTAR ENTERTAINMENT, INC. 1998 STOCK OPTION AND INCENTIVE PLAN 2 TABLE OF CONTENTS
PAGE 1. Purposes of this Plan................................................................................... 1 2. Definitions............................................................................................. 1 3. Stock Subject to this Plan.............................................................................. 4 4. Administration of this Plan............................................................................. 4 5. Eligibility............................................................................................. 5 6. Term of Plan............................................................................................ 6 7. Exercise Price and Consideration........................................................................ 6 8. Options................................................................................................. 8 9. Stock Purchase Rights................................................................................... 10 10. Stock Appreciation Rights............................................................................... 10 11. Restricted Shares....................................................................................... 11 12. Performance Units and Performance Shares................................................................ 12 13. Non-Transferability of Options and Stock Purchase Rights................................................ 13 14. Adjustments Upon Changes in Capitalization, Merger or Other Events...................................... 13 15. Time of Grant........................................................................................... 14 16. Amendment and Termination............................................................................... 14 17. Conditions Upon Issuance of Shares...................................................................... 15 18. Reservation of Shares................................................................................... 15 19. Option, Stock Purchase and Stock Bonus Agreements....................................................... 16 20. Shareholder Approval.................................................................................... 16 21. Information to Optionees and Purchasers................................................................. 16 22. Right of Company to Terminate Employment or Consulting Services......................................... 16 23. Rights of First Refusal and Repurchase.................................................................. 17 24. Withholding............................................................................................. 17 25. Separability............................................................................................ 17 26. Non-Exclusivity of this Plan............................................................................ 18 27. Governing Law........................................................................................... 18 28. Cancellation of and Substitution for Nonstatutory Options............................................... 18 29. Market Standoff......................................................................................... 18 Exhibit 1 - Form of Stock Option Agreement
-i- 3 BIGSTAR ENTERTAINMENT, INC. 1998 STOCK OPTION AND INCENTIVE PLAN 1. Purposes of this Plan. The general purpose of this 1998 Stock Option and Incentive Plan is to promote the interests of the Company and its shareholders by (i) providing certain Employees of and Consultants to the Company with additional incentives to continue and increase their efforts with respect to achieving success in the business of the Company, its Affiliates and its Subsidiaries, and (ii) attracting and retaining the best available personnel to participate in the ongoing business operations of the Company and its Subsidiaries. Options granted under this Plan may be either Incentive Stock Options or Nonstatutory Stock Options, as determined at the discretion of the Board and as reflected in the terms of the written option agreements. The Board may also grant Stock Purchase Rights hereunder. 2. Definitions. As used in this Plan, the following definitions shall apply: "Affiliates" means any other entity directly or indirectly controlling, controlled by, or under common control, with the Company. "Affiliated SAR" means a SAR that is granted in connection with a related Option, and which will be deemed to automatically be exercised simultaneous with the exercise of the related Option. "Award" means, individually or collectively, a grant under this Plan, including any Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, or Performance Shares. "Award Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under the Plan. "Board" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed. "Board of Directors" means the full Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any particular Code section shall include any successor section. "Committee" shall mean the Committee appointed by the Board of Directors in accordance with Section 4(a) of this Plan, if one is appointed, or if no Committee is appointed, the Board of Directors. 4 "Common Stock" shall mean the Common Stock of the Company. "Company" shall mean BigStar Entertainment, Inc., a Delaware corporation. "Consultant" shall mean any person who is engaged by the Company or by any Parent or Subsidiary to render consulting services and is compensated for such consulting services, and any director of the Company whether compensated for such services or not. "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. "Disinterested Person" shall mean a member of the Board of Directors of the Company: (i) who was not during the one year prior to service as an administrator of this Plan granted or awarded equity securities pursuant to this Plan, or any other plan of the Company or any of its affiliates entitling the participants therein to acquire equity securities of the Company or any of its affiliates except as permitted by Rule 16b-3(c)(2)(i) promulgated under the Exchange Act ("Rule 16b-3(c)(2)(i)"); or (ii) who is otherwise considered to be a "disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission. "Employee" shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company as a common-law employee. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Freestanding SAR" means a SAR that is granted independently of any Options. "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. "Major Event" shall be deemed to have occurred if (i) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger generally have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; (ii) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; (iii) proceedings or actions for the liquidation or dissolution of the Company are initiated by the Company; or (iv) any "person" (as defined in Sections 13(d) and 14(d) of the Exchange Act) (other than persons who beneficially own more than 30% of the capital stock of the Company on a fully diluted and as converted basis outstanding as of the date of adoption of 2 5 this Plan by the Board of Directors) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's outstanding capital stock on a fully diluted and as converted basis at such time; provided, however, that a "Major Event" shall not be deemed to have occurred solely by reason of the consummation of a public offering by the Company of common stock registered under the Securities Act. "Nonstatutory Stock Option" shall mean an Option which is not intended to qualify as an Incentive Stock Option. "Option" shall mean a stock option granted pursuant to this Plan. "Optioned Stock" shall mean the Common Stock subject to an Option. "Optionee" shall mean an Employee or Consultant who receives an Option. "Parent" shall mean a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. "Participant" means an Employee of the Company who has outstanding an Award granted under the Plan. "Performance Unit" means an Award granted to an Employee pursuant to Section 12. "Performance Share" means an Award granted to an Employee, pursuant to Section 12 herein. "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Section 11. "Plan" shall mean this 1998 Stock Option and Incentive Plan. "Purchaser" shall mean an Employee or Consultant who exercises a Stock Purchase Right. "Restricted Stock" means an Award granted to a Participant pursuant to Section 11. "Securities Act" shall mean the Securities Act of 1933, as amended. "Share" shall mean a share of Common Stock, as adjusted in accordance with Section 14 of this Plan. 3 6 "Stock Appreciation Right" or "SAR" means an Award, granted alone or in connection with a related Option, designated as a SAR, pursuant to the terms of Section 10. "Stock Purchase Right" shall mean a right to purchase Common Stock pursuant to this Plan or the right to receive a bonus of Common Stock for past services. "Subsidiary" shall mean a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. "Tandem SAR" means a SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, a SAR shall similarly be cancelled). 3. Stock Subject to this Plan. Subject to the provisions of Section 14 of this Plan, the maximum aggregate number of Shares under this Plan is 250,000. The Shares may be authorized but unissued, or reacquired Common Stock, or both. If an Option or Stock Purchase Right should expire, terminate, be cancelled or become unexercisable for any reason without having been exercised in full, then the unpurchased Shares which were subject thereto shall, unless this Plan shall have been terminated, become available for future grant or sale under this Plan. In addition, Shares issued under this Plan and later repurchased or otherwise reacquired by the Company shall, unless this Plan shall have been terminated, become available for future grant or sale under this Plan. 4. Administration of this Plan. (a) Procedure. This Plan shall be administered by the Board of Directors of the Company unless and until the Board of Directors delegates administration to a Committee, as provided in this Section 4(a). (i) Subject to Section 4(a)(ii), the Board of Directors may appoint a Committee consisting of not less than two persons (who need not be members of the Board of Directors) to administer this Plan on behalf of the Board of Directors, subject to such terms and conditions not inconsistent with this Plan as the Board of Directors may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. Members of the Board who are either eligible for Options and/or Stock Purchase Rights or have been granted Options and/or Stock Purchase Rights may vote on any matters affecting the administration of this Plan or the grant of any Options and/or Stock Purchase Rights pursuant to this Plan, except that no such member shall act upon the granting of an option to such member, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options and/or Stock Purchase Rights to such member. (ii) Notwithstanding the foregoing Section 4(a)(i), if the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, from the effective date of such registration until six months after the termination of such registration, any grants of Options and/or Stock Purchase Rights to directors or officers who are subject to Section 16 of the Exchange Act shall be made only by a Committee consisting of two or more persons, 4 7 each of whom shall be a Disinterested Person (if necessary to meet the requirements of Rule 16b-3 promulgated under the Exchange Act). The Board shall otherwise comply with the requirements of Rule 16b-3 promulgated under the Exchange Act, as from time to time in effect, unless the Board expressly declares that any such requirement shall not apply. (iii) Subject to the foregoing Sections 4(a)(i) and 4(a)(ii), from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer this Plan. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. (b) Powers of the Board. Subject to the provisions of this Plan, the Board shall have plenary authority, in its discretion and without limitation, to do the following: (i) to grant Incentive Stock Options, Nonstatutory Stock Options or Stock Purchase Rights; (ii) to determine, upon review of relevant information and in accordance with Section 7 of this Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options or Stock Purchase Rights to be granted, which exercise price shall be determined in accordance with Section 7 hereof; (iv) to determine the Employees or Consultants to whom, and the time or times at which, Options or Stock Purchase Rights shall be granted and the number of Shares to be represented by each Option or Stock Purchase Right; (v) to interpret this Plan; (vi) to prescribe, amend and rescind rules and regulations relating to this Plan, and in the exercise of this power, to correct any defect, omission or inconsistency in this Plan or in any agreement relating to an Option or Stock Purchase Right, in a manner and to the extent the Board shall deem necessary or expedient to make this Plan fully effective; (vii) to determine the terms and provisions of each Option or Stock Purchase Right granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option or Stock Purchase Right; (viii) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option or Stock Purchase Right previously granted by the Board; and (ix) to make all other determinations deemed necessary or advisable for the administration of this Plan. (c) Board Determinations. In making determinations under this Plan, the Board may take into account the nature of the services rendered by the respective Employees, their present and potential contributions to the success of the Company, or its Subsidiaries, as the case may be, and such other factors as the Board in its discretion shall deem relevant. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees, Purchasers and any other holders of any Options and/or Stock Purchase Rights granted under this Plan. 5. Eligibility. (a) Options and Stock Purchase Rights may be granted to Employees, provided that Incentive Stock Options may only be granted to Employees. An Employee who has been granted an Option or Stock Purchase Right may, if such Employee is otherwise eligible, be granted additional Option(s) or Stock Purchase Right(s). 5 8 (b) No Incentive Stock Option may be granted to an Employee which, when aggregated with all other Incentive Stock Options granted to such Employee by the Company or by any Parent or Subsidiary, would result in Shares having an aggregate fair market value (determined for each Share as of the date of grant of the Option covering such Share) in excess of $100,000 (or such different amount as provided for under the Code requirements for Incentive Stock Options) becoming first available for purchase upon exercise of one or more incentive stock options during any calendar year. (c) Section 5(b) of this Plan shall apply only to an Incentive Stock Option evidenced by a stock option agreement which sets forth the intention of the Company and the Optionee that such Option shall qualify as an Incentive Stock Option. Section 5(b) of this Plan shall not apply to any Option evidenced by a stock option agreement which sets forth the intention of the Company and the Optionee that such Option shall be a Nonstatutory Stock Option. (d) On and after the effective date of the registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act, a member of the Board of Directors who is not an Employee shall not be eligible for the benefits of this Plan unless at the time an Option or Stock Purchase Right is granted to such member, the Board expressly declares that such exclusion will not apply. 6. Term of Plan. This Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by vote of the holders of a majority of the outstanding shares of the Company entitled to vote on the adoption of this Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of this Plan. 7. Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option or Stock Purchase Right shall be such price as is determined by the Board, but shall be subject to the following provisions: (i) In the case of an Incentive Stock Option: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per share exercise price shall be no less than 110% of the fair market value per share on the date of grant. (B) granted to any Employee other than an Employee described in Section 7(a)(i)(A), the per share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option: (A) granted to an Employee or Consultant who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting 6 9 power of all classes of stock of the Company or any Parent or Subsidiary, the per share exercise price shall be no less than 110% of the fair market value per share on the date of the grant. (B) granted to any Employee or Consultant, other than an Employee or Consultant described in Section 7(a)(ii)(A), the per share exercise price shall be no less than 85% of the fair market value per share on the date of grant. (iii) In the case of a Stock Purchase Right granted to any person, the per share exercise price shall be no less than 85% of the fair market value per share on the date of grant; provided, however, that if such person at the time of the grant of such Stock Purchase Right, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per share exercise price shall be no less than 100% of the fair market value per share on the date of the grant. (b) Fair market value shall be determined by the Board in its discretion; provided, however, that where there is an active public market for the Common Stock, the fair market value per share shall be determined as follows: (i) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System, then the closing or last sale price, respectively, on the date of grant, as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the NASDAQ System). (ii) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market System but is traded in the over-the-counter market, then the mean of the closing bid and asked prices on the date of grant as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the NASDAQ System). (c) The consideration to be paid for the Shares to be issued upon exercise of an Option or Stock Purchase Right, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory note or other deferred payment arrangement, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option or Stock Purchase Right shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 8. Options. (a) Term of Option. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the stock option agreement relating to such Option; provided that the term of a Nonstatutory Stock Option may, as provided in Section 8(b)(iv), be extended for a period of up to six (6) months. However, in the case of an Option granted to an Employee who, at the time the Option is granted, owns stock representing 7 10 more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter time as may be provided in the stock option agreement relating to such Option. (b) Exercise of Option. (i) Procedure for Exercise; Rights as a Shareholder. Any Option granted under this Plan shall be exercisable at such times and under such conditions as determined by the Board, such as vesting conditions and/or performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of this Plan. Notwithstanding anything herein to the contrary, no Option granted hereunder shall have a vesting period in excess of five (5) years. An Option may, but need not, include a provision whereby at any time prior to termination of the Optionee's Continuous Status as an Employee, the Optionee may elect to exercise the Option as to all or any part of the Shares subject to the Option prior to the stated vesting date of the Option or of any vesting installment or installments specified in the Option. Any shares so purchased from any unvested installment or Option may be subject to a repurchase right in favor of the Company or to any restriction the Board determines to be appropriate. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. An Option may not be exercised for a fraction of a Share. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 7 of this Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of this Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (ii) Termination of Status as an Employee. In the event of termination of an Optionee's Continuous Status as an Employee (as the case may be), such Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent that such Employee was entitled to exercise it at the date of such termination. To the extent that such Employee was not entitled to exercise the Option at the date of such termination, or if such Employee does not exercise such Option (which such Employee was entitled to exercise) within such thirty (30) day time period, the Option shall terminate. 8 11 (iii) Disability of Optionee. Notwithstanding the provisions of Section 8(b)(ii) above, in the event of termination of an Optionee's Continuous Status as an Employee as a result of such Employee's disability, such Employee may, but only within six (6) months from the date of such termination (but in no event later than the date of expiration of the term of such option as set forth in the Option Agreement), exercise the Option to the extent such Employee was entitled to exercise it at the date of such termination; provided however, that if the Option is an Incentive Stock Option and the disability is not a total and permanent disability (as defined in Section 422(c)(6) of the Code), then if the Optionee does not exercise the Option within three months after such termination, such Option shall automatically convert into a Nonstatutory Stock Option; and provided, further, that if the termination is as a result of a total and permanent disability (as defined in Section 422(c)(6) of the Code), such Employee may within one (1) year from the date of such termination, but in no event later than the date of expiration of the term of such option as set forth in the Option Agreement), exercise the Option to the extent such Employee was entitled to exercise it at the date of such termination. To the extent that such Employee was not entitled to exercise the Option at the date of termination, or if such Employee does not exercise such Option (which such Employee was entitled to exercise) within the time periods specified above, as the case may be, the Option shall terminate. (iv) Death of Optionee. In the event of the death of an Optionee: (A) while the Optionee is an Employee or Consultant, (B) during the thirty (30) day period described in Section 8(b)(ii), or (C) during the one (1) year period described in Section 8(b)(iii), the Option may be exercised, at any time within one (1) year following the date of death (but, in the case of an Incentive Stock Option, in no event later than the date of expiration of the term of such Incentive Stock Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the time of death of the Optionee. To the extent that such Employee or Consultant was not entitled to exercise the Option at the date of death, or if such Employee or Consultant, estate or other person does not exercise such Option (which such Employee or Consultant, estate or person was entitled to exercise) within the one (1) year time period specified in this Plan, the Option shall terminate. 9. Stock Purchase Rights. (a) Rights to Purchase. After the Board determines that it will offer an Employee or Consultant a Stock Purchase Right, it shall deliver to the offeree a stock purchase agreement or stock bonus agreement, as the case may be, setting forth the terms, conditions and restrictions relating to the offer, including the number of Shares which such person shall be entitled to purchase, and the time within which such person must accept such offer, which shall in no event exceed six (6) months from the date upon which the Board made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a stock purchase agreement or stock bonus agreement in the form approved by the Board. (b) Issuance of Shares. Forthwith after payment therefor, the Shares purchased shall be duly issued; provided, however, that the Board may require that the Purchaser make adequate provision for any federal and state withholding obligations of the Company as a condition to the Purchaser purchasing such Shares. 9 12 (c) Other Provisions. The stock purchase agreement or stock bonus agreement shall contain such other terms, provisions and conditions not inconsistent with this Plan as may be determined by the Board, including rights of first refusal as set forth in Section 20 hereof. 10. Stock Appreciation Rights. (a) Grants of SARs. Tandem SARs may be awarded by the Committee in connection with any Option granted under the Plan, either on the Date of Grant of the Option or thereafter at any time prior to the exercise, termination or expiration of the Option Nontandem SARs may also be granted by the Committee at any time. On the Date of Grant of a Nontandem SAR, the Committee shall specify the number of shares of Common Stock covered by such right and the base price of shares of Common Stock to be used in connection with the calculation described in Section 10(c) below. SARs shall be subject to such terms and conditions not inconsistent with the other provisions of this Plan as the Committee shall determine. (b) Exercise of Tandem SARs. A Tandem SAR shall be exercisable only to the extent that the related Option is exercisable and shall be exercisable only for such period as the Committee may determine (which period may expire prior to the expiration date of the related Option). Upon the exercise of all or a portion of a Tandem SAR, the related Option shall be canceled with respect to an equal number of shares of Common Stock. A Tandem SAR shall entitle the Grantee to surrender to the Corporation unexercised the related Option, or any portion thereof, and to receive from the Corporation in exchange therefor that number of shares of Common Stock having an aggregate fair market value equal to (A) the excess of (i) the fair market value of one (1) share of Common Stock as of the date the Tandem SAR is exercised over (ii) the Option price per share specified in such Option, multiplied by (B) the number of shares of Common Stock subject to the Option, or portion thereof, which is surrendered. Cash shall be delivered in lieu of any fractional shares. (c) Exercise of Nontandem SARs. A Nontandem SAR shall be exercisable during such period as the Committee shall determine prior to the Date of Grant. The exercise of a Nontandem SAR shall entitle the Grantee to receive from the Corporation that number of shares of Common Stock having an aggregate fair market value equal to (A) the excess of (i) the fair market value of one (1) share of Common Stock as of the date on which the Nontandem SAR is exercised over (ii) the base price of the shares covered by the Nontandem SAR, multiplied by (B) the number of shares of Common Stock covered by the Nontandem SAR, or the portion thereof being exercised. Cash shall be delivered in lieu of any fractional shares. (d) Settlement of SARs. As soon as is reasonably practicable after the exercise of a SAR, the Corporation shall (i) issue, in the name of the Grantee, stock certificates representing the total number of full shares of Common Stock to which the Grantee is entitled pursuant to Section 10(b) or 10(c) hereof and cash in an amount equal to the fair market value, as of the date of exercise, of any resulting fractional shares, and (ii) if the Committee causes the Corporation to elect to settle all or part of its obligations arising out of the exercise of the SAR in cash pursuant to Section 10(e), deliver to the Grantee an amount in cash equal to the fair market 10 13 value, as of the date of exercise, of the shares of Common Stock it would otherwise be obligated to deliver. (e) Cash Settlement. The Committee, in its discretion, may cause the Corporation to settle all or any part of its obligation arising out of the exercise of a SAR by the payment of cash in lieu of all or part of the shares of Common Stock it would otherwise be obligated to deliver in an amount equal to the fair market value of such shares on the date of exercise. 11. Restricted Shares. (a) Grant of Restricted Shares. The Committee may from time to time cause the Corporation to issue Restricted Shares under the Plan, subject to such restrictions, conditions and other terms as the Committee may determine in addition to those set forth herein. (b) Restrictions. At the time a grant of Restricted Shares is made, the Committee shall establish a period of time (the "Restricted Period") applicable to such Restricted Shares. Each grant of Restricted Shares may be subject to a different Restricted Period. The Committee may, in its sole discretion, at the time a grant is made, prescribe restrictions in addition to or other than the expiration of the Restricted Period, including the satisfaction of corporate or individual performance objectives, which shall be applicable to all or any portion of the Restricted Shares. Except with respect to grants of Restricted Shares intended to qualify as performance based compensation for purposes of Section 162(m) of the Code, the Committee may also, in its sole discretion, shorten or terminate the Restricted Period or waive any other restrictions applicable to all or a portion of such Restricted Shares. None of the Restricted Shares may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of prior to the date on which such Restricted Shares vest in accordance with Section 11(c). (c) Restricted Stock Certificates. The Corporation shall issue, in the name of each Grantee, stock certificates with proper legends representing the total number of Restricted Shares granted to the Grantee, as soon as reasonably practicable after the Date of Grant. The Secretary of the Corporation shall hold such certificates, properly endorsed for transfer, after the Grantee's benefit until such time as the Restricted Shares are forfeited to the Corporation or until the Restricted Shares vest. In lieu of the foregoing, Restricted Shares awarded to a Grantee may be held under the Grantee's name in a book entry account maintained by or on behalf of the Corporation. (d) Rights of Holders of Restricted Shares. Except as otherwise determined by the Committee either at the time Restricted Shares are awarded or at any time thereafter prior to the lapse of the restrictions, holders of Restricted Shares shall not have the right to vote such shares or the right to receive any dividends with respect to such shares. All distributions, if any, received by an employee or consultant with respect to Restricted Shares as a result of any stock split-up, stock distribution, combination of shares, or other similar transaction shall be subject to the restrictions of this Section 11. 11 14 (e) Termination of Employment Relationship. Any Restricted Shares granted pursuant to the Plan shall be forfeited if the Grantee terminates employment or consultant relationship with the Corporation or its subsidiaries for reasons other than death or disability prior to the expiration or termination of the Period of Restriction and the satisfaction of any other conditions applicable to such Restricted Shares. Upon such forfeiture, the Secretary of the Corporation shall either cancel or retain in its treasury the Restricted Shares that are forfeited to the Corporation. Upon the death of a Grantee prior to his termination of employment or service as a consultant, or upon a Grantee's termination of employment as a result of disability, all Restricted Shares previously awarded to such Grantee which have not previously vested shall be forfeited unless the Committee in its sole discretion shall determine otherwise. (f) Delivery of Restricted Shares. Subject to the provisions of this Section, at such time as the Grantee shall become vested in his Restricted Shares, the restrictions applicable to the Restricted Shares shall lapse and a stock certificate for the number of Restricted Shares with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, to the Grantee or the Grantee's beneficiary or estate, as the case may be. 12. Performance Units and Performance Shares. (a) Grant of Performance Units/Shares. Subject to the terms of the Plan, Performance Units and Performance Shares may be granted to eligible Employees and Consultants at any time and from time to time, as shall be determined by the Committee, in its sole discretion. The Committee shall have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant. (b) Value of Performance Units/Shares. Each Performance Unit shall have an initial value that is established by the Committee at the time of the grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Shares that will be paid out to the Participants. The time period during which the performance goals must be met shall be called a "Performance Period." Performance Periods of Awards granted to Insiders shall, in all cases, exceed six (6) months in length. (c) Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of Performance Units/Shares shall be entitled to receive a payout of the number of Performance Unit/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. Notwithstanding the preceding sentence, after the grant of a Performance Unit/Share, the Committee, in its sole discretion, may waive the achievement of any performance goals for such Performance Unit/Share. (d) Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/Shares shall be made in a single lump sum, within forty-five (45) calendar days following the close of the applicable Performance Period. The Committee, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which 12 15 have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in combination thereof. Prior to the beginning of each Performance Period, Participants may, in the discretion of the Committee, elect to defer the receipt of any Performance Unit/Share payout upon such terms as the Committee shall determine. (e) Cancellation of Performance Units/Shares. Subject to the applicable Award Agreement, upon the earlier of (a) the Participant's termination of employment, or (b) the date set forth in the Award Agreement, all remaining Performance Units/Shares shall be forfeited by the Participant to the Company, the Shares subject thereto shall again be available for grant under the Plan. (f) Nontransferability. Performance Units/Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further a Participant's rights under the Plan shall be exercisable during the Participant's lifetime only by the Participant or the Participant's legal representative. 13. Non-Transferability of Options and Stock Purchase Rights. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee or Purchaser, only by the Optionee or Purchaser. 14. Adjustments Upon Changes in Capitalization, Merger or Other Events. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under this Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option or Stock Purchase Right, or repurchase of Shares from a Purchaser or Optionee upon termination of employment or otherwise, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock of the Company or the payment of a stock dividend with respect to the Common Stock. Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Rights. In the event of the dissolution or liquidation of the Company, all Options and Stock Purchase Rights will terminate immediately prior to the consummation of such proposed action if not previously exercised. The Board, at its option, may provide for one or more of the following from time to time or in any stock option agreement or stock purchase agreement that, 13 16 in the event of a Major Event, then (A) all Options and Stock Purchase Rights will be assumed or equivalent options or stock purchase rights will be substituted by such surviving corporation (or other entity) or a parent or subsidiary of such surviving corporation (or other entity), (B) all Options and Stock Purchase Rights will continue in full force and effect, or (C) all Options and Stock Purchase Rights will terminate if not exercised prior to the consummation of the transaction. The foregoing adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. The grant of an Option or Stock Purchase Right pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 15. Time of Grant. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Board makes the determination granting such Option or Stock Purchase Right. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 16. Amendment and Termination. (a) Amendment. The Board may amend this Plan from time to time in such respects as the Board may deem advisable; provided that the shareholders of the Company must approve the following amendments or revisions within 12 months before or after the adoption of such revision or amendment: (i) any increase in the number of Shares subject to this Plan, other than in connection with an adjustment under Section 14 of this Plan; (ii) any change in the designation of the class of persons eligible to be granted Options (to the extent such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422(b) of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act); or (iii) any other revision or amendment if such revision or amendment requires shareholder approval in order for this Plan to satisfy the requirements of Section 422(b) of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act if applicable to the Company. (b) Shareholder Approval. If any amendment requiring shareholder approval under Section 16(a) of this Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 20 of this Plan. 14 17 (c) Suspension and Termination. The Board may suspend or terminate this Plan at any time. No Options or Stock Purchase Rights may be granted while this Plan is suspended or after it is terminated. (d) Effect of Amendment; Termination or Suspension. Any such amendment, termination or suspension of this Plan shall not affect Options or Stock Purchase Rights already granted and such Options or Stock Purchase Rights shall remain in full force and effect as if this Plan had not been amended, terminated or suspended, unless mutually agreed otherwise between the Optionee or Purchaser (as the case may be) and the Company, which agreement must be in writing and signed by the Optionee or Purchaser (as the case may be) and the Company. 17. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or other stock trading system upon which the Shares may then be listed. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to make such representations and warranties at the time of any such exercise as the Company may at that time determine, including without limitation, representations and warranties that (i) the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares in violation of applicable federal or state securities laws, and (ii) such person is knowledgeable and experienced in financial and business matters and is capable of evaluating the merits and the risks associated with purchasing the Shares. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares under this Plan, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19. Option, Stock Purchase and Stock Bonus Agreements. Options shall be evidenced by written stock option agreements in such form as the Board shall approve. Upon the exercise of Stock Purchase Rights, the Purchaser shall sign a stock purchase agreement or stock bonus agreement in such form as the Board shall approve. 20. Shareholder Approval. (a) The shareholders of the Company shall have approved this Plan within 12 months before or after this Plan is adopted. Any shares purchased before shareholder approval is obtained shall be rescinded if shareholder approval is not obtained within 12 months before or 15 18 after this Plan is adopted. Such shares shall not be counted in determining whether such approval is obtained. (b) If the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approval of the shareholders of the Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. (c) If the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act and if prior to such time either (x) the shareholders of the Company did not approve this Plan or (y) the Company did not solicit shareholder approval substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder, then the Company shall take all necessary actions to qualify the Plan under Rule 16(b)(3) promulgated under the Exchange Act at or prior to the later of (A) the first annual meeting of shareholders held subsequent to the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act or (B) the granting of an Option hereunder to an officer or director after such registration. 21. Information to Optionees and Purchasers. The Company shall provide annually to each Optionee and Purchaser, during the period that such Optionee or Purchaser has one or more Options or Stock Purchase Rights outstanding, copies of the annual financial statements of the Company. 22. Right of Company to Terminate Employment or Consulting Services. This Plan shall not confer upon any Optionee or holder of a Stock Purchase Right any right with respect to continuation of employment by or the rendition of consulting services to the Company, any of its Subsidiaries or its Parent, nor shall it interfere in any way with his or her right or the Company's, any of its Subsidiaries' or its Parent's right to terminate his or her employment or services at any time, with or without cause. 23. Rights of First Refusal and Repurchase. (a) The written agreements evidencing Options or Stock Purchase Rights may contain such provisions as the Board shall determine (or pursuant to a separate agreement) to the effect that if an Optionee or Purchaser elects to sell all or any Shares that the Optionee or Purchaser acquired upon the exercise of an Option or Stock Purchase Right, then any proposed sale of such Shares by such Optionee or Purchaser shall be subject to a right of first refusal in favor of the Company. (b) The Board may require, at its option, that a stock purchase agreement, stock option agreement, stock bonus agreement, or other agreement pursuant to this Plan grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the Purchaser's employment with the Company for any reason (including death or disability). The repurchase price shall be at the higher of the original purchase price or fair value of the Shares on the date of termination of employment. If the Board so determines, the purchase price for shares repurchased may be paid by cancellation of any indebtedness of the Purchaser to the 16 19 Company. The repurchase option must be exercised by the Company within 90 days of termination of employment for cash or cancellation of money indebtedness for the Shares and the right shall terminate when the Company's Common Stock becomes publicly traded. The Board may require such a repurchase right in other events. (c) Certificates representing shares issued upon exercise of Options or Stock Purchase Rights shall bear a restrictive legend to the effect that the transferability of such shares is subject to the restrictions contained in this Plan and the applicable written agreement between the Optionee or Purchaser and the Company. 24. Withholding. The Company's obligation to deliver shares of Common Stock under this Plan shall be subject to applicable federal, state and local tax withholding requirements. To the extent provided by the terms of the stock option agreement relating to an Option, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any or a combination of the following means: (i) cash payment or wage withholding; (ii) authorizing the Company to withhold from the Shares otherwise issuable to the Optionee upon exercise of the Option the number of Shares having a fair market value less than or equal to the amount of the withholding tax obligation; or (iii) delivering to the Company unencumbered shares of Common Stock owned by the Optionee having a fair market value less than or equal to the amount of the withholding tax obligation; provided, however, that with respect to clauses (ii) and (iii) above the Board in its sole discretion may disapprove such payment and require that such taxes be paid in cash. 25. Separability. At a time when the Company has a class of equity securities registered pursuant to Section 12 of the Exchange Act, if any of the terms or provisions of this Plan conflict with the requirements of Rule 16b-3 promulgated under the Exchange Act and/or Section 422 of the Code, then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of Rule 16b-3 promulgated under the Exchange Act, and/or with respect to Incentive Stock Options, Section 422 of the Code. The foregoing sentence shall not apply with respect to the requirements of Rule 16b-3 promulgated under the Exchange Act if the Board has expressly declared that such requirements shall not apply. With respect to Incentive Stock Options, if this Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out at length herein. To the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, such Option, to that extent, shall be deemed to be a Nonstatutory Stock Option for all purposes of this Plan. 26. Non-Exclusivity of this Plan. The adoption of this Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 27. Governing Law. This Plan shall be governed by, and construed in accordance with the laws of the State of New York. 17 20 28. Cancellation of and Substitution for Nonstatutory Options. The Company shall have the right to cancel any Nonstatutory Stock Option at any time before it otherwise would have expired by its terms and to grant to the same Optionee in substitution therefor a new Nonstatutory Stock Option stating an option price which is lower (but not higher) than the option price stated in the cancelled Option. Any such substituted option shall contain all the terms and conditions of the cancelled Option; provided, however, that such substituted Option shall not be exercisable after the expiration of ten (10) years and one day from the date of grant of the cancelled Option. 29. Market Standoff. Unless the Board determines otherwise, each Optionee or Purchaser shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall apply only to the first two registration statements of the Company to become effective under the Securities Act which includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 18 21 Exhibit 1 Form of Stock Option Agreement 22 THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is made and entered into as of the date of grant set forth below (the "Date of Grant") by and between BigStar Entertainment, Inc., a Delaware corporation (the "Company"), and the optionee named below ("Optionee"). Capitalized terms not defined herein shall have the meaning ascribed to them in the Company's 1998 Stock Option & Incentive Plan (the "Plan"). Optionee: ________________________________________ Social Security Number: ________________________________________ Address: ________________________________________ ________________________________________ ________________________________________ Total Option Shares: ________________________________________ Exercise Price Per Share: ________________________________________ Date of Grant: ________________________________________ First Vesting Date: ________________________________________ Expiration Date for Exercise of Options:_____________________________ Type of Stock Option: ________________________________________ (Check one): [ ] Incentive Stock Option ("ISO") [ ] Non-Statutory Stock Option 1. Grant of Option. The Company hereby grants to Optionee an option (the "Option") to purchase the total number of shares of Common Stock of the Company set forth above (the "Shares") at the Exercise Price Per Share set forth above (the "Exercise Price"), subject to all of the terms and conditions of this Agreement and the Plan. If designated as an Incentive Stock Option above, the Option is intended to qualify as an "incentive stock option" ("ISO") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Only Employees of the Company shall receive ISOs. 23 2. Exercise Price. The Exercise Price, is not less than the fair market value per share of Common Stock on the date of grant, as determined by the Board; provided, however, in the event Optionee is an Employee and owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its Parent or Subsidiary corporations immediately before this Option is granted, said exercise price is not less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant as determined by the Board. 3. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 8 of the Plan as follows: (i) Vesting (a) This Option shall not become exercisable as to any of the number of the Shares as follows (check one) : [ ]: until the date that is one (1) year from the date of grant of the Option (the "Anniversary Date"). On the Anniversary Date, this Option may be exercised to the extent of 25% of the Shares. Upon the expiration of each calendar month from the Anniversary Date, this Option may be exercised to the extent of the product of (a) the total number of Shares set forth at the beginning of this Agreement and (b) the fraction the numerator of which is one (1) and the denominator of which is forty-eight (48) (the "Monthly Vesting Amount"), plus the shares as to which the right to exercise the Option has previously accrued but has not been exercised; provided, however, that notwithstanding any of the above, the 25% exercisable on the Anniversary Date and the Monthly Vesting Amount with respect to any calendar month shall become exercisable only if the Employee was an employee of the Company or any Subsidiary of the Company as of the Anniversary Date and the last day of such month, respectively. [ ]: ____ % of the shares vesting over ____ months, pro rata for each month of Optionee providing continued service to the Company. [ ]: _________________________________________________. (b) This Option may not be exercised for a fraction of a Share. (c) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 7, 8 and 9 below, subject to the limitations contained in subsection 3(i)(d). (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 11 below. 2 24 (ii) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the President, Secretary or Chief Financial Officer of the Company. The written notice shall be accompanied by payment of the exercise price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. (iii) Adjustments, Merger, etc. The number and class of the Shares and/or the exercise price specified above are subject to appropriate adjustment in the event of changes in the capital stock of the Company by reason of stock dividends, split-ups or combinations of shares, reclassifications, mergers, consolidations, reorganizations or liquidations. Subject to any required action of the stockholders of the Company, if the Company shall be the surviving corporation in any merger or consolidation, this Option (to the extent that it is still outstanding) shall pertain to and apply to the securities to which a holder of the same number of shares of Common Stock that are then subject to this Option would have been entitled. A dissolution or liquidation of the Company, or a merger or consolidation in which the Company is not the surviving corporation, will cause this Option to terminate, unless the agreement or merger or consolidation shall otherwise provide, provided that the Optionee shall, if the Board expressly authorizes, in such event have the right immediately prior to such dissolution or liquidation, or merger or consolidation, to exercise this Option in whole or part. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. In the event that (i) Optionee is an Employee, and (ii) the Company consummates a merger resulting in a change in control of the Company, and (iii) the Employee is terminated without cause, then any options remaining unvested hereunder shall be deemed to automatically vest. 4. Optionee's Representations. By receipt of this Option, by its execution, and by its exercise in whole or in part, Optionee represents to the Company that Optionee understands that: (i) both this Option and any Shares purchased upon its exercise are securities, the issuance by the Company of which requires compliance with federal and state securities laws; (ii) these securities are made available to Optionee only on the condition that Optionee makes the representations contained in this Section 4 to the Company; 3 25 (iii) Optionee has made a reasonable investigation of the affairs of the Company sufficient to be well informed as to the rights and the value of these securities; (iv) Optionee understands that the securities have not been registered under the Securities Act of 1933, as amended (the "Act") in reliance upon one or more specific exemptions contained in the Act, which may include reliance on Rule 701 promulgated under the Act, if available, or which may depend upon (a) Optionee's bona fide investment intention in acquiring these securities; (b) Optionee's intention to hold these securities in compliance with federal and state securities laws; (c) Optionee having no present intention of selling or transferring any part thereof (recognizing that the Option is not transferable) in violation of applicable federal and state securities laws; and (d) there being certain restrictions on transfer of the Shares subject to the Option; (v) Optionee understands that the Shares subject to this Option, in addition to other restrictions on transfer, must be held indefinitely unless subsequently registered under the Act, or unless an exemption from registration is available; that Rule 144, the usual exemption from registration, is only available after the satisfaction of certain holding periods and in the presence of a public market for the Shares; that there is no certainty that a public market for the Shares will exist, and that otherwise it will be necessary that the Shares be sold pursuant to another exemption from registration which may be difficult to satisfy; and (vi) Optionee understands that the certificate representing the Shares will bear a legend prohibiting their transfer in the absence of their registration or the opinion of counsel for the Company that registration is not required, and a legend prohibiting their transfer in compliance with applicable state securities laws unless otherwise exempted. 5. Method of Payment. Payment of the purchase price shall be made by cash, check or, in the sole discretion of the Board at the time of exercise, promissory notes or other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate purchase price of the Shares being purchased. 6. Restrictions on Exercise. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such Shares would constitute a violation of any applicable federal or state securities or other law or regulation. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee. In the event of termination of Optionee's Continuous Status as an Employee for any reason other than death or disability, Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, 4 26 or if Optionee does not exercise this Option within the time specified herein, this Option shall terminate. 8. Disability of Optionee. In the event of termination of Optionee's Continuous Status as an Employee as a result of Optionee's disability, Optionee may, but only within six (6) months from the date of termination of employment or consulting relationship (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent Optionee was entitled to exercise it at the date of such termination; provided, however that if the disability is not total and permanent (as defined in Section 22(e)(3) of the Code) and the Optionee exercises the option within the period provided above but more than three months after the date of termination, this Option shall automatically be deemed to be a Nonstatutory Stock Option and not an Incentive Stock Option; and provided, further, that if the disability is total and permanent (as defined in Section 22(e)(3) of the Code), then the Optionee may, but only within one (1) year from the date of termination of employment or consulting relationship (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise this Option at the date of termination, or if Optionee does not exercise such Option (which Optionee was entitled to exercise) within the time periods specified herein, this Option shall terminate. 9. Death of Optionee. In the event of the death of Optionee: (i) during the term of this Option while an Employee of the Company and having been in Continuous Status as an Employee since the date of grant of this Option, this Option may be exercised, at any time within one (1) year following the date of death (but, in the case of an Incentive Stock Option, in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the time of death of the Optionee. To the extent that such Employee was not entitled to exercise the Option at the date of death, or if such Employee, estate or other person does not exercise such Option (which such Employee, estate or person was entitled to exercise) within the one (1) year time period specified herein, the Option shall terminate; or (ii) during the thirty (30) day period specified in Section 7 or the one (1) year period specified in Section 8, after the termination of Optionee's Continuous Status as an Employee, this Option may be exercised, at any time within one (1) year following the date of death (but, in the case of an Incentive Stock Option, in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise this Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. To the extent that such Employee was not entitled to exercise this Option at the date of death, or if such Employee, estate or other person does not exercise such Option (which such Employee, estate or person was entitled to exercise) within the one (1) year time period specified herein, this Option shall terminate. 5 27 10. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee, only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 11. Term of Option. This Option may not be exercised more than five (5) years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and terms of this Option; provided, however, that the term of this option, if it is a Nonstatutory Stock Option, may be extended for the period set forth in Section 9(i) or Section 9(ii) in the circumstances set forth in such Sections. 12. Early Disposition of Stock; Taxation Upon Exercise of Option. If Optionee is an Employee and the Option qualifies as an ISO, Optionee understands that, if Optionee disposes of any Shares received under this Option within two (2) years after the date of this Agreement or within one (1) year after such Shares were transferred to Optionee, Optionee will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in any amount generally measured as the difference between the price paid for the Shares and the lower of the fair market value of the Shares at the date of exercise or the fair market value of the Shares at the of disposition. Any gain recognized on such premature sale of the Shares in excess of the amount treated as ordinary income will be characterized as capital gain. Optionee hereby agrees to notify the Company in writing within thirty (30) days after the date of any such disposition. Optionee understands that if Optionee disposes of such Shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be treated as long-term capital gain laws subject to meeting various qualifications. If Optionee is a Consultant or this is a Nonstatutory Stock Option, Optionee understands that, upon exercise of this Option, Optionee will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the exercise price. Upon a resale of such shares by the Optionee, any difference between the sale price and the fair market value of the Shares on the date of exercise of the Option will be treated as capital gain or loss. Optionee understands that the Company will be required to withhold tax from Optionee's current compensation in some of the circumstances described above; to the extent that Optionee's current compensation is insufficient to satisfy the withholding tax liability, the Company may require the Optionee to make a cash payment to cover such liability as a condition to exercise of this Option. 13. Tax Consequences. The Optionee understands that any of the foregoing references to taxation are based on federal income tax laws and regulations now in effect, and may not be applicable to the Optionee under certain circumstances. The Optionee may also have adverse tax consequences under state or local law. The Optionee has reviewed with the Optionee's own tax advisors the federal, state, local and foreign tax consequences of the transactions contemplated by this Agreement. The Optionee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Optionee understands that the Optionee (and not the Company) shall be responsible for the Optionee's own tax liability that may arise as a result of the transactions contemplated by this Agreement. 6 28 14. Severability; Construction. In the event that any provision in this Option shall be invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Option. This Option shall be construed as to its fair meaning and not for or against either party. 15. Damages. The parties agree that any violation of this Option (other than a default in the payment of money) cannot be compensated for by damages, and any aggrieved party shall have the right, and is hereby granted the privilege, of obtaining specific performance of this Option in any court of competent jurisdiction in the event of any breach hereunder. 16. Governing Law. This Option shall be deemed to be made under and governed by and construed in accordance with the laws of the State of New York Jurisdiction for any disputes hereunder shall be solely in New York, New York. 17. Delay. No delay or failure on the part of the Company or the Optionee in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. 18. Restrictions. Notwithstanding anything herein to the contrary, Optionee understands and agrees that Optionee shall not dispose of any of the Shares, whether by sale, exchange, assignment, transfer, gift, devise, bequest, mortgage, pledge, encumbrance or otherwise, except in accordance with the terms and conditions of this Section 18, and Optionee shall not take or omit any action which will impair the absolute and unrestricted right, power, authority and capacity of Optionee to sell Shares in accordance with the terms and conditions hereof. Any purported transfer of Shares by Optionee that violates any provision of this Section 18 shall be wholly void and ineffectual and shall give to the Company or its designee the right to purchase from Optionee all but not less than all of the Shares then owned by Optionee for a period of 90 days from the date the Company first learns of the purported transfer at the Agreement Price and on the Agreement Terms (as those terms are defined in subsections (b)(3) and (b)(4), respectively, of this Section 18). If the Shares are not purchased by the Company or its designee, the purported transfer thereof shall remain void and ineffectual and they shall continue to be subject to this Agreement. The Company shall not cause or permit the transfer of any Shares to be made on its books except in accordance with the terms hereof. (a)(1). Permitted Transfers. (i) Optionee may sell, assign or transfer any Shares held by the Optionee but only by complying with the provisions of subsection (b)(1) of this Section 18. 7 29 (ii) Optionee may sell, assign or transfer any Shares held by the Optionee without complying with the provisions of subsection (b)(1) by obtaining the prior written consent of the Company's shareholders owning 50% of the then issued and outstanding shares of the Company's Common Stock (determined on a fully diluted basis) or a majority of the members of the Board of Directors of the Company, provided that the transferee agrees in writing to be bound by the provisions of this Option and the transfer is made in accordance with any other restrictions or conditions contained in the written consent and in accordance with applicable federal and state securities laws. (iii) Upon the death of Optionee, Shares held by the Optionee may be transferred to the personal representative of the Optionee's estate without complying with the provisions of subsection (b)(1). Shares so transferred shall be subject to the other provisions of this Option, including in particular subsection (b)(2). (a)(2). No Pledge. Unless a majority of the members of the Board of Directors consent, Shares may not be pledged, mortgaged or otherwise encumbered to secure indebtedness for money borrowed or any other obligation for which the Optionee is primarily or secondarily liable. (a)(3). Stock Certificate Legend. Each stock certificate for Shares issued to the Optionee shall have conspicuously written, printed, typed or stamped upon the face thereof, or upon the reverse thereof with a conspicuous reference on the face thereof, one or both of the following legend: (i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF REGISTRATION THEREUNDER OR AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT. SUCH SHARES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN ANY MANNER EXCEPT IN ACCORDANCE WITH AND SUBJECT TO THE TERMS OF THE STOCK OPTION AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. UNLESS A MAJORITY OF THE MEMBERS OF THE BOARD OF DIRECTORS CONSENT, SUCH STOCK OPTION AGREEMENT PROHIBITS ANY PLEDGE, MORTGAGE OR OTHER ENCUMBRANCE OF SUCH SHARES TO SECURE ANY OBLIGATION OF THE HOLDER HEREOF. EVERY CREDITOR OF THE HOLDER HEREOF AND ANY PERSON ACQUIRING OR PURPORTING TO ACQUIRE THIS CERTIFICATE OR THE SHARES HEREBY EVIDENCED OR ANY INTEREST THEREIN IS HEREBY NOTIFIED OF THE EXISTENCE OF SUCH STOCK OPTION AGREEMENT, AND ANY ACQUISITION OR PURPORTED ACQUISITION OF THIS CERTIFICATE OR THE SHARES HEREBY EVIDENCED OR ANY INTEREST THEREIN SHALL BE SUBJECT TO ALL RIGHTS AND OBLIGATIONS OF THE PARTIES TO SUCH STOCK OPTION AGREEMENT AS THEREIN SET FORTH. (ii) [any legend required by applicable state securities laws] 8 30 (b)(1). Sales of Shares. (i) Company's Right of First Refusal. In the event that the Optionee shall desire to sell, assign or transfer any Shares held by the Optionee to any other person (the "Offered Shares") and shall be in receipt of a bona fide offer to purchase the Offered Shares ("Offer"), the following procedure shall apply. The Optionee shall give to the Company written notice containing the terms and conditions of the Offer, including, but not limited to (a) the number of Offered Shares; (b) the price per Share; (c) the method of payment; and (d) the name(s) of the proposed purchaser(s). An offer shall not be deemed bona fide unless the Optionee has informed the prospective purchaser of the Optionee's obligation under this Option and the prospective purchaser has agreed to become a party hereunder and to be bound hereby. The Company is entitled to take such steps as it reasonably may deem necessary to determine the validity and bona fide nature of the Offer. Until 30 days after such notice is given, the Company or its designee shall have the right to purchase all of the Offered Shares at the price offered by the prospective purchaser and specified in such notice. Such purchase shall be on the Agreement Terms, as defined in subsection (b)(4). (ii) Failure of Company or its Designee to Purchase Offered Shares. If all of the Offered Shares are not purchased by the Company and/or its designee within the 30-day period granted for such purchases, then any remaining Offered Shares may be sold, assigned or transferred pursuant to the Offer; provided, that the Offered Shares are so transferred within 30 days of the expiration of the 30-day period to the person or persons named in, and under the terms and conditions of, the bona fide Offer described in the notice to the Company; and provided further, that such persons agree to execute and deliver to the Company a written agreement, in form and content satisfactory to the Company, agreeing to be bound by the terms and conditions of this Option. (b)(2). Manner of Exercise. Any right to purchase hereunder shall be exercised by giving written notice of election to the Optionee, the Optionee's personal representative or any other selling person, as the case may be, prior to the expiration of such right to purchase. (b)(3). Agreement Price. The "Agreement Price" shall be the higher of (A) the fair market value of the Shares to be purchased determined in good faith by the Board of Directors of the Company and (B) the original exercise price of the Shares to be purchased. (b)(4). Agreement Terms. "Agreement Terms" shall mean and include the following: 9 31 (i) Delivery of Shares and Closing Date. At the closing, the Optionee, the Optionee's personal representative or such other selling person, as the case may be, shall deliver certificates representing the Shares, properly endorsed for transfer, and with the necessary documentary and transfer tax stamps, if any, affixed, to the purchaser of such Shares. Payment of the purchase price therefor shall concurrently be made to the Optionee, the Optionee's personal representative or such other selling person, as provided in subsection (ii) of this subsection (b)(4). Such delivery and payment shall be made at the principal office of the Company or at such other place as the parties mutually agree. (ii) Payment of Purchase Price. The Company shall pay the purchase price to the Optionee at the closing. (b)(5). Right to Purchase Upon Certain Other Events. The Company or its designee shall have the right to purchase all, but not less than all, of the Shares held by the Optionee at the Agreement Price and on the Agreement Terms for a period of 90 days after any of the following events: (i) an attempt by a creditor to levy upon or sell any of the Optionee's Shares; (ii) the filing of a petition by the Optionee under the U.S. Bankruptcy Code or any insolvency laws; (iii) the filing of a petition against Optionee under any insolvency or bankruptcy laws by any creditor of the Optionee if such petition is not dismissed within 30 days of filing; or (iv) the entry of a decree of divorce between the Optionee and the Optionee's spouse. The Optionee shall provide the Company written notice of the occurrence of any such event within 30 days of such event. (c)(1). Termination. The provisions of this Section 18 shall terminate and all rights of each such party hereunder shall cease except for those which shall have theretofore accrued upon the occurrence of any of the following events: (i) cessation of the Company's business; (ii) bankruptcy, receivership or dissolution of the Company; (iii) ownership of all of the issued and outstanding shares of the Company by a single shareholder of the Company; 10 32 (iv) written consent or agreement of the shareholders of the Company holding 50% of the then issued and outstanding shares of the Company (determined on a fully diluted basis); (v) consent or agreement of a majority of the members of the Board of Directors of the Company; or (vi) registration of any class of equity securities of the Company pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. (c)(2). Amendment. This Section 18 may be modified or amended in whole or in part by a written instrument signed by shareholders of the Company holding 50% of the outstanding shares of Common Stock (determined on a fully diluted basis) or a majority of the members of the Board of Directors of the Company. 19. Market Standoff. Unless the Board of Directors otherwise consents, Optionee agrees hereby not to sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the Act; provided, however, that such restriction shall apply only to the first two registration statements of the Company to become effective under the Act which includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 20. Complete Agreement. This Agreement constitutes the entire agreement between the parties with respect to its subject matter, and supersedes all other prior or contemporaneous agreements and understandings both oral or written; subject, however, that in the event of any conflict between this Agreement and the Plan, the Plan shall govern. This Agreement may only be amended in a writing signed by the Company and the Optionee. 21. Privileges of Stock Ownership. Participant shall not have any of the rights of a shareholder with respect to any Shares until Optionee exercises the Option and pay the Exercise Price. 22. Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated above or to such other address as such party may designate in writing from time to tome to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by rapifax or telecopier. 11 33 DATE OF GRANT:______________ BIGSTAR ENTERTAINMENT, INC. By:______________________________ Name: Title: 12 34 OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE COMPANY'S PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan, represents that Optionee is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of this Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or of the Committee upon any questions arising under the Plan. Dated:______________ ______________________________ Optionee 13 35 Consent of Spouse The undersigned spouse of the Optionee to the foregoing Stock Option Agreement acknowledges on his or her own behalf that: I have read the foregoing Stock Option Agreement and I know its contents. I hereby consent to and approve of the provisions of the Stock Option Agreement, and agree that the Shares issued upon exercise of the options covered thereby and my interest in them are subject to the provisions of the Stock Option Agreement and that I will take no action at any time to hinder operation of the Stock Option Agreement on those Shares or my interest in them. ______________________________ Signature of Spouse ______________________________ Address 14 EX-10.3 8 1999 STOCK OPTION AND INCENTIVE PLAN 1 BIGSTAR ENTERTAINMENT, INC. 1999 STOCK OPTION AND INCENTIVE PLAN 2 TABLE OF CONTENTS PAGE 1. Purposes of this Plan....................................................1 2. Definitions..............................................................1 3. Stock Subject to this Plan...............................................3 4. Administration of this Plan..............................................4 5. Eligibility..............................................................5 6. Term of Plan.............................................................5 7. Exercise Price and Consideration.........................................6 8. Options..................................................................7 9. Stock Purchase Rights....................................................8 10. Stock Appreciation Rights................................................9 11. Restricted Shares.......................................................10 12. Performance Units and Performance Shares................................11 13. Non-Transferability of Options and Stock Purchase Rights................12 14. Adjustments Upon Changes in Capitalization, Merger or Other Events......12 15. Time of Grant...........................................................12 16. Amendment and Termination...............................................13 17. Conditions Upon Issuance of Shares......................................13 18. Reservation of Shares...................................................14 19. Option, Stock Purchase and Stock Bonus Agreements.......................14 20. Shareholder Approval....................................................14 21. Information to Optionees and Purchasers.................................14 22. Right of Company to Terminate Employment or Consulting Services.........14 23. Rights of First Refusal and Repurchase..................................15 24. Withholding.............................................................15 25. Separability............................................................15 26. Non-Exclusivity of this Plan............................................16 27. Governing Law...........................................................16 28. Cancellation of and Substitution for Nonstatutory Options...............16 29. Market Standoff.........................................................16 Exhibit 1 - Form of Stock Option Agreement -i- 3 BIGSTAR ENTERTAINMENT, INC. 1999 STOCK OPTION AND INCENTIVE PLAN 1. Purposes of this Plan. The general purpose of this 1999 Stock Option and Incentive Plan is to promote the interests of the Company and its shareholders by (i) providing certain Employees of and Consultants to the Company with additional incentives to continue and increase their efforts with respect to achieving success in the business of the Company, its Affiliates and its Subsidiaries, and (ii) attracting and retaining the best available personnel to participate in the ongoing business operations of the Company and its Subsidiaries. Options granted under this Plan may be either Incentive Stock Options or Nonstatutory Stock Options, as determined at the discretion of the Board and as reflected in the terms of the written option agreements. The Board may also grant Stock Purchase Rights hereunder. 2. Definitions. As used in this Plan, the following definitions shall apply: "Affiliates" means any other entity directly or indirectly controlling, controlled by, or under common control, with the Company. "Affiliated SAR" means a SAR that is granted in connection with a related Option, and which will be deemed to automatically be exercised simultaneous with the exercise of the related Option. "Award" means, individually or collectively, a grant under this Plan, including any Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, or Performance Shares. "Award Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under the Plan. "Board" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed. "Board of Directors" means the full Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any particular Code section shall include any successor section. "Committee" shall mean the Committee appointed by the Board of Directors in accordance with Section 4(a) of this Plan, if one is appointed, or if no Committee is appointed, the Board of Directors. "Common Stock" shall mean the Common Stock of the Company. "Company" shall mean BigStar Entertainment, Inc., a Delaware corporation. "Consultant" shall mean any person who is engaged by the Company or by any Parent or Subsidiary to render consulting services and is compensated for such consulting services, and any director of the Company whether compensated for such services or not. 4 "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. "Disinterested Person" shall mean a member of the Board of Directors of the Company: (i) who was not during the one year prior to service as an administrator of this Plan granted or awarded equity securities pursuant to this Plan, or any other plan of the Company or any of its affiliates entitling the participants therein to acquire equity securities of the Company or any of its affiliates except as permitted by Rule 16b-3(c)(2)(i) promulgated under the Exchange Act ("Rule 16b-3(c)(2)(i)"); or (ii) who is otherwise considered to be a "disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission. "Employee" shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company as a common-law employee. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Freestanding SAR" means a SAR that is granted independently of any Options. "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. "Major Event" shall be deemed to have occurred if (i) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger generally have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; (ii) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; (iii) proceedings or actions for the liquidation or dissolution of the Company are initiated by the Company; or (iv) any "person" (as defined in Sections 13(d) and 14(d) of the Exchange Act) (other than persons who beneficially own more than 30% of the capital stock of the Company on a fully diluted and as converted basis outstanding as of the date of adoption of this Plan by the Board of Directors) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's outstanding capital stock on a fully diluted and as converted basis at such time; provided, however, that a "Major Event" shall not be deemed to have occurred solely by reason of the consummation of a public offering by the Company of common stock registered under the Securities Act. "Nonstatutory Stock Option" shall mean an Option which is not intended to qualify as an Incentive Stock Option. "Option" shall mean a stock option granted pursuant to this Plan. "Optioned Stock" shall mean the Common Stock subject to an Option. "Optionee" shall mean an Employee or Consultant who receives an Option. "Parent" shall mean a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. 2 5 "Participant" means an Employee of the Company who has outstanding an Award granted under the Plan. "Performance Unit" means an Award granted to an Employee pursuant to Section 12. "Performance Share" means an Award granted to an Employee, pursuant to Section 12 herein. "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Section 11. "Plan" shall mean this 1998 Stock Option and Incentive Plan. "Purchaser" shall mean an Employee or Consultant who exercises a Stock Purchase Right. "Restricted Stock" means an Award granted to a Participant pursuant to Section 11. "Securities Act" shall mean the Securities Act of 1933, as amended. "Share" shall mean a share of Common Stock, as adjusted in accordance with Section 14 of this Plan. "Stock Appreciation Right" or "SAR" means an Award, granted alone or in connection with a related Option, designated as a SAR, pursuant to the terms of Section 10. "Stock Purchase Right" shall mean a right to purchase Common Stock pursuant to this Plan or the right to receive a bonus of Common Stock for past services. "Subsidiary" shall mean a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. "Tandem SAR" means a SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, a SAR shall similarly be cancelled). 3. Stock Subject to this Plan. Subject to the provisions of Section 14 of this Plan, the maximum aggregate number of Shares under this Plan is 500,000. The Shares may be authorized but unissued, or reacquired Common Stock, or both. If an Option or Stock Purchase Right should expire, terminate, be cancelled or become unexercisable for any reason without having been exercised in full, then the unpurchased Shares which were subject thereto shall, unless this Plan shall have been terminated, become available for future grant or sale under this Plan. In addition, Shares issued under this Plan and later repurchased or otherwise reacquired by the Company shall, unless this Plan shall have been terminated, become available for future grant or sale under this Plan. 4. Administration of this Plan. (a) Procedure. This Plan shall be administered by the Board of Directors of the Company unless and until the Board of Directors delegates administration to a Committee, as provided in this Section 4(a). 3 6 (i) Subject to Section 4(a)(ii), the Board of Directors may appoint a Committee consisting of not less than two persons (who need not be members of the Board of Directors) to administer this Plan on behalf of the Board of Directors, subject to such terms and conditions not inconsistent with this Plan as the Board of Directors may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. Members of the Board who are either eligible for Options and/or Stock Purchase Rights or have been granted Options and/or Stock Purchase Rights may vote on any matters affecting the administration of this Plan or the grant of any Options and/or Stock Purchase Rights pursuant to this Plan, except that no such member shall act upon the granting of an option to such member, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options and/or Stock Purchase Rights to such member. (ii) Notwithstanding the foregoing Section 4(a)(i), if the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, from the effective date of such registration until six months after the termination of such registration, any grants of Options and/or Stock Purchase Rights to directors or officers who are subject to Section 16 of the Exchange Act shall be made only by a Committee consisting of two or more persons, each of whom shall be a Disinterested Person (if necessary to meet the requirements of Rule 16b-3 promulgated under the Exchange Act). The Board shall otherwise comply with the requirements of Rule 16b-3 promulgated under the Exchange Act, as from time to time in effect, unless the Board expressly declares that any such requirement shall not apply. (iii) Subject to the foregoing Sections 4(a)(i) and 4(a)(ii), from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer this Plan. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. (b) Powers of the Board. Subject to the provisions of this Plan, the Board shall have plenary authority, in its discretion and without limitation, to do the following: (i) to grant Incentive Stock Options, Nonstatutory Stock Options or Stock Purchase Rights; (ii) to determine, upon review of relevant information and in accordance with Section 7 of this Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options or Stock Purchase Rights to be granted, which exercise price shall be determined in accordance with Section 7 hereof; (iv) to determine the Employees or Consultants to whom, and the time or times at which, Options or Stock Purchase Rights shall be granted and the number of Shares to be represented by each Option or Stock Purchase Right; (v) to interpret this Plan; (vi) to prescribe, amend and rescind rules and regulations relating to this Plan, and in the exercise of this power, to correct any defect, omission or inconsistency in this Plan or in any agreement relating to an Option or Stock Purchase Right, in a manner and to the extent the Board shall deem necessary or expedient to make this Plan fully effective; (vii) to determine the terms and provisions of each Option or Stock Purchase Right granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option or Stock Purchase Right; (viii) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option or Stock Purchase Right previously granted by the Board; and (ix) to make all other determinations deemed necessary or advisable for the administration of this Plan. (c) Board Determinations. In making determinations under this Plan, the Board may take into account the nature of the services rendered by the respective Employees, their present and potential contributions to the success of the Company, or its Subsidiaries, as the case may be, and such other factors as the Board in its discretion shall deem relevant. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees, Purchasers and any other holders of any Options and/or Stock Purchase Rights granted under this Plan. 5. Eligibility. 4 7 (a) Options and Stock Purchase Rights may be granted to Employees, provided that Incentive Stock Options may only be granted to Employees. An Employee who has been granted an Option or Stock Purchase Right may, if such Employee is otherwise eligible, be granted additional Option(s) or Stock Purchase Right(s). (b) No Incentive Stock Option may be granted to an Employee which, when aggregated with all other Incentive Stock Options granted to such Employee by the Company or by any Parent or Subsidiary, would result in Shares having an aggregate fair market value (determined for each Share as of the date of grant of the Option covering such Share) in excess of $100,000 (or such different amount as provided for under the Code requirements for Incentive Stock Options) becoming first available for purchase upon exercise of one or more incentive stock options during any calendar year. (c) Section 5(b) of this Plan shall apply only to an Incentive Stock Option evidenced by a stock option agreement which sets forth the intention of the Company and the Optionee that such Option shall qualify as an Incentive Stock Option. Section 5(b) of this Plan shall not apply to any Option evidenced by a stock option agreement which sets forth the intention of the Company and the Optionee that such Option shall be a Nonstatutory Stock Option. (d) On and after the effective date of the registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act, a member of the Board of Directors who is not an Employee shall not be eligible for the benefits of this Plan unless at the time an Option or Stock Purchase Right is granted to such member, the Board expressly declares that such exclusion will not apply. 6. Term of Plan. This Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by vote of the holders of a majority of the outstanding shares of the Company entitled to vote on the adoption of this Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of this Plan. 7. Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option or Stock Purchase Right shall be such price as is determined by the Board, but shall be subject to the following provisions: (i) In the case of an Incentive Stock Option: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per share exercise price shall be no less than 110% of the fair market value per share on the date of grant. (B) granted to any Employee other than an Employee described in Section 7(a)(i)(A), the per share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option: (A) granted to an Employee or Consultant who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per share exercise price shall be no less than 110% of the fair market value per share on the date of the grant. 5 8 (B) granted to any Employee or Consultant, other than an Employee or Consultant described in Section 7(a)(ii)(A), the per share exercise price shall be no less than 85% of the fair market value per share on the date of grant. (iii) In the case of a Stock Purchase Right granted to any person, the per share exercise price shall be no less than 85% of the fair market value per share on the date of grant; provided, however, that if such person at the time of the grant of such Stock Purchase Right, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per share exercise price shall be no less than 100% of the fair market value per share on the date of the grant. (b) Fair market value shall be determined by the Board in its discretion; provided, however, that where there is an active public market for the Common Stock, the fair market value per share shall be determined as follows: (i) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System, then the closing or last sale price, respectively, on the date of grant, as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the NASDAQ System). (ii) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market System but is traded in the over-the-counter market, then the mean of the closing bid and asked prices on the date of grant as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the NASDAQ System). (c) The consideration to be paid for the Shares to be issued upon exercise of an Option or Stock Purchase Right, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory note or other deferred payment arrangement, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option or Stock Purchase Right shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 8. Options. (a) Term of Option. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the stock option agreement relating to such Option; provided that the term of a Nonstatutory Stock Option may, as provided in Section 8(b)(iv), be extended for a period of up to six (6) months. However, in the case of an Option granted to an Employee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter time as may be provided in the stock option agreement relating to such Option. (b) Exercise of Option. (i) Procedure for Exercise; Rights as a Shareholder. Any Option granted under this Plan shall be exercisable at such times and under such conditions as determined by the Board, such as vesting conditions and/or performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of this Plan. Notwithstanding anything herein to the contrary, no Option granted hereunder shall have a vesting period in excess of five (5) years. 6 9 An Option may, but need not, include a provision whereby at any time prior to termination of the Optionee's Continuous Status as an Employee, the Optionee may elect to exercise the Option as to all or any part of the Shares subject to the Option prior to the stated vesting date of the Option or of any vesting installment or installments specified in the Option. Any shares so purchased from any unvested installment or Option may be subject to a repurchase right in favor of the Company or to any restriction the Board determines to be appropriate. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. An Option may not be exercised for a fraction of a Share. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 7 of this Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of this Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (ii) Termination of Status as an Employee. In the event of termination of an Optionee's Continuous Status as an Employee (as the case may be), such Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent that such Employee was entitled to exercise it at the date of such termination. To the extent that such Employee was not entitled to exercise the Option at the date of such termination, or if such Employee does not exercise such Option (which such Employee was entitled to exercise) within such thirty (30) day time period, the Option shall terminate. (iii) Disability of Optionee. Notwithstanding the provisions of Section 8(b)(ii) above, in the event of termination of an Optionee's Continuous Status as an Employee as a result of such Employee's disability, such Employee may, but only within six (6) months from the date of such termination (but in no event later than the date of expiration of the term of such option as set forth in the Option Agreement), exercise the Option to the extent such Employee was entitled to exercise it at the date of such termination; provided however, that if the Option is an Incentive Stock Option and the disability is not a total and permanent disability (as defined in Section 422(c)(6) of the Code), then if the Optionee does not exercise the Option within three months after such termination, such Option shall automatically convert into a Nonstatutory Stock Option; and provided, further, that if the termination is as a result of a total and permanent disability (as defined in Section 422(c)(6) of the Code), such Employee may within one (1) year from the date of such termination, but in no event later than the date of expiration of the term of such option as set forth in the Option Agreement), exercise the Option to the extent such Employee was entitled to exercise it at the date of such termination. To the extent that such Employee was not entitled to exercise the Option at the date of termination, or if such Employee does not exercise such Option (which such Employee was entitled to exercise) within the time periods specified above, as the case may be, the Option shall terminate. (iv) Death of Optionee. In the event of the death of an Optionee: (A) while the Optionee is an Employee or Consultant, (B) during the thirty (30) day period described in Section 8(b)(ii), or (C) during the one (1) year period described in Section 8(b)(iii), the Option may be exercised, at any time within one (1) year following the date of death (but, in the case of an Incentive Stock Option, in 7 10 no event later than the date of expiration of the term of such Incentive Stock Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the time of death of the Optionee. To the extent that such Employee or Consultant was not entitled to exercise the Option at the date of death, or if such Employee or Consultant, estate or other person does not exercise such Option (which such Employee or Consultant, estate or person was entitled to exercise) within the one (1) year time period specified in this Plan, the Option shall terminate. 9. Stock Purchase Rights. (a) Rights to Purchase. After the Board determines that it will offer an Employee or Consultant a Stock Purchase Right, it shall deliver to the offeree a stock purchase agreement or stock bonus agreement, as the case may be, setting forth the terms, conditions and restrictions relating to the offer, including the number of Shares which such person shall be entitled to purchase, and the time within which such person must accept such offer, which shall in no event exceed six (6) months from the date upon which the Board made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a stock purchase agreement or stock bonus agreement in the form approved by the Board. (b) Issuance of Shares. Forthwith after payment therefor, the Shares purchased shall be duly issued; provided, however, that the Board may require that the Purchaser make adequate provision for any federal and state withholding obligations of the Company as a condition to the Purchaser purchasing such Shares. (c) Other Provisions. The stock purchase agreement or stock bonus agreement shall contain such other terms, provisions and conditions not inconsistent with this Plan as may be determined by the Board, including rights of first refusal as set forth in Section 20 hereof. 10. Stock Appreciation Rights. (a) Grants of SARs. Tandem SARs may be awarded by the Committee in connection with any Option granted under the Plan, either on the Date of Grant of the Option or thereafter at any time prior to the exercise, termination or expiration of the Option Nontandem SARs may also be granted by the Committee at any time. On the Date of Grant of a Nontandem SAR, the Committee shall specify the number of shares of Common Stock covered by such right and the base price of shares of Common Stock to be used in connection with the calculation described in Section 10(c) below. SARs shall be subject to such terms and conditions not inconsistent with the other provisions of this Plan as the Committee shall determine. (b) Exercise of Tandem SARs. A Tandem SAR shall be exercisable only to the extent that the related Option is exercisable and shall be exercisable only for such period as the Committee may determine (which period may expire prior to the expiration date of the related Option). Upon the exercise of all or a portion of a Tandem SAR, the related Option shall be canceled with respect to an equal number of shares of Common Stock. A Tandem SAR shall entitle the Grantee to surrender to the Corporation unexercised the related Option, or any portion thereof, and to receive from the Corporation in exchange therefor that number of shares of Common Stock having an aggregate fair market value equal to (A) the excess of (i) the fair market value of one (1) share of Common Stock as of the date the Tandem SAR is exercised over (ii) the Option price per share specified in such Option, multiplied by (B) the number of shares of Common Stock subject to the Option, or portion thereof, which is surrendered. Cash shall be delivered in lieu of any fractional shares. (c) Exercise of Nontandem SARs. A Nontandem SAR shall be exercisable during such period as the Committee shall determine prior to the Date of Grant. The exercise of a Nontandem SAR shall entitle the Grantee to receive from the Corporation that number of shares of Common Stock 8 11 having an aggregate fair market value equal to (A) the excess of (i) the fair market value of one (1) share of Common Stock as of the date on which the Nontandem SAR is exercised over (ii) the base price of the shares covered by the Nontandem SAR, multiplied by (B) the number of shares of Common Stock covered by the Nontandem SAR, or the portion thereof being exercised. Cash shall be delivered in lieu of any fractional shares. (d) Settlement of SARs. As soon as is reasonably practicable after the exercise of a SAR, the Corporation shall (i) issue, in the name of the Grantee, stock certificates representing the total number of full shares of Common Stock to which the Grantee is entitled pursuant to Section 10(b) or 10(c) hereof and cash in an amount equal to the fair market value, as of the date of exercise, of any resulting fractional shares, and (ii) if the Committee causes the Corporation to elect to settle all or part of its obligations arising out of the exercise of the SAR in cash pursuant to Section 10(e), deliver to the Grantee an amount in cash equal to the fair market value, as of the date of exercise, of the shares of Common Stock it would otherwise be obligated to deliver. (e) Cash Settlement. The Committee, in its discretion, may cause the Corporation to settle all or any part of its obligation arising out of the exercise of a SAR by the payment of cash in lieu of all or part of the shares of Common Stock it would otherwise be obligated to deliver in an amount equal to the fair market value of such shares on the date of exercise. 11. Restricted Shares. (a) Grant of Restricted Shares. The Committee may from time to time cause the Corporation to issue Restricted Shares under the Plan, subject to such restrictions, conditions and other terms as the Committee may determine in addition to those set forth herein. (b) Restrictions. At the time a grant of Restricted Shares is made, the Committee shall establish a period of time (the "Restricted Period") applicable to such Restricted Shares. Each grant of Restricted Shares may be subject to a different Restricted Period. The Committee may, in its sole discretion, at the time a grant is made, prescribe restrictions in addition to or other than the expiration of the Restricted Period, including the satisfaction of corporate or individual performance objectives, which shall be applicable to all or any portion of the Restricted Shares. Except with respect to grants of Restricted Shares intended to qualify as performance based compensation for purposes of Section 162(m) of the Code, the Committee may also, in its sole discretion, shorten or terminate the Restricted Period or waive any other restrictions applicable to all or a portion of such Restricted Shares. None of the Restricted Shares may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of prior to the date on which such Restricted Shares vest in accordance with Section 11(c). (c) Restricted Stock Certificates. The Corporation shall issue, in the name of each Grantee, stock certificates with proper legends representing the total number of Restricted Shares granted to the Grantee, as soon as reasonably practicable after the Date of Grant. The Secretary of the Corporation shall hold such certificates, properly endorsed for transfer, after the Grantee's benefit until such time as the Restricted Shares are forfeited to the Corporation or until the Restricted Shares vest. In lieu of the foregoing, Restricted Shares awarded to a Grantee may be held under the Grantee's name in a book entry account maintained by or on behalf of the Corporation. (d) Rights of Holders of Restricted Shares. Except as otherwise determined by the Committee either at the time Restricted Shares are awarded or at any time thereafter prior to the lapse of the restrictions, holders of Restricted Shares shall not have the right to vote such shares or the right to receive any dividends with respect to such shares. All distributions, if any, received by an employee or consultant with respect to Restricted Shares as a result of any stock split-up, stock distribution, combination of shares, or other similar transaction shall be subject to the restrictions of this Section 11. 9 12 (e) Termination of Employment Relationship. Any Restricted Shares granted pursuant to the Plan shall be forfeited if the Grantee terminates employment or consultant relationship with the Corporation or its subsidiaries for reasons other than death or disability prior to the expiration or termination of the Period of Restriction and the satisfaction of any other conditions applicable to such Restricted Shares. Upon such forfeiture, the Secretary of the Corporation shall either cancel or retain in its treasury the Restricted Shares that are forfeited to the Corporation. Upon the death of a Grantee prior to his termination of employment or service as a consultant, or upon a Grantee's termination of employment as a result of disability, all Restricted Shares previously awarded to such Grantee which have not previously vested shall be forfeited unless the Committee in its sole discretion shall determine otherwise. (f) Delivery of Restricted Shares. Subject to the provisions of this Section, at such time as the Grantee shall become vested in his Restricted Shares, the restrictions applicable to the Restricted Shares shall lapse and a stock certificate for the number of Restricted Shares with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, to the Grantee or the Grantee's beneficiary or estate, as the case may be. 12. Performance Units and Performance Shares. (a) Grant of Performance Units/Shares. Subject to the terms of the Plan, Performance Units and Performance Shares may be granted to eligible Employees and Consultants at any time and from time to time, as shall be determined by the Committee, in its sole discretion. The Committee shall have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant. (b) Value of Performance Units/Shares. Each Performance Unit shall have an initial value that is established by the Committee at the time of the grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Shares that will be paid out to the Participants. The time period during which the performance goals must be met shall be called a "Performance Period." Performance Periods of Awards granted to Insiders shall, in all cases, exceed six (6) months in length. (c) Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of Performance Units/Shares shall be entitled to receive a payout of the number of Performance Unit/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. Notwithstanding the preceding sentence, after the grant of a Performance Unit/Share, the Committee, in its sole discretion, may waive the achievement of any performance goals for such Performance Unit/Share. (d) Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/Shares shall be made in a single lump sum, within forty-five (45) calendar days following the close of the applicable Performance Period. The Committee, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in combination thereof. Prior to the beginning of each Performance Period, Participants may, in the discretion of the Committee, elect to defer the receipt of any Performance Unit/Share payout upon such terms as the Committee shall determine. (e) Cancellation of Performance Units/Shares. Subject to the applicable Award Agreement, upon the earlier of (a) the Participant's termination of employment, or (b) the date set forth in 10 13 the Award Agreement, all remaining Performance Units/Shares shall be forfeited by the Participant to the Company, the Shares subject thereto shall again be available for grant under the Plan. (f) Nontransferability. Performance Units/Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further a Participant's rights under the Plan shall be exercisable during the Participant's lifetime only by the Participant or the Participant's legal representative. 13. Non-Transferability of Options and Stock Purchase Rights. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee or Purchaser, only by the Optionee or Purchaser. 14. Adjustments Upon Changes in Capitalization, Merger or Other Events. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under this Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option or Stock Purchase Right, or repurchase of Shares from a Purchaser or Optionee upon termination of employment or otherwise, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock of the Company or the payment of a stock dividend with respect to the Common Stock. Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Rights. In the event of the dissolution or liquidation of the Company, all Options and Stock Purchase Rights will terminate immediately prior to the consummation of such proposed action if not previously exercised. The Board, at its option, may provide for one or more of the following from time to time or in any stock option agreement or stock purchase agreement that, in the event of a Major Event, then (A) all Options and Stock Purchase Rights will be assumed or equivalent options or stock purchase rights will be substituted by such surviving corporation (or other entity) or a parent or subsidiary of such surviving corporation (or other entity), (B) all Options and Stock Purchase Rights will continue in full force and effect, or (C) all Options and Stock Purchase Rights will terminate if not exercised prior to the consummation of the transaction. The foregoing adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. The grant of an Option or Stock Purchase Right pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 15. Time of Grant. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Board makes the determination granting such Option or Stock Purchase Right. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 11 14 16. Amendment and Termination. (a) Amendment. The Board may amend this Plan from time to time in such respects as the Board may deem advisable; provided that the shareholders of the Company must approve the following amendments or revisions within 12 months before or after the adoption of such revision or amendment: (i) any increase in the number of Shares subject to this Plan, other than in connection with an adjustment under Section 14 of this Plan; (ii) any change in the designation of the class of persons eligible to be granted Options (to the extent such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422(b) of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act); or (iii) any other revision or amendment if such revision or amendment requires shareholder approval in order for this Plan to satisfy the requirements of Section 422(b) of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act if applicable to the Company. (b) Shareholder Approval. If any amendment requiring shareholder approval under Section 16(a) of this Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 20 of this Plan. (c) Suspension and Termination. The Board may suspend or terminate this Plan at any time. No Options or Stock Purchase Rights may be granted while this Plan is suspended or after it is terminated. (d) Effect of Amendment; Termination or Suspension. Any such amendment, termination or suspension of this Plan shall not affect Options or Stock Purchase Rights already granted and such Options or Stock Purchase Rights shall remain in full force and effect as if this Plan had not been amended, terminated or suspended, unless mutually agreed otherwise between the Optionee or Purchaser (as the case may be) and the Company, which agreement must be in writing and signed by the Optionee or Purchaser (as the case may be) and the Company. 17. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or other stock trading system upon which the Shares may then be listed. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to make such representations and warranties at the time of any such exercise as the Company may at that time determine, including without limitation, representations and warranties that (i) the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares in violation of applicable federal or state securities laws, and (ii) such person is knowledgeable and experienced in financial and business matters and is capable of evaluating the merits and the risks associated with purchasing the Shares. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of this Plan. 12 15 The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares under this Plan, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19. Option, Stock Purchase and Stock Bonus Agreements. Options shall be evidenced by written stock option agreements in such form as the Board shall approve. Upon the exercise of Stock Purchase Rights, the Purchaser shall sign a stock purchase agreement or stock bonus agreement in such form as the Board shall approve. 20. Shareholder Approval. (a) The shareholders of the Company shall have approved this Plan within 12 months before or after this Plan is adopted. Any shares purchased before shareholder approval is obtained shall be rescinded if shareholder approval is not obtained within 12 months before or after this Plan is adopted. Such shares shall not be counted in determining whether such approval is obtained. (b) If the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approval of the shareholders of the Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. (c) If the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act and if prior to such time either (x) the shareholders of the Company did not approve this Plan or (y) the Company did not solicit shareholder approval substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder, then the Company shall take all necessary actions to qualify the Plan under Rule 16(b)(3) promulgated under the Exchange Act at or prior to the later of (A) the first annual meeting of shareholders held subsequent to the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act or (B) the granting of an Option hereunder to an officer or director after such registration. 21. Information to Optionees and Purchasers. The Company shall provide annually to each Optionee and Purchaser, during the period that such Optionee or Purchaser has one or more Options or Stock Purchase Rights outstanding, copies of the annual financial statements of the Company. 22. Right of Company to Terminate Employment or Consulting Services. This Plan shall not confer upon any Optionee or holder of a Stock Purchase Right any right with respect to continuation of employment by or the rendition of consulting services to the Company, any of its Subsidiaries or its Parent, nor shall it interfere in any way with his or her right or the Company's, any of its Subsidiaries' or its Parent's right to terminate his or her employment or services at any time, with or without cause. 23. Rights of First Refusal and Repurchase. (a) The written agreements evidencing Options or Stock Purchase Rights may contain such provisions as the Board shall determine (or pursuant to a separate agreement) to the effect that if an Optionee or Purchaser elects to sell all or any Shares that the Optionee or Purchaser acquired upon the exercise of an Option or Stock Purchase Right, then any proposed sale of such Shares by such Optionee or Purchaser shall be subject to a right of first refusal in favor of the Company. (b) The Board may require, at its option, that a stock purchase agreement, stock option agreement, stock bonus agreement, or other agreement pursuant to this Plan grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the Purchaser's employment with the Company for any reason (including death or disability). The repurchase price shall be at the higher of the original purchase price or fair value of the Shares on the date of termination of 13 16 employment. If the Board so determines, the purchase price for shares repurchased may be paid by cancellation of any indebtedness of the Purchaser to the Company. The repurchase option must be exercised by the Company within 90 days of termination of employment for cash or cancellation of money indebtedness for the Shares and the right shall terminate when the Company's Common Stock becomes publicly traded. The Board may require such a repurchase right in other events. (c) Certificates representing shares issued upon exercise of Options or Stock Purchase Rights shall bear a restrictive legend to the effect that the transferability of such shares is subject to the restrictions contained in this Plan and the applicable written agreement between the Optionee or Purchaser and the Company. 24. Withholding. The Company's obligation to deliver shares of Common Stock under this Plan shall be subject to applicable federal, state and local tax withholding requirements. To the extent provided by the terms of the stock option agreement relating to an Option, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any or a combination of the following means: (i) cash payment or wage withholding; (ii) authorizing the Company to withhold from the Shares otherwise issuable to the Optionee upon exercise of the Option the number of Shares having a fair market value less than or equal to the amount of the withholding tax obligation; or (iii) delivering to the Company unencumbered shares of Common Stock owned by the Optionee having a fair market value less than or equal to the amount of the withholding tax obligation; provided, however, that with respect to clauses (ii) and (iii) above the Board in its sole discretion may disapprove such payment and require that such taxes be paid in cash. 25. Separability. At a time when the Company has a class of equity securities registered pursuant to Section 12 of the Exchange Act, if any of the terms or provisions of this Plan conflict with the requirements of Rule 16b-3 promulgated under the Exchange Act and/or Section 422 of the Code, then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of Rule 16b-3 promulgated under the Exchange Act, and/or with respect to Incentive Stock Options, Section 422 of the Code. The foregoing sentence shall not apply with respect to the requirements of Rule 16b-3 promulgated under the Exchange Act if the Board has expressly declared that such requirements shall not apply. With respect to Incentive Stock Options, if this Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out at length herein. To the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, such Option, to that extent, shall be deemed to be a Nonstatutory Stock Option for all purposes of this Plan. 26. Non-Exclusivity of this Plan. The adoption of this Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 27. Governing Law. This Plan shall be governed by, and construed in accordance with the laws of the State of New York. 28. Cancellation of and Substitution for Nonstatutory Options. The Company shall have the right to cancel any Nonstatutory Stock Option at any time before it otherwise would have expired by its terms and to grant to the same Optionee in substitution therefor a new Nonstatutory Stock Option stating an option price which is lower (but not higher) than the option price stated in the cancelled Option. Any such substituted option shall contain all the terms and conditions of the cancelled Option; provided, however, that such substituted Option shall not be exercisable after the expiration of ten (10) years and one day from the date of grant of the cancelled Option. 14 17 29. Market Standoff. Unless the Board determines otherwise, each Optionee or Purchaser shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall apply only to the first two registration statements of the Company to become effective under the Securities Act which includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 15 18 Exhibit 1 Form of Stock Option Agreement 19 THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is made and entered into as of the date of grant set forth below (the "Date of Grant") by and between BigStar Entertainment, Inc., a Delaware corporation (the "Company"), and the optionee named below ("Optionee"). Capitalized terms not defined herein shall have the meaning ascribed to them in the Company's 1999 Stock Option & Incentive Plan (the "Plan"). Optionee: ______________________________________________ Social Security Number: ______________________________________________ Address: ______________________________________________ ______________________________________________ Total Option Shares: ______________________________________________ Exercise Price Per Share: ______________________________________________ Date of Grant: ______________________________________________ Type of Stock Option: [ ] Incentive Stock Option ("ISO") (Check one): [ ] Non-Statutory Stock Option 1. Grant of Option. The Company hereby grants to Optionee an option (the "Option") to purchase the total number of shares of Common Stock of the Company set forth above (the "Shares") at the Exercise Price Per Share set forth above (the "Exercise Price"), subject to all of the terms and conditions of this Agreement and the Plan. If designated as an Incentive Stock Option above, the Option is intended to qualify as an "incentive stock option" ("ISO") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Only Employees of the Company shall receive ISOs. 2. Exercise Price. The Exercise Price, is not less than the fair market value per share of Common Stock on the date of grant, as determined by the Board; provided, however, in the event Optionee is an Employee and owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its Parent or Subsidiary corporations immediately before this Option is granted, said exercise price is not less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant as determined by the Board. 3. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 8 of the Plan as follows: (i) Vesting (a) This Option shall not become exercisable as to any of the number of the Shares as follows (check one) : 20 [ ]: until the date that is one (1) year from the date of grant of the Option (the "Anniversary Date"). On the Anniversary Date, this Option may be exercised to the extent of 25% of the Shares. Upon the expiration of each calendar month from the Anniversary Date, this Option may be exercised to the extent of the product of (a) the total number of Shares set forth at the beginning of this Agreement and (b) the fraction the numerator of which is one (1) and the denominator of which is forty-eight (48) (the "Monthly Vesting Amount"), plus the shares as to which the right to exercise the Option has previously accrued but has not been exercised; provided, however, that notwithstanding any of the above, the 25% exercisable on the Anniversary Date and the Monthly Vesting Amount with respect to any calendar month shall become exercisable only if the Employee was an employee of the Company or any Subsidiary of the Company as of the Anniversary Date and the last day of such month, respectively. [ ]: ____ % of the shares vesting over ____ months, pro rata for each month of Optionee providing continued service to the Company. [ ]: ________________________________________________. (b) This Option may not be exercised for a fraction of a Share. (c) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 7, 8 and 9 below, subject to the limitations contained in subsection 3(i)(d). (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 11 below. (ii) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the President, Secretary or Chief Financial Officer of the Company. The written notice shall be accompanied by payment of the exercise price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. (iii) Adjustments, Merger, etc. The number and class of the Shares and/or the exercise price specified above are subject to appropriate adjustment in the event of changes in the capital stock of the Company by reason of stock dividends, split-ups or combinations of shares, reclassifications, mergers, consolidations, reorganizations or liquidations. Subject to any required action of the stockholders of the Company, if the Company shall be the surviving corporation in any merger or consolidation, this Option (to the extent that it is still outstanding) shall pertain to and apply to the securities to which a holder of the same number of shares of Common Stock that are then subject to this Option would have been entitled. A dissolution or liquidation of the Company, or a merger or consolidation in which the Company is not the surviving corporation, will cause this Option to terminate, unless the agreement or merger or consolidation shall otherwise provide, provided that the Optionee shall, if the Board expressly authorizes, in such event have the right immediately prior to such dissolution or liquidation, or merger or consolidation, to exercise this Option in whole or part. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board, whose 2 21 determination in that respect shall be final, binding and conclusive. In the event that (i) Optionee is an Employee, and (ii) the Company consummates a merger resulting in a change in control of the Company, and (iii) the Employee is terminated without cause, then any options remaining unvested hereunder shall be deemed to automatically vest. 4. Optionee's Representations. By receipt of this Option, by its execution, and by its exercise in whole or in part, Optionee represents to the Company that Optionee understands that: (i) both this Option and any Shares purchased upon its exercise are securities, the issuance by the Company of which requires compliance with federal and state securities laws; (ii) these securities are made available to Optionee only on the condition that Optionee makes the representations contained in this Section 4 to the Company; (iii) Optionee has made a reasonable investigation of the affairs of the Company sufficient to be well informed as to the rights and the value of these securities; (iv) Optionee understands that the securities have not been registered under the Securities Act of 1933, as amended (the "Act") in reliance upon one or more specific exemptions contained in the Act, which may include reliance on Rule 701 promulgated under the Act, if available, or which may depend upon (a) Optionee's bona fide investment intention in acquiring these securities; (b) Optionee's intention to hold these securities in compliance with federal and state securities laws; (c) Optionee having no present intention of selling or transferring any part thereof (recognizing that the Option is not transferable) in violation of applicable federal and state securities laws; and (d) there being certain restrictions on transfer of the Shares subject to the Option; (v) Optionee understands that the Shares subject to this Option, in addition to other restrictions on transfer, must be held indefinitely unless subsequently registered under the Act, or unless an exemption from registration is available; that Rule 144, the usual exemption from registration, is only available after the satisfaction of certain holding periods and in the presence of a public market for the Shares; that there is no certainty that a public market for the Shares will exist, and that otherwise it will be necessary that the Shares be sold pursuant to another exemption from registration which may be difficult to satisfy; and (vi) Optionee understands that the certificate representing the Shares will bear a legend prohibiting their transfer in the absence of their registration or the opinion of counsel for the Company that registration is not required, and a legend prohibiting their transfer in compliance with applicable state securities laws unless otherwise exempted. 5. Method of Payment. Payment of the purchase price shall be made by cash, check or, in the sole discretion of the Board at the time of exercise, promissory notes or other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate purchase price of the Shares being purchased. 6. Restrictions on Exercise. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such Shares would constitute a violation of any applicable federal or state securities or other law or regulation. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee. In the event of termination of Optionee's Continuous Status as an Employee for any reason other than death or disability, Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to 3 22 exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, this Option shall terminate. 8. Disability of Optionee. In the event of termination of Optionee's Continuous Status as an Employee as a result of Optionee's disability, Optionee may, but only within six (6) months from the date of termination of employment or consulting relationship (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent Optionee was entitled to exercise it at the date of such termination; provided, however that if the disability is not total and permanent (as defined in Section 22(e)(3) of the Code) and the Optionee exercises the option within the period provided above but more than three months after the date of termination, this Option shall automatically be deemed to be a Nonstatutory Stock Option and not an Incentive Stock Option; and provided, further, that if the disability is total and permanent (as defined in Section 22(e)(3) of the Code), then the Optionee may, but only within one (1) year from the date of termination of employment or consulting relationship (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise this Option at the date of termination, or if Optionee does not exercise such Option (which Optionee was entitled to exercise) within the time periods specified herein, this Option shall terminate. 9. Death of Optionee. In the event of the death of Optionee: (i) during the term of this Option while an Employee of the Company and having been in Continuous Status as an Employee since the date of grant of this Option, this Option may be exercised, at any time within one (1) year following the date of death (but, in the case of an Incentive Stock Option, in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the time of death of the Optionee. To the extent that such Employee was not entitled to exercise the Option at the date of death, or if such Employee, estate or other person does not exercise such Option (which such Employee, estate or person was entitled to exercise) within the one (1) year time period specified herein, the Option shall terminate; or (ii) during the thirty (30) day period specified in Section 7 or the one (1) year period specified in Section 8, after the termination of Optionee's Continuous Status as an Employee, this Option may be exercised, at any time within one (1) year following the date of death (but, in the case of an Incentive Stock Option, in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise this Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. To the extent that such Employee was not entitled to exercise this Option at the date of death, or if such Employee, estate or other person does not exercise such Option (which such Employee, estate or person was entitled to exercise) within the one (1) year time period specified herein, this Option shall terminate. 10. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee, only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 11. Term of Option. Subject to the other terms of this Agreement, this Option may not be exercised more than five (5) years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and terms of this Option; provided, however, that the term of this option, if it is a Nonstatutory Stock Option, may be extended for the period set forth in Section 9(i) or Section 9(ii) in the circumstances set forth in such Sections. 4 23 12. Early Disposition of Stock; Taxation Upon Exercise of Option. If Optionee is an Employee and the Option qualifies as an ISO, Optionee understands that, if Optionee disposes of any Shares received under this Option within two (2) years after the date of this Agreement or within one (1) year after such Shares were transferred to Optionee, Optionee will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in any amount generally measured as the difference between the price paid for the Shares and the lower of the fair market value of the Shares at the date of exercise or the fair market value of the Shares at the of disposition. Any gain recognized on such premature sale of the Shares in excess of the amount treated as ordinary income will be characterized as capital gain. Optionee hereby agrees to notify the Company in writing within thirty (30) days after the date of any such disposition. Optionee understands that if Optionee disposes of such Shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be treated as long-term capital gain laws subject to meeting various qualifications. If Optionee is a Consultant or this is a Nonstatutory Stock Option, Optionee understands that, upon exercise of this Option, Optionee will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the exercise price. Upon a resale of such shares by the Optionee, any difference between the sale price and the fair market value of the Shares on the date of exercise of the Option will be treated as capital gain or loss. Optionee understands that the Company will be required to withhold tax from Optionee's current compensation in some of the circumstances described above; to the extent that Optionee's current compensation is insufficient to satisfy the withholding tax liability, the Company may require the Optionee to make a cash payment to cover such liability as a condition to exercise of this Option. 13. Tax Consequences. The Optionee understands that any of the foregoing references to taxation are based on federal income tax laws and regulations now in effect, and may not be applicable to the Optionee under certain circumstances. The Optionee may also have adverse tax consequences under state or local law. The Optionee has reviewed with the Optionee's own tax advisors the federal, state, local and foreign tax consequences of the transactions contemplated by this Agreement. The Optionee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Optionee understands that the Optionee (and not the Company) shall be responsible for the Optionee's own tax liability that may arise as a result of the transactions contemplated by this Agreement. 14. Severability; Construction. In the event that any provision in this Option shall be invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Option. This Option shall be construed as to its fair meaning and not for or against either party. 15. Damages. The parties agree that any violation of this Option (other than a default in the payment of money) cannot be compensated for by damages, and any aggrieved party shall have the right, and is hereby granted the privilege, of obtaining specific performance of this Option in any court of competent jurisdiction in the event of any breach hereunder. 16. Governing Law. This Option shall be deemed to be made under and governed by and construed in accordance with the laws of the State of New York. Jurisdiction for any disputes hereunder shall be solely in New York, New York. 17. Delay. No delay or failure on the part of the Company or the Optionee in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. 18. Restrictions. Notwithstanding anything herein to the contrary, Optionee understands and agrees that Optionee shall not dispose of any of the Shares, whether by sale, exchange, assignment, transfer, gift, devise, bequest, mortgage, pledge, encumbrance or otherwise, except in accordance with the terms and conditions of this Section 18, and Optionee shall not take or omit any action which will 5 24 impair the absolute and unrestricted right, power, authority and capacity of Optionee to sell Shares in accordance with the terms and conditions hereof. Any purported transfer of Shares by Optionee that violates any provision of this Section 18 shall be wholly void and ineffectual and shall give to the Company or its designee the right to purchase from Optionee all but not less than all of the Shares then owned by Optionee for a period of 90 days from the date the Company first learns of the purported transfer at the Agreement Price and on the Agreement Terms (as those terms are defined in subsections (b)(3) and (b)(4), respectively, of this Section 18). If the Shares are not purchased by the Company or its designee, the purported transfer thereof shall remain void and ineffectual and they shall continue to be subject to this Agreement. The Company shall not cause or permit the transfer of any Shares to be made on its books except in accordance with the terms hereof. (a)(1). Permitted Transfers. (i) Optionee may sell, assign or transfer any Shares held by the Optionee but only by complying with the provisions of subsection (b)(1) of this Section 18. (ii) Optionee may sell, assign or transfer any Shares held by the Optionee without complying with the provisions of subsection (b)(1) by obtaining the prior written consent of the Company's shareholders owning 50% of the then issued and outstanding shares of the Company's Common Stock (determined on a fully diluted basis) or a majority of the members of the Board of Directors of the Company, provided that the transferee agrees in writing to be bound by the provisions of this Option and the transfer is made in accordance with any other restrictions or conditions contained in the written consent and in accordance with applicable federal and state securities laws. (iii) Upon the death of Optionee, Shares held by the Optionee may be transferred to the personal representative of the Optionee's estate without complying with the provisions of subsection (b)(1). Shares so transferred shall be subject to the other provisions of this Option, including in particular subsection (b)(2). (a)(2). No Pledge. Unless a majority of the members of the Board of Directors consent, Shares may not be pledged, mortgaged or otherwise encumbered to secure indebtedness for money borrowed or any other obligation for which the Optionee is primarily or secondarily liable. (a)(3). Stock Certificate Legend. Each stock certificate for Shares issued to the Optionee shall have conspicuously written, printed, typed or stamped upon the face thereof, or upon the reverse thereof with a conspicuous reference on the face thereof, one or both of the following legend: (i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF REGISTRATION THEREUNDER OR AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT. SUCH SHARES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN ANY MANNER EXCEPT IN ACCORDANCE WITH AND SUBJECT TO THE TERMS OF THE STOCK OPTION AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. UNLESS A MAJORITY OF THE MEMBERS OF THE BOARD OF DIRECTORS CONSENT, SUCH STOCK OPTION AGREEMENT PROHIBITS ANY PLEDGE, MORTGAGE OR OTHER ENCUMBRANCE OF SUCH SHARES TO SECURE ANY OBLIGATION OF THE HOLDER HEREOF. EVERY CREDITOR OF THE HOLDER HEREOF AND ANY PERSON ACQUIRING OR PURPORTING TO ACQUIRE THIS CERTIFICATE OR THE SHARES HEREBY EVIDENCED OR 6 25 ANY INTEREST THEREIN IS HEREBY NOTIFIED OF THE EXISTENCE OF SUCH STOCK OPTION AGREEMENT, AND ANY ACQUISITION OR PURPORTED ACQUISITION OF THIS CERTIFICATE OR THE SHARES HEREBY EVIDENCED OR ANY INTEREST THEREIN SHALL BE SUBJECT TO ALL RIGHTS AND OBLIGATIONS OF THE PARTIES TO SUCH STOCK OPTION AGREEMENT AS THEREIN SET FORTH. (ii) [any legend required by applicable state securities laws] (b)(1). Sales of Shares. (i) Company's Right of First Refusal. In the event that the Optionee shall desire to sell, assign or transfer any Shares held by the Optionee to any other person (the "Offered Shares") and shall be in receipt of a bona fide offer to purchase the Offered Shares ("Offer"), the following procedure shall apply. The Optionee shall give to the Company written notice containing the terms and conditions of the Offer, including, but not limited to (a) the number of Offered Shares; (b) the price per Share; (c) the method of payment; and (d) the name(s) of the proposed purchaser(s). An offer shall not be deemed bona fide unless the Optionee has informed the prospective purchaser of the Optionee's obligation under this Option and the prospective purchaser has agreed to become a party hereunder and to be bound hereby. The Company is entitled to take such steps as it reasonably may deem necessary to determine the validity and bona fide nature of the Offer. Until 30 days after such notice is given, the Company or its designee shall have the right to purchase all of the Offered Shares at the price offered by the prospective purchaser and specified in such notice. Such purchase shall be on the Agreement Terms, as defined in subsection (b)(4). (ii) Failure of Company or its Designee to Purchase Offered Shares. If all of the Offered Shares are not purchased by the Company and/or its designee within the 30-day period granted for such purchases, then any remaining Offered Shares may be sold, assigned or transferred pursuant to the Offer; provided, that the Offered Shares are so transferred within 30 days of the expiration of the 30-day period to the person or persons named in, and under the terms and conditions of, the bona fide Offer described in the notice to the Company; and provided further, that such persons agree to execute and deliver to the Company a written agreement, in form and content satisfactory to the Company, agreeing to be bound by the terms and conditions of this Option. (b)(2). Manner of Exercise. Any right to purchase hereunder shall be exercised by giving written notice of election to the Optionee, the Optionee's personal representative or any other selling person, as the case may be, prior to the expiration of such right to purchase. (b)(3). Agreement Price. The "Agreement Price" shall be the higher of (A) the fair market value of the Shares to be purchased determined in good faith by the Board of Directors of the Company and (B) the original exercise price of the Shares to be purchased. (b)(4). Agreement Terms. "Agreement Terms" shall mean and include the following: (i) Delivery of Shares and Closing Date. At the closing, the Optionee, the Optionee's personal representative or such other selling person, as the case may be, shall deliver certificates representing the Shares, properly endorsed for transfer, and with the necessary documentary and transfer tax stamps, if any, affixed, to the purchaser of such Shares. Payment of the purchase price therefor shall concurrently be made to the Optionee, the Optionee's personal representative or such other selling person, as provided in subsection (ii) of this subsection (b)(4). Such delivery and payment shall be made at the principal office of the Company or at such other place as the parties mutually agree. 7 26 (ii) Payment of Purchase Price. The Company shall pay the purchase price to the Optionee at the closing. (b)(5). Right to Purchase Upon Certain Other Events. The Company or its designee shall have the right to purchase all, but not less than all, of the Shares held by the Optionee at the Agreement Price and on the Agreement Terms for a period of 90 days after any of the following events: (i) an attempt by a creditor to levy upon or sell any of the Optionee's Shares; (ii) the filing of a petition by the Optionee under the U.S. Bankruptcy Code or any insolvency laws; (iii) the filing of a petition against Optionee under any insolvency or bankruptcy laws by any creditor of the Optionee if such petition is not dismissed within 30 days of filing; or (iv) the entry of a decree of divorce between the Optionee and the Optionee's spouse. The Optionee shall provide the Company written notice of the occurrence of any such event within 30 days of such event. (c)(1). Termination. The provisions of this Section 18 shall terminate and all rights of each such party hereunder shall cease except for those which shall have theretofore accrued upon the occurrence of any of the following events: (i) cessation of the Company's business; (ii) bankruptcy, receivership or dissolution of the Company; (iii) ownership of all of the issued and outstanding shares of the Company by a single shareholder of the Company; (iv) written consent or agreement of the shareholders of the Company holding 50% of the then issued and outstanding shares of the Company (determined on a fully diluted basis); (v) consent or agreement of a majority of the members of the Board of Directors of the Company; or (vi) registration of any class of equity securities of the Company pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. (c)(2). Amendment. This Section 18 may be modified or amended in whole or in part by a written instrument signed by shareholders of the Company holding 50% of the outstanding shares of Common Stock (determined on a fully diluted basis) or a majority of the members of the Board of Directors of the Company. 19. Market Standoff. Unless the Board of Directors otherwise consents, Optionee agrees hereby not to sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the Act; provided, however, that such restriction shall apply only to the first two registration statements of the Company to become effective under the Act which includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Act. The Company may impose 8 27 stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 20. Complete Agreement. This Agreement constitutes the entire agreement between the parties with respect to its subject matter, and supersedes all other prior or contemporaneous agreements and understandings both oral or written; subject, however, that in the event of any conflict between this Agreement and the Plan, the Plan shall govern. This Agreement may only be amended in a writing signed by the Company and the Optionee. 21. Privileges of Stock Ownership. Participant shall not have any of the rights of a shareholder with respect to any Shares until Optionee exercises the Option and pay the Exercise Price. 22. Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated above or to such other address as such party may designate in writing from time to tome to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by rapifax or telecopier. DATE OF GRANT:________________ BIGSTAR ENTERTAINMENT, INC. By:________________________________ Name: Title: OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE COMPANY'S PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan, represents that Optionee is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of this Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or of the Committee upon any questions arising under the Plan. Dated:________________ 9 28 ___________________________________ Optionee 10 29 Consent of Spouse The undersigned spouse of the Optionee to the foregoing Stock Option Agreement acknowledges on his or her own behalf that: I have read the foregoing Stock Option Agreement and I know its contents. I hereby consent to and approve of the provisions of the Stock Option Agreement, and agree that the Shares issued upon exercise of the options covered thereby and my interest in them are subject to the provisions of the Stock Option Agreement and that I will take no action at any time to hinder operation of the Stock Option Agreement on those Shares or my interest in them. ___________________________________ Signature of Spouse ___________________________________ Address 11 EX-10.4 9 EMPLOYMENT AGREEMENT: FRIEDENSOHN 1 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is entered into by and between BigStar Entertainment, Inc., a Delaware corporation (the "Company"), and David Friedensohn, the undersigned individual ("Executive"). RECITAL The Company and Executive desire to enter into an Employment Agreement setting forth the terms and conditions of Executive's employment with the Company. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and Executive agree as follows: 1. Employment. (a) Term. The Company hereby employs Executive to serve as CEO of the Company. The employment with the Company is not for any specified period of time. As a result, either the Company or the Executive is free to terminate the employment relationship at any time, subject to the other provisions of this Agreement. (b) Duties and Responsibilities. Executive will be reporting to the Company's Board of Directors. Within the limitations established by the Bylaws of the Company, the Executive shall have each and all of the duties and responsibilities of that position and such other duties on behalf of the Company, as may be assigned from time to time by the Company's Board. (c) Location. The location at which Executive shall perform services for the Company shall be New York, New York. (d) Board Seat. The Company shall nominate Executive to continue to be a Board member while he is employed by the Company, and shall use its commercially reasonable efforts to ensure his election to the Board. 2. Compensation. (a) Base Salary. Executive shall be paid a base salary ("Base Salary") payable in bi-weekly installments consistent with Company's payroll practices. The Base Salary shall be as follows: 2
Calendar Year Amount ------------- ------ 1999 $160,000 2000 $200,000 2001 and thereafter $250,000
(b) Payment. Payment of all compensation to Executive hereunder shall be made in accordance with the relevant Company policies in effect from time to time, including normal payroll practices, and shall be subject to all applicable employment and withholding taxes. (c) Bonus. Executive shall also be entitled to a guaranteed bonus as follows:
Calendar Year Amount ------------- ------ 1999 Quarterly bonus of $22,500 2000 Quarterly bonus of $5,000 ($10,000 if the Company is publicly traded) 2001 and thereafter Quarterly bonus of $18,750 ($37,500 if the Company is publicly traded)
3. Other Employment Benefits. (a) Business Expenses. Upon submission of itemized expense statements in the manner specified by the Company, Executive shall be entitled to reimbursement for reasonable travel and other reasonable business expenses duly incurred by Executive in the performance of his duties under this Agreement. (b) Benefit Plans. Executive shall be entitled to participate in the Company's medical and dental plans, life and disability insurance plans and retirement plans pursuant to their terms and conditions. Executive shall be entitled to participate in any other benefit plan offered by the Company to its employees during the term of this Agreement (other than stock option or stock incentive plans, which are governed by Section 3(d) below). Nothing in this Agreement shall preclude the Company from terminating or amending any employee benefit plan or program from time to time. 2 3 (c) Vacation. Executive shall be entitled to four (4) weeks of vacation each year of full employment, exclusive of legal holidays, as long as the scheduling of Executive's vacation does not interfere with the Company's normal business operations. (d) Stock Options. Executive shall be entitled to options to acquire shares of the Common Stock of the Company pursuant to the terms of the Company's 1999 Stock Option and Incentive Plan, subject to the following terms: (1) The number of shares for which the options will become exercisable shall be 100,000 shares, subject to vesting. The shares will vest in 1/48 equal amounts for each month of continued employment by Executive. (2) The exercise price for the options shall be at seven dollars and twenty-five cents ($7.25) per share, as appropriately adjusted for stock splits, stock dividends, and the like. (3) The vested options shall be exercisable until the earlier of five (5) years after vesting or 90 days after termination of Executive's employment with the Company. Executive may elect within 30 days after termination for his stock options to be non-incentive stock options, and in that event, the vested options need not be exercised until five (5) years after the date of vesting. (4) Issuance of the options shall be in accordance with all applicable securities laws and the other terms and conditions of the Company's Stock Option Plan and the Stock Option Agreement with Executive of even date herewith. (5) Executive shall be given credit for two years worth of vesting of his unvested options (and any stock subject to vesting, if any) in the following events: (a) the termination of Executive without cause (defined in Section 5(a) below) or (b) the acquisition of the Company by merger, sale of all or substantially all of the Company's assets, or other reorganization resulting in a change of 50% or more in the ownership of the Company's stock. (e) No Other Benefits. Subject to Section 5(b), Executive understands and acknowledges that the compensation specified in Sections 2 and 3 of this Agreement shall be in lieu of any and all other compensation, benefits and plans; provided, that each year the Board shall review whether it is appropriate to award Executive additional stock options. (f) Life Insurance. The Company shall pay for the premiums of a universal life insurance policy with the benefits payable to the Executive or his heirs, in the principal amount of $1 million, subject to the Company being able to obtain such coverage on reasonable terms. (g) Key Man Life Insurance. The Company shall obtain Key Man Life Insurance on the life of the Executive, in the amount of $2 million, with the proceeds payable to 3 4 the Company. Executive shall cooperate in connection therewith as may be reasonably requested by the Company (including but not limited to taking physical exams). 4. Executive's Business Activities. Executive shall devote the substantial portion of his entire business time, attention and energy exclusively to the business and affairs of the Company, Executive may serve as a member of the Board of Directors of other organizations that do not compete with the Company, and may participate in other professional, civic, governmental organizations and activities that do not materially affect his ability to carry out his duties hereunder. 5. Termination of Employment. (a) For Cause. Notwithstanding anything herein to the contrary, the Company may terminate Executive's employment hereunder for cause for any one of the following reasons: (1) conviction of a felony, or a misdemeanor where imprisonment is imposed, (2) Executive's gross incompetence in performing his duties hereunder, or (3) material breach of this Agreement which breach is not cured within ten (10) days following written notice of such breach. Upon termination of Executive's employment with the Company for cause, the Company shall be under no further obligation to Executive for salary or bonus, except to pay all accrued but unpaid base salary, accrued bonus (if any) and accrued vacation to the date of termination thereof. (b) Without Cause. The Company may terminate Executive's employment hereunder at any time without cause, provided, however, that Executive shall be entitled to severance pay in the amount of two (2) years of Base Salary in addition to accrued but unpaid Base Salary and accrued vacation, less deductions required by law, but if, and only if, Executive executes a valid and comprehensive release of any and all claims that the Executive may have against the Company in a form provided by the Company and Executive executes such form. (c) Termination for Good Reason. If Executive terminates his employment with the Company for Good Reason (as hereinafter defined), he shall be entitled to the vesting benefits set forth in Section 3(d)(5) and the severance benefits set forth in Section 5(b). For purposes of this Agreement, "Good Reason" shall mean any of the following: (i) relocation of the Company's executive offices more than forty miles from the current location, without Executive's concurrence; (ii) any material breach by the Company of this Agreement; (iii) a material change in the principal line of business of the Company, without Executive's concurrence, or (iv) any significant change in the Executive's duties and responsibilities. (d) Cooperation. After notice of termination, Executive shall cooperate with the Company, as reasonably requested by the Company, to effect a transition of Executive's responsibilities and to ensure that the Company is aware of all matters being handled by Executive. 6. Disability of Executive. The Company may terminate this Agreement without liability if Executive shall be permanently prevented from properly performing his essential duties hereunder with reasonable accommodation by reason of illness or other physical 4 5 or mental incapacity for a period of more than 120 consecutive days. Upon such termination, Executive shall be entitled to all accrued but unpaid Base Salary, accrued bonus (if any) and accrued vacation. 7. Death of Executive. In the event of the death of Executive, the Company's obligations hereunder shall automatically cease and terminate; provided, however, that within 15 days the Company shall pay to Executive's heirs or personal representatives Executive's Base Salary and accrued vacation accrued to the date of death. 8. Confidential Information and Invention Assignments. Executive has executed a Confidential Information and Invention Assignment Agreement (the "Confidential Information and Invention Assignment Agreement"). The obligations under the Confidential Information and Invention Assignment Agreement shall survive termination of this Agreement for any reason. 9. Exclusive Employment. During employment with the Company, (a) Executive will not do anything to compete with the Company's present or contemplated business, nor will he plan or organize any competitive business activity and (b) Executive will not enter into any agreement which conflicts with his duties or obligations to the Company. Executive will not during his employment or within one (1) year after it ends, without the Company's express written consent, solicit or encourage any employee, agent, independent contractor, supplier, consultant, investor, or alliance partner to terminate or alter a relationship with the Company. 10. Assignment and Transfer. Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, and any purported assignment, transfer or delegation thereof shall be void. 11. No Inconsistent Obligations. Executive is aware of no obligations, legal or otherwise, inconsistent with the terms of this Agreement or with his undertaking employment with the Company. Executive will not disclose to the Company, or use, or induce the Company to use, any proprietary information or trade secrets of others. Executive represents and warrants that he or she has returned all property and confidential information belonging to all prior employers. 12. Miscellaneous. (a) Attorneys' Fees. Should either party hereto, or any heir, personal representative, successor or assign of either party hereto, resort to legal proceedings in connection with this Agreement or Executive's employment with the Company, the party or parties prevailing in such legal proceedings shall be entitled, in addition to such other relief as may be granted, to recover its or their reasonable attorneys' fees and costs in such legal proceedings from the non-prevailing party or parties; provided, however, that nothing herein is intended to affect the provisions of Section 12(l). (b) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflict of law principles. 5 6 (c) Entire Agreement. Except with respect to the Stock Option Plan and Stock Option Agreement referenced in Section 3(d), this Agreement, together with the Confidential Information and Invention Assignment Agreement, contains the entire agreement and understanding between the parties hereto and supersedes any prior or contemporaneous written or oral agreements, representations and warranties between them respecting the subject matter hereof. (d) Amendment. This Agreement may be amended only by a writing signed by Executive and by a duly authorized representative of the Company. (e) Severability. If any term, provision, covenant or condition of this Agreement, or the application thereof to any person, place or circumstance, shall be held to be invalid, unenforceable or void, the remainder of this Agreement and such term, provision, covenant or condition as applied to other persons, places and circumstances shall remain in full force and effect. (f) Construction. The headings and captions of this Agreement are provided for convenience only and are intended to have no effect in construing or interpreting this Agreement. The language in all parts of this Agreement shall be in all cases construed according to its fair meaning and not strictly for or against the Company or Executive. (g) Rights Cumulative. The rights and remedies provided by this Agreement are cumulative, and the exercise of any right or remedy by either party hereto (or by its successor), whether pursuant to this Agreement, to any other agreement, or to law, shall not preclude or waive its right to exercise any or all other rights and remedies. (h) Nonwaiver. No failure or neglect of either party hereto in any instance to exercise any right, power or privilege hereunder or under law shall constitute a waiver of any other right, power or privilege or of the same right, power or privilege in any other instance. All waivers by either party hereto must be contained in a written instrument signed by the party to be charged and, in the case of the Company, by an officer of the Company (other than Executive) or other person duly authorized by the Company. (i) Notices. Any notice, request, consent or approval required or permitted to be given under this Agreement or pursuant to law shall be sufficient if in writing, and if and when sent by certified or registered mail, with postage prepaid, to Executive's residence (as noted in the Company's records), or to the Company's principal office, as the case may be. (j) Assistance in Litigation. Executive shall, during and after termination of employment, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become a party; provided, however, that such assistance following termination shall be furnished at mutually agreeable times and for mutually agreeable compensation. (k) Disputes. Any controversy, claim or dispute arising out of or relating to this Agreement or the employment relationship, either during the existence of the 6 7 employment relationship or afterwards, between the parties hereto, shall be litigated solely in state or federal court in New York, New York. Each party (1) submits to the jurisdiction of such court, (2) waives the defense of an inconvenient forum, (3) agrees that valid consent to service may be made by mailing or delivery of such service to the New York Secretary of State (the "Agent") or to the party at the party's last known address, if personal service delivery can not be easily effected, and (4) authorizes and directs the Agent to accept such service in the event that personal service delivery can not easily be effected. EACH PARTY, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER MATTER INVOLVING THE PARTIES HERETO. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date set forth below. BIGSTAR ENTERTAINMENT, INC. EXECUTIVE: By: /s/ David Levitsky /s/ David Friedensohn --------------------------- ----------------------------------- Name: David Levitsky David Friedensohn --------------------------- Title: Executive Vice President --------------------------- Date: March 15, 1999 --------------------------- 7 EX-10.5 10 DISTRIBUTION AGREEMENT 1 * Confidential treatment has been requested for certain portions of this exhibit. Omitted portions have been filed separately with the Commission. DISTRIBUTION AGREEMENT THIS DISTRIBUTION AGREEMENT (this "Agreement") is entered this 18 day of February 1998, by and between Big Star Entertainment, a having an address at 330 E. 83rd St., Apt G3, New York, NY ("Company"), and BAKER & TAYLOR, INC. ("B&T"), a Delaware corporation having an address at 8140 North Lehigh Avenue, Morton Grove, Illinois 60053. WITNESSETH: For valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS As used throughout this Agreement the following terms have the following meanings: 1.1 "Effective Date" means February 18, 1998 1.2 "Initial Termination Date" means the day preceding the first anniversary of the Effective Date. 1.3 "Customers" or "Customer" means customers of Company within the United States who order Products (hereinafter defined) from Company by means of Company's online retail store doing business over the Internet. 1.4 "Products" means [books, spoken word audio products,] pre-recorded video products in VHS, laser disc and DVD formats, multi-media products, and music audio products. 2. TERM 2.1 This Agreement will begin on the Effective Date and will expire on the Initial Termination Date, unless terminated on an earlier date pursuant to the express terms of this Agreement or unless extended pursuant to the terms of Section 2.2. 2.2 Unless one of the parties ("the "Notifying Party") to this Agreement notifies the other party not less than 60 days prior to the Initial Termination Date or any subsequent Termination Date (hereinafter defined) that the Notifying Party wishes that this Agreement not be renewed, and if this Agreement otherwise is in full force and effect and no Event of Default (hereinafter defined) has occurred, this Agreement automatically may be renewed for not more than five (5) consecutive periods of one (1) year each (each such period, a "Renewal Term") without further action by either party and on the same terms and conditions as set forth herein. If the Notifying Party notifies the other party before the 60 day period that it does not wish that this Agreement be renewed, this Agreement automatically will expire on the Initial Termination Date or on the next succeeding Termination Date. As used herein, "Termination Date" means the anniversary of the Initial Termination Date in a Renewal Term to which the same relates. As used herein, 2 "Term" means the period beginning on the date hereof and ending on the Initial Termination Date or a Renewal Term, as the case may be. 3. ORDER FULFILLMENT 3.1 Company will transmit orders in batches via the Internet to B&T at B&T's Internet mailbox location by file transfer protocol ("FTP"). The frequency of batched orders transmitted to B&T will be determined by the parties' mutual agreement. Each order transmitted by Company to B&T will contain the following information: (a) the Customer's name and shipping address, (b) the method by which Products ordered must be shipped to the Customer, (c) whether or not the order may be fulfilled in multiple shipments of Products to the Company or if the order may only be fulfilled when B&T has all products ordered in stock, (d) the text of any special messages to the Customer, and (e) instructions concerning specific package inserts to be included in the order. B&T will furnish Company with specifications for FTP communications. B&T may change such specifications from time to time on not less than 30 days' prior written notice to Company. 3.2 If Company wishes B&T to include specialized package inserts ("Special Inserts" with orders to Customers, Company from time to time will deliver to B&T the same at no expense to B&T and in sufficient quantity to supply to Customers as directed by Company to B&T and in sufficient quantity to supply to Customers as directed by Company to B&T. The handling cost payable by Company for including the Special Inserts will be $45 for every 1,000 Special Inserts included pursuant to Company's directions. Within one (1) business day after inquiry from Company, B&T will notify Company of the quantity of the various Special Inserts on hand at Shipping Facilities (hereinafter defined). B&T will use reasonable commercial efforts to assure that an adequate quantity of Special Inserts is maintained at each Shipping Facility. 3.3 After receipt of an order, B&T will (a) fill the order from inventory of Products in stock at such of B&T's facilities in the United States as B&T from time to time may designate (collectively, "Shipping Facilities"), (b) print the text of any special message requested by Company on the standard packing slip included in the order, (c) include any additional packing slips (including Special Interests) requested by Company in the order, (d) pursuant to Company's instructions, and based upon availability of Products in stock, ship the order to Company either as a multiple shipment or as one shipment, (e) promptly place any Products ordered by Company which B&T does not have in stock on a backorder report for review by B&T's account manager for Company, after which time such Products will be promptly ordered by B&T (collectively, "Backordered Products"), and (f) ship any Backordered Products, when received by B&T, pursuant to the terms of the preceding clauses (a)-(d) and the following two sentences. B&T will ship on the same business day all orders received by 1:00 P.M. Eastern time from Company on such business day for Products which B&T then has in stock at a Shipping Facility. Any orders received by B&T after 1:00 P.M. Eastern time will be shipped on the following business day. As used in this Section, "business day" means Monday through Friday, but excluding any Holidays. As used herein, "Holiday" means any recognized holiday on which the approved carrier or shippers providing services under this Agreement are closed for business. 3.4 B&T will print all packing slips (other than Special Inserts,) will insert all packing slips and will print and affix shipping labels on orders being shipped to Customers as part of its 2 3 fulfillment obligations hereunder and at no expense to Company, other than the fulfillment fee specified below. 3.5 Company acknowledges that it does not expect B&T to maintain in stock a complete inventory of all Products that may be ordered by Customers. B&T will maintain, and will update on a weekly basis, stock availability for Products. In addition, B&T will provide stock availability to Company on demand by FTP transmission. 3.6 Invoices enclosed in shipments by B&T to Customers will be customized in accordance with Company's specifications. Company's specifications will not exceed the capabilities of B&T's invoice printers. 3.7 (a) B&T will provide the following reports to Company: (i) On a weekly basis, B&T will transmit to Company a Ship Complete Report which details, by order, all orders received from Company for the preceding week, all Products contained in each order from Company, the fulfillment status of each such order, and the number of days elapsed since the order was made. (ii) On a daily basis and on a weekly basis, B&T will deliver to Company on a Daily Log and a Weekly Log, respectively, which details (x) all Product returns (identified by invoice number) processed by B&T for the preceding business day or for the preceding week, as the case may be, and indicating quantity and amount, and (y) by order, all orders filled by B&T on the preceding business day or the preceding week, as the case may be, and which includes the following information for each such order: the order number, the Customer's name and address, an itemization of Products shipped, the price charged by B&T to Company for each Product, and shipping and handling charges to Customers and to Company. (iii) On a weekly basis, B&T will deliver to Company a Canceled Order Report which specifies all orders canceled each day during the previous week and includes the following information for each cancelled order: the order number, the Customer's name, the title of each Product, the quantity of all Products, and the name of the person who cancelled the order on behalf of the Customer. (iv) On a weekly basis, B&T will deliver to Company an Inactive Product Report which specifies all orders of Products which are on backorder during the previous week and for which any Product contained in the order has been flagged as "inactive" in B&T's inventory system. As used herein, "inactive" means all Products which are out of print or otherwise permanently unavailable for sale. (v) On a monthly basis, B&T will deliver to Company a statement of account which itemizes (x) all invoices sent to Company hereunder during the prior calendar month, (y) all payments received from Company hereunder during the prior calendar month which have been applied against invoices and (z) all invoices unpaid by Company hereunder. (b) The preceding reports will be delivered by FTP transmission to Company's Internet address at no additional charge to Company. 3 4 3.8 If any Products ordered by a Company are placed on moratorium by the vendor, B&T will notify Company and will supply the Product only while B&T's supplies last, after which time B&T will cancel the order. If a shipment from any vendor to B&T of any Products ordered by Customers is delayed, B&T will notify Company within one (1) business day after being notified by the vendor of the delay. B&T will not be liable for delays arising from the failure of any freight carrier to meet its respective delivery standards. As used herein, "placed on moratorium" means Products which are designated by the vendor as being indefinitely unavailable for purchase from the vendor. 4. ORDER PROCESSING BY B&T Within 30 days after receipt of Company's request to do so, B&T will establish and thereafter maintain a dedicated post office box and/or a dedicated toll-free telephone number to which Customers may place order with B&T directly by mail or telephone, respectively, as part of Company's Internet retail store operation. B&T's actual costs to establish and maintain either the post office box or the 800 telephone number will be reimbursed by Company within 30 days after receipt of B&T's invoice therefor. B&T will terminate either the direct mail or the toll-free telephone number within 30 days after the Company's request to do the same. 5. RETURNS 5.1 (a) As used in this Agreement: (i) "Defective Products" means Products which contain manufactured defects which prevent them from being used for their intended purpose; (ii) "Damaged Products" means Products which are damaged during shipment to Customers which prevent them from being used for their intended purpose; and (iii) "Unmerchandisable Products" means Products which are shopworn and/or soiled. (b) Each shipment of Products to Customers will include Company's return policy, including instructions that Customers are to make returns of Products to Company at B&T's return center address. Within three (3) business days of B&T's receipt of the same, all returned Products will be received into B&T's inventory, the Products will be logged as having been received, Company will be issued a credit by B&T for the price paid by Company to B&T for the returned Products and B&T will provide Company with information in reasonably sufficient detail to allow Company to properly credit Customers for such returns. Company will reimburse B&T for any freight costs incurred for Products returns within 30 days after receipt of B&T's invoice therefor, except for returns of Defective Products, Unmerchandisable Products and/or Products shipped erroneously to Customers, in which case B&T promptly will issue a credit to Company equal to the U.S. Postal Service charge for shipment from Customers to B&T of such Products, and B&T will be responsible for any freight costs to ship replacement Products. On not less than 30 days' prior notice to B&T, Company may elect to process all returns of Products from Customers after the date specified in such notice. 4 5 (c) B&T will not be obligated to accept any returns of Products submitted more than 60 days after shipment of such Products to a Customer, including returns of Defective Products, Damaged Products, Unmerchandisable Products and/or erroneously shipped Products. 5.2 If returns of Products (other than returns of Defective Products, Unmerchandisable Products or Products erroneously shipped by B&T) during any calendar quarter exceed [*] [*] of the total price charged by B&T to Company of all Products shipped during the prior calendar quarter, Company will pay B&T a return fee equal to [*] [*] of the price charged by B&T to Company for such Products. Payment of any return fees will be made within 30 days after Company's receipt of B&T's invoice therefor. Credit memos for returns will be processed by B&T and delivered to Company within 15 days after B&T's receipt of the returned product. Credits issued to Company under such credit memos will be applied immediately to payables incurred by Company. 5.3 All Product returned to B&T (except for returns of Defective Products and/or Unmerchandisable Products) during any calendar quarter must be with the original packaging intact (including manufacturer's shrink wrap for video and audio Products.) Returns of any Products which are not in compliance with the preceding sentence will be subject to a repackaging fee of $[*] per unit, for returns of all Products which in the aggregate exceed __ percent (__%) of the price charged by B&T to Company of all Products shipped during the prior calendar quarter. Conversely, no repackaging fee will be payable for returns of all Products which in the aggregate are __ percent (__%) or less of the price charged by B&T to Company of all Products shipped during the prior calendar quarter. Payment of any repackaging fees will be made within 30 days after Company's receipt of B&T's invoice therefor. 5.4 (a) B&T will use commercially reasonable efforts to not ship Unmerchandisable Products to Customers. If Unmerchandisable Products are shipped by B&T to Customers, B&T's sole liability hereunder will be to accept returns of the same within the time period specified above and, subject to availability, promptly replace the same for Customers at no additional cost to them or to Company. If replacement Products are not available, B&T promptly will issue a credit to Company in the amount theretofore invoiced to Company for the same. (b) B&T will package for shipment to Customers in a manner which is commercially reasonable to prevent damage during shipment. If Products are damaged during shipment to Customers, B&T will accept a return of the same made within the time period specified above and, subject to availability, replace the same for Customers at no additional cost to Customers within a reasonable period of time. If replacement Products are not available, B&T promptly will issue a credit to Company in the amount theretofore invoiced to Company for the same. Company will reimburse B&T for the freight charges incurred by B&T for the return of such Products to B&T and for shipment of replacement Products to Customers. Such reimbursement will be made within 30 days after Customer's receipt of B&T's invoice therefor. Company also will pay B&T a fulfillment charge for supplying replacement Products in accordance with the terms of Section 6.3 (a) below. Company will not be responsible for reimbursing B&T for the cost of replacement Products. B&T promptly will file a claim with the carrier that shipped the Damaged Products (if permitted by such carrier's terms), and will use commercially reasonable efforts to prosecute any such claim. If any portion recovered by B&T from a carrier with respect 5 6 to a claim filed by B&T is specifically identified as reimbursement for freight charges, B&T will issue a credit to Company in such amount within 30 days after B&T's receipt thereof. 6. PRICING AND PAYMENT TERMS 6.1 (a) Company will pay B&T for all Products ordered by Customers, and Company will pay all fees and reimbursables payable to B&T herein, within [*] days after Customer's receipt of B&T's invoice therefor. All payments made to B&T will be in good funds and delivered by check or wire transfer to the order of B&T pursuant to B&T's instructions. Company may not reduce and set off amounts payable hereunder against any indebtedness or any other claim that Company may have against B&T, however or whenever arising, except as expressly provided herein. (b) The purchase price payable by Company for Products ordered by Customers during the Term will be the following: (i) for VHS video products (other than for Disney Classics having a list price of $[*]) purchased for sale (i.e., for which the suggested retail price for a single unit is under $30, or which is designated with "E" for the product group in B&T's ordering system) the list price at the time an order is placed; less a discount of [*]%; (ii) for VHS video products which are designated with "R" for the product group in B&T's ordering system, the list price at the time an order is placed, less a discount of [*]%; (iii) for DVD video products, B&T's cost to purchase, plus an amount equal to [*]% of such cost; (vii) for music audio compact discs and music audio cassettes, the published list price at the time an order is placed, less a discount of [*]%; (viii) for spoken word audio compact discs and spoken word audio cassettes, the published list price at the time an order is placed, less a discount of [*]%; (ix) for multimedia products, B&T's cost to purchase, plus an amount equal to [*]% of such cost; and (x) for printed books, the prices established from time to time as B&T's published standard retail terms (a copy of the current published standard retail terms is attached hereto as Exhibit 6.1(b). 6.2 As used in this Agreement, "list price" means, respectively, the publisher's, studio's or audio label's published list price with respect to a Product, unless the same does not exist, in which case "list price" means B&T's published list price for such Product. 6.3 (a) Company will pay B&T an order fulfillment fee for each order placed by Company equal to $[*] for the first unit in each order and $[*] for each additional unit in each 6 7 order, regardless of the number of shipments made for each order or the number of locations from which the shipments are made. (b) Company will pay B&T a transmission fee of $[*] per order for all orders of Products made by Company to B&T by means of electronic data interchange transmission through a value added network. No fee will be payable if Company transmits orders to B&T by FTP. (c) Company will reimburse B&T for all toll-free telephone orders from Customers to B&T at the rate of $[*] per minute. (d) Company will reimburse B&T for all mail orders from Customers to B&T at the rate of $[*] for the first unit in each order and $[*] for each additional unit in each order. (e) Company will reimburse B&T for all toll-free telephone customer service calls at the rate of $[*] per minute. (f) Company will pay B&T for a toll-free telephone maintenance charge at the rate of $[*] per month for each toll-free line used by B&T hereunder. Plus any additional set up costs. Company will not be liable for any payments referred to in clauses (c) - (f) of this Section unless Company has requested B&T to perform such services pursuant to Section 4.1 above. 6.4 Except as provided in Section 5.1 concerning returns of Defective Products, Unmerchandisable Products and/or erroneously shipped Products, Company will pay all freight costs for all Product shipments to, and Product returns from, Customers. Freight costs will be at the carriers' published rates. Company acknowledges that such freight charges are subject to change. 6.5 The cost of any custom reporting functions or custom packaging requested by Company and supplied by B&T hereunder will be determined by the agreement of the parties from time to time. 7. WARRANTY OF TITLE 7.1 B&T warrants that it has good title to the Products delivered to Customers pursuant to this Agreement. EXCEPT FOR THE FOREGOING WARRANTY, THERE ARE NO OTHER EXPRESS WARRANTIES, AND THERE ARE NO IMPLIED WARRANTIES. EXPRESSLY EXCLUDED ARE ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY B&T OR ITS AGENTS OR EMPLOYEES WILL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF THE FOREGOING WARRANTY. 7.2 NEITHER B&T NOR COMPANY WILL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, OR INCIDENTAL DAMAGES (INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, AND THE LIKE) ARISING OUT OF ANY CUSTOMER'S USE OF, OR INABILITY TO USE, ANY PRODUCTS, EVEN IF EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF 7 8 SUCH DAMAGES. The only liability B&T will have with respect to any Defective Products, damaged Products, Unmerchandisable Products and/or Products erroneously shipped will be the return rights of Customers described herein. 7.3 The provisions of this Section shall survive the termination or expiration of this Agreement. 8. TERMINATION 8.1 Either party may terminate this Agreement forthwith upon the occurrence of an Event of Default by the other party. As used herein, an "Event of Default" means the defaulting party's failure to cure, after receipt of not less than 30 days' prior written notice from the non-defaulting party, of any of the following: (i) failure of the defaulting party to observe or perform any condition or obligation imposed on the defaulting party under this Agreement (including payment obligations), (ii) breach of any warranty made by the defaulting party under this Agreement, and/or (iii) filing of a voluntary petition in bankruptcy or having an involuntary petition filed against the defaulting party, the appointment of a receiver or trustee for the defaulting party, or the execution of an assignment for the benefit of creditors of the defaulting party. The option to terminate this Agreement shall be in addition to, and not in lieu of, any other remedy available to the terminating party under this Agreement or at law or equity, all such remedies being cumulative. 8.2 Termination of this Agreement upon either party's default, or the expiration of this Agreement will not affect: (a) the rights of either party with respect to any breach of this Agreement, or (b) the obligations of either party already accrued prior to the effective date of expiration or termination (including obligations with respect to returned Products). (c) those obligations of the parties that, by their terms, survive termination or expiration of this Agreement. 8.3 In the event of the expiration or a termination of this Agreement, the parties promptly will reconcile accounts payable and receivable and bring the balance owed, if any, current and up-to-date to the party concerned. 9. CONFIDENTIALITY. The parties acknowledge that each may be exposed under this Agreement to confidential information relating to the other party's business, including but not limited to, the terms of this Agreement, quantities of Products, dollar volumes, revenues of Products, wholesale prices and similar information. The parties agree that, during the Term and for a period of three (3) years after the termination or expiration of this Agreement, neither party will disclose to any third party (except to the party's employees, agents, contractors, directors and similar entities solely required to fulfill the terms of this Agreement) any such confidential information without the prior written consent of the other party, only if such third parties agree to be bound by the confidentiality provisions hereof. The confidential information which each party may receive from the other party for the above period will be treated with the same degree of care used to protect its own confidential business information. The confidentiality obligations 8 9 between the parties will not apply to any information (a) which is in the public domain or which becomes part of the public domain through no fault of the party receiving the confidential information (the "receiving party"); (b) which is known by the receiving party prior to the disclosure thereof by the disclosing party (as established by documentary evidence); (c) which is lawfully received by the receiving party from a third party who provided such information without breach of any separate confidentiality obligation owed to the disclosing party; (d) which is disclosed by the disclosing party to any third party without restriction on further disclosure; or (e) which is independently developed by personnel having no access to the disclosing party's confirmation information (as established by documentary evidence). Confidential information also may be disclosed to third parties as may be required by law in the reasonable judgment of the receiving party's attorneys. In the event of disclosure under the preceding sentence, the receiving party promptly will notify the disclosing party of the same so that the disclosing party may seek a protective order or other appropriate remedy, and the receiving party will not oppose action by the disclosing party to obtain such an order or remedy. 10. MISCELLANEOUS 10.1 The risk of loss for Products shall pass from B&T when the Products are delivered to the carrier for shipment to Customers. 10.2 B&T will not be responsible for any sales or related tax liability, if any, associated with the sale of Products to Customers. 10.3 Neither party will be liable for any failure to perform, or delay in the performance of, any of its obligations hereunder (nor will the same constitute in an Event of Default) if and to the extent the failure or delay is caused, directly or indirectly, by events beyond its control, such as acts of God, acts of the public enemy, acts of any governmental body in its sovereign or contractual capacity, fires, floods, epidemics, quarantine restrictions, strikes or other labor disputes (except strikes or labor disputes that are not industry wide but are brought against Company or B&T solely), freight embargoes, and/or unusually severe weather. Lack of funds by either party will not excuse its timely performance of its obligations hereunder. In the event of an occurrence described in the first sentence, the non-performing party affected will be excused from further performance or observance of the obligation(s) so affected for as long as such circumstances prevail and if the party continues to use its best efforts to recommence performance or observance whenever and to whatever extent possible without delay. 10.4 This Agreement shall be construed in accordance with the laws of the State of Illinois, without giving effect to the conflict of laws provisions thereof. 10.5 The parties agree to bring any dispute, controversy or claim arising out of this Agreement or the matters provided for in this Agreement and which has not been resolved by the parties through an informal process within 45 days after either party notifies the other that a matter is in dispute, for arbitration and settlement in Chicago, Illinois in accordance with the Rules of the American Arbitration Association (the "Rules"). Each party will bear its own legal expenses, attorneys' fees and disbursements and costs of all experts and witnesses called by it. However, if the claim of either party is upheld by the arbitrators in all material respects, then the prevailing party promptly will be reimbursed by the other party for its reasonable attorneys' fees and 9 10 disbursements and the reasonable costs of its experts and witnesses, and the non-prevailing party also will pay all fees, costs and expenses of the arbitration. Any award rendered will be final and conclusive upon the parties. Any judgment thereon may be enforced in any court having jurisdiction. Both parties will continue to perform their respective obligations under this Agreement during any arbitration proceedings. Notwithstanding the Rules, the arbitrators' determination will only be in favor of one party's position. 10.6 No representation, promise, inducement or agreement relating to the transactions contemplated by this Agreement has been made by either party that is not set forth in this Agreement, and neither party shall be bound by or liable for any representation, promise, inducement or agreement not so set forth. 10.7 All notices, demands, consents, approvals and requests given by either party hereunder shall be in writing and shall be sent, by a nationally recognized overnight courier with receipt acknowledged and provision for payment made, or by registered or certified mail (return receipt requested), return postage pre-paid, to the parties at the following addresses: If to B&T: Baker & Taylor, Inc. c/o Baker & Taylor Entertainment 8140 North Lehigh Avenue Morton Grove, IL 60053 Attn: Sherri L. Sawyer Telecopy No.: 847-470-7860 If to Company: Big Star Entertainment 330 E. 83rd Street, Apt. G3 New York, NY Attn: Mr. David Levitsky All notices given by courier will be deemed delivered when received at the notice address and all notices given by registered or certified mail will be deemed delivered five (5) days after deposit with the U.S. Postal Service. Either party may change its notice address from time to time by notification in writing to the other party, however any such notification will not be deemed given until actually received by the recipient party. 10.8 Either party (the "Auditing Party") may, on reasonable prior notice to the other party (the "Audited Party"), at the Auditing Party's own expense, during the Audited Party's regular business hours and at the place where the Audited Party regularly keeps them, examine the books and records of the Audited Party relating to the Audited Party's performance of its obligations hereunder. 10.9 The waiver or failure of either party to exercise in any respect any right provided for herein will not be deemed a waiver of any further right hereunder. 10.10 The provisions of this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and each of their respective successors and assigns. Neither party may assign its interest in this Agreement without the prior written consent of the other party, which consent will not be unreasonably withheld or delayed. Notwithstanding the preceding sentence, either 10 11 party shall have the right, upon contemporaneous notice given to the other party, and provided the assignee assumes all of the assigning party's obligations under this Agreement accruing after the date of such assignment, to assign this Agreement to any entity to which the assigning party may transfer all or substantially all of its assets (or, in the case of B&T, the assets of its operating unit presently known as Baker & Taylor Entertainment). 10.11 Nothing contained in this Agreement shall be deemed or construed to create a partnership or joint venture of or between Company and B&T, or to create any other relationship between the parties other than that of independent contractors. 10.12 The captions used herein are for convenience of reference only and are not part of this Agreement, and shall in no way be deemed to define, limit, describe, or modify the meaning of any provision of this Agreement. 10.13 If any term or provision of this Agreement or applications thereof to any person or circumstances is, to any extent, held to be invalid or unenforceable, the remaining terms and provisions of this Agreement, or the applications of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, will not be affected thereby, and each term and provision of this Agreement will be valid and enforced to the fullest extent permitted by law. 10.14 If Company fails to make any payment to B&T within 30 days after payment is due hereunder with respect to an invoice actually delivered to Company, then Company will pay B&T the amount due, together with interest thereon until paid, calculated at the rate of twelve percent (12%) per annum. 10.15 This Agreement contains and embodies the entire agreement of the parties hereto, and no representations, inducements, or agreements, oral or otherwise between the parties not contained in this Agreement, if any, will be of any force or effect. This Agreement may not be modified, changed or terminated in whole or in part in any manner other than by an agreement in writing duly signed by both parties. 10.16 This Agreement may be signed in counterparts both of which taken together shall be deemed one original. Telecopied facsimiles of a signed counterpart of this Agreement from one party to the other will be deemed to be delivery of a signed counterpart by the party sending the telecopied facsimile. 11 12 IN WITNESS WHEREOF, the parties have signed and delivered this Agreement on the date first above written. BAKER & TAYLOR, INC., by Baker & Taylor Entertainment By: /s/ William J. Polich ---------------------- Name: William J. Polich -------------------- Title: Sr. VP ------------------- Big Star Entertainment By: /s/ David Levitsky ---------------------- Name: David Levitsky -------------------- Title: Executive VP ------------------- 12 13 EXHIBIT 6.1(b) [Baker & Taylor Books' Current Standard Terms] 13 EX-10.6 11 STRATEGIC MARKETING AGREEMENT 1 * Confidential treatment has been requested for certain portions of this exhibit. Omitted portions have been filed separately with the Commission. STRATEGIC MARKETING AGREEMENT AGREEMENT, dated as of May, 1999 by and between BigStar Entertainment, Inc. ("BigStar") a Delaware corporation with offices at 19 Fulton St. 5th Floor, New York, NY, 10038 Tel. 212/422-1160, Fax. 212/422-1950 and Baker & Taylor, Inc. ("B&T") 2709 Water Ridge Parkway, Charlotte, NC 28217, Tel., 704/329-9102, Fax 704/329-9105. BigStar wishes to establish a strategic marketing relationship with B & T pursuant to the terms and conditions set forth herein. 1) Term The initial term of this Agreement will begin on May 1, 1999 and will end December 31, 2000. This Agreement will renew automatically for 24 month Additional Terms unless cancelled in writing by either party with 90 days notice prior the end of the preceding term. 2) B & T Duties B & T shall be responsible for all of the following: a) Fulfillment of entertainment products, order processing and customer fulfillment terms ("Fulfillment Services") for BigStar and BigStar customers pursuant to the terms and conditions set forth in the Agreement dated 18 February, 1998 between B&T and BigStar, except as expressly revised by the terms of this Agreement. b) Expansion of credit for the purchase of goods ("Purchases") from B & T for BigStar to $[*] with [*] day payment terms (the "B&T Credit"), such credit terms to be expanded to at least $[*] upon the successful completion of an Initial Public Offering by BigStar (the "IPO") of $[*] of BigStar common stock or more. These credit terms will become subject to B & T's standard reasonable commercial credit terms [*] months after the completion of an IPO or [*] months after the signature date of this Agreement, if no IPO is completed in that time. c) Reasonable commercial best efforts to assist in the sourcing and price negotiation of advertising media co-operative funding, barter advertising opportunities, market development funds and: d) Other areas of cooperation that B & T may feel is in the best interest of BigStar. 3) No Obligation to Purchase BigStar shall no obligation to make any minimum purchases from B & T and this Agreement is mutually non-exclusive. 4) Warrant Agreement In additional consideration for the rights and agreements detailed in this Agreement, BigStar will grant warrants that provide B & T with the right, but not the obligation, to purchase 60,000 BigStar Entertainment Inc. shares at $4.00 per share at any time in the next 3 years. These warrants will be subject to the terms of, and detailed further in, a "B & T BigStar Warrant Agreement" attached in draft form as Appendix I. The current outstanding stock of BigStar is detailed in Appendix II [NOTE BigStar Entertainment is currently filing a 4:1 stock split with the State of Delaware. The Terms in this Agreement are all on a "post-split" basis.] 5) Termination Subject to Section 1 herein, this Agreement shall terminate pursuant to the terms and conditions of the Fulfillment Services agreement. 6) Confidentiality Each party acknowledges that during the course of this Agreement it may be entrusted with certain confidential information of the other party that is identified as such in writing, and agrees that it will protect 2 the confidentiality thereof with the same measures that it would use to protect its own similar information, but in no event shall the care be less than reasonable and that it will not (i) use such confidential information for any purpose except the performance of this Agreement, or (ii) disclose any such confidential information to any person except employees on a need to know basis where such persons have agreed to be contractually bound by this confidentiality provision. These obligations shall not apply to any information generally available to the public or information approved for release by BigStar and Subscriber without restriction. 7) Governing Law This Agreement shall be governed pursuant to the governing law and contents of law provisions of the Fulfillment Services agreement. 8) Dispute Resolution All disputes shall be governed pursuant to the dispute resolution provisions of the Fulfillment Services agreement. 9) General Provisions The provisions hereof, including the attachments and any written supplemental agreement hereto signed as of the date hereof constitute the entire agreement between the parties relating to the transactions contemplated herein and merge and supersede all prior discussions, agreements, and understandings of every kind and nature between them. No oral modification or additions hereto shall be binding. Neither party shall be bound by any condition, definition, warranty or representation other than as expressly provided for in this Agreement or as may be duly set forth in a writing signed by an authorized officer of the party hereto which is to be bound thereby. IN WITNESS WHEREOF, the parties hereto have executed this Agreement Baker & Taylor, Inc. BigStar Entertainment, Inc. /s/ W. Polich/Pres. David Friedensohn - ------------------------- ------------------------- (Name & Title) (Name & Title) /s/ W. Polich /s/ David Friedensohn - ------------------------- ------------------------- (Signature) (Signature) 5/3/99 - ------------------------- ------------------------- (Date) (Date) EX-10.7 12 RIGHTS AGREEMENT 1 RIGHTS AGREEMENT This Agreement is made by and among BigStar Entertainment, Inc., a Delaware corporation (the "Company") and each of the Stockholders set forth in the signature lines below. ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS 1.1. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Agreement" means this Rights Agreement as from time to time amended and in effect between the parties, including all Exhibits hereto. "Approved Sale" shall mean the meaning assigned to it in Section 3.1. "Board" or "Board of Directors" means the board of directors of the Company as constituted from time to time. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act or Exchange Act. "Common Stock" means the Company's Common Stock. "Common Shares" means shares of the Company's Common Stock. "Company" means BigStar Entertainment, Inc., a Delaware corporation. "Directors" means the members from time to time of the Board of Directors. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission (or of any other federal agency then administering the Exchange Act) thereunder, all as the same shall be in effect at the time. "Holder" means any person owning or having the right to acquire Registrable Shares or any assignee thereof in accordance with Section 2.14 hereof. "Immediate Family" means any spouse, child, grandchild, brother, parent or sister of a Holder. 2 "Initial Public Offering" means the first public offering of Common Stock of the Company for the account of the Company pursuant to an offering registered under the Securities Act with the Commission. "Person" means an individual, corporation, partnership, joint venture, trust, university, or unincorporated organization, or a government, or any agency or political subdivision thereof. "Recapitalization Events" means stock splits, stock dividends, recapitalizations, reclassifications and similar events. "Registrable Shares" shall mean and include (i) shares of Common Stock held by a Stockholder; and (ii) any shares of Common Stock issuable upon exercise of warrants or options, if the Company expressly accords to such shares the registration rights contained in this Agreement; provided, however, that shares of Common Stock which are Registrable Shares shall cease to be Registrable Shares upon the consummation of any sale of such shares pursuant to a registration statement or Rule 144 under the Securities Act. "Sale of the Company" means the sale of the Company by way of (i) merger, consolidation or sale or transfer of at least a majority of the Company's capital stock, or (ii) the transfer of all or substantially all of the Company's assets. "Securities" means any shares of capital stock of the Company or any securities convertible into or exchangeable for any class of capital stock of the Company and all securities into which such Securities may be converted or reclassified as a result of any merger, consolidation, stock split, stock dividend or other recapitalization of the Company whether now owned or hereafter acquired. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission (or of any other federal agency then administering the Securities Act) thereunder, all as the same shall be in effect at the time. "Stockholders" means (i) Persons listed as Stockholders on the signature page hereof, (ii) any Person who purchases from the Company after the date hereof newly issued shares of Securities of the Company and who, as permitted by this Agreement, becomes a party to this Agreement and executes a counterpart of this Agreement, and (iii) any permitted assignee or transferee from any of the foregoing of Registrable Shares who is not a competitor of the Company pursuant to the terms of this Agreement. "Subsidiary" or "Subsidiaries" means any Person of which the Company and/or any of its other Subsidiaries (as herein defined) directly or indirectly owns at the time at least fifty percent (50%) of the outstanding voting securities. 2 3 ARTICLE 2 REGISTRATION RIGHTS 2.1. Piggy-Back Registrations. If at any time the Company shall determine to register for its own account or the account of others under the Securities Act (including without limitation pursuant to the Initial Public Offering or a demand for registration of any Stockholder of the Company) any of its equity securities, other than on Form S-8 or Form S-4 or their then equivalents (a "Piggy-Back Registration"), it shall send to each Holder, written notice of such determination and, if within fifteen (15) days after receipt of such notice, such Holder shall so request in writing, the Company shall use its diligent efforts to include in such registration statement all or any part of the Registrable Shares such Holder requests to be registered, except that if, in connection with any offering involving an underwriting of Common Stock to be issued by the Company, the managing underwriter shall impose a limitation on the number of shares of Common Stock which may be included in the registration statement because, in its judgment, such limitation is necessary to effect an orderly public distribution, then the Company shall be obligated to include in such registration statement only such limited portion (or none, if so required by the managing underwriter) of the Registrable Shares with respect to which such Holder has requested inclusion hereunder. No right under this Section 2.1 shall be construed to limit any registration required under Section 2.2. 2.2. Demand Registration. If on any occasion Holders holding at least 25% of the then outstanding Registrable Shares shall notify the Company in writing that it or they intend to offer or cause to be offered for public sale at least 25% of the then outstanding Registrable Shares, the Company will so notify all Holders. Upon written request of any Holder given within fifteen (15) days after the receipt by such Holder from the Company of such notification, the Company will use its diligent efforts to cause such of the Registrable Shares as may be requested by any Holder (including the Holder giving the initial notice of intent to offer) to be registered under the Securities Act as expeditiously as possible (a "Demand Registration"). The Company shall not be required to effect more than two Demand Registrations. If in the good faith judgment of the Board of Directors of the Company, a Demand Registration would be detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is important to defer the filing of such registration statement at such time, then the Company shall have the right to defer such filing, provided that the Company may not defer the filing for a period of more than 180 days after receipt of the request for a Demand Registration, or more than once in any 12-month period. Unless otherwise agreed to by the Company, the Holders may not exercise their rights under this Section 2.2 until the earlier to occur of (i) forty-eight (48) months following the date of this Agreement or (ii) one hundred eighty (180) after the effectiveness of any registration statement covering the Initial Public Offering. The Holders may not exercise their right under this Section 2.2 for an effective date that is one hundred eighty (180) days of the effective date of any registration statement (other than on Form S-8) covering capital stock of the Company. 2.3. Registrations on Form S-3. In addition to the rights provided the Holders in Sections 2.1 and 2.2 above, if the registration of Registrable Shares under the Securities Act can be effected on Form S-3 (or any equivalent successor form promulgated by the Commission), then the Company shall provide the Holders with the following rights: 3 4 (a) For the Holders. Upon the written request of one or more Holders, the Company will so notify each Holder, and then will, as expeditiously as possible, use its diligent efforts to effect qualification and registration under the Securities Act on Form S-3 of all or such portion of the Registrable Shares as the Holders shall specify; provided, however, the Company shall not be required to effect a registration pursuant to this Section 2.3(a) unless the market value of the Registrable Shares to be sold by the Holders in any such registration shall be at least $1,000,000 at the time of filing such registration statement, and further provided that the Company shall not be required to effect more than one registration during any 12 month period pursuant to this Section 2.3(a) or more than four registrations in the aggregate pursuant to this Section 2.3(a). (b) Conflicts. In the event that, in a registration under this Section 2.3 which is effected through an underwriter, the underwriter imposes a limitation on the number of Registrable Shares which may be included in the registration statement in order to effect an orderly public distribution, then the Company shall exclude from such registration statement, first, all shares which are not Registrable Shares, and second, Registrable Shares which are requested to be included pursuant to Section 2.1. 2.4. Effectiveness. The Company will use its diligent efforts to maintain the effectiveness for up to one hundred twenty (120) days (or such shorter period of time as the underwriters need to complete the distribution of the registered offering, or ninety (90) days in the case of a "shelf" registration statement on Form S-3) of any registration statement pursuant to which any of the Registrable Shares are being offered, and from time to time will amend or supplement such registration statement and the prospectus contained therein to the extent necessary to comply with the Securities Act and any applicable state securities statute or regulation. The Company will also provide each Holder with as many copies of the prospectus contained in any such registration statement as it may reasonably request. 2.5. Indemnification of Holders. (a) In the event that the Company registers any of the Registrable Shares under the Securities Act, the Company will indemnify and hold harmless each Holder and each underwriter of the Registrable Shares (including their officers, directors, affiliates and partners) so registered (including any broker or dealer through whom such shares may be sold) and each Person, if any, who controls such Holder or any such underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them become subject under the Securities Act, applicable state securities laws or under any other statute or at common law or otherwise, as incurred, and, except as hereinafter provided, will reimburse each such Holder, each such underwriter and each such controlling Person, if any, for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, as incurred, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement, in any preliminary or amended preliminary prospectus or in the final prospectus (or the registration statement or prospectus as from time to time amended or supplemented by the Company) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated 4 5 therein or necessary in order to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities laws applicable to the Company and relating to action or inaction required of the Company in connection with such registration, unless (i) such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, preliminary or amended preliminary prospectus or final prospectus in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by any such holder of Registrable Shares or its controlling person (in the case of indemnification of such holder or its controlling person), or any such underwriter or its controlling person (in the case of indemnification of such underwriter or its controlling person) expressly for use therein, or unless (ii) in the case of a sale directly by such Holder of (including a sale of such Registrable Shares through any underwriter retained by such holder of Registrable Shares to engage in a distribution on behalf of such Holder), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus copies of which were delivered to such Holder or such underwriter on a timely basis, and such Holder failed to deliver a copy of the final or amended prospectus at or prior to the confirmation for the sale of the Registrable Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act. (b) Promptly after receipt by any Holder, any underwriter or any controlling Person of notice of the commencement of any action in respect of which indemnity may be sought against the Company, such Holder, or such underwriter or such controlling person, as the case may be, will notify the Company in writing of the commencement thereof (provided, that failure to so notify the Company shall not relieve the Company from any liability it may have hereunder) and, subject to the provisions hereinafter stated, the Company shall be entitled to assume the defense of such action (including the employment of counsel, who shall be counsel reasonably satisfactory to such Holder, of such underwriter or such controlling Person, as the case may be), and the payment of expenses insofar as such action shall relate to any alleged liability in respect of which indemnity may be sought against the Company. (c) Such Holder, any such underwriter or any such controlling Person shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel subsequent to any assumption of the defense by the Company shall not be at the expense of the Company unless the employment of such counsel has been specifically authorized in writing by the Company. The Company shall not be liable to indemnify any Person for any settlement of any such action effected without the Company's written consent. The Company shall not, except with the approval of each party being indemnified under this Section 2.5, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to the parties being so indemnified of a release from all liability in respect to such claim or litigation. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which any Holder exercising rights under this Article 2, or any controlling Person of any such Holder, makes a claim for indemnification pursuant to this Section 2.5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of 5 6 appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 2.5 provides for indemnification in such case, then, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Holder on the other, and each party's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Shares offered by such Holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 2.6. Indemnification of Company. (a) In the event that the Company registers any of the Registrable Shares under the Securities Act, each Holder so registered will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed or otherwise participated in the preparation of the registration statement, each underwriter of the Registrable Shares so registered (including any broker or dealer through whom such of the shares may be sold) and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, applicable state securities laws or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Company and each such director, officer, underwriter or controlling Person for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement, in any preliminary or amended preliminary prospectus or in the final prospectus (or in the registration statement or prospectus as from time to time amended or supplemented) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such Holder expressly for use therein; provided, however, that such Holder's obligations hereunder shall be limited to an amount equal to the proceeds received by such Holder sold in such registration. (b) Promptly after receipt of notice of the commencement of any action in respect of which indemnity may be sought against such Holder, the Company will notify such Holder in writing of the commencement thereof (provided, that failure to so notify such Holder 6 7 shall not relieve such holder from any liability it may have hereunder), and such Holder shall, subject to the provisions hereinafter stated, be entitled to assume the defense of such action (including the employment of counsel, who shall be counsel reasonably satisfactory to the Company) and the payment of expenses insofar as such action shall relate to the alleged liability in respect of which indemnity may be sought against such holder of Registrable Shares. The Company and each such director, officer, underwriter or controlling Person shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel subsequent to any assumption of the defense by such Holder shall not be at the expense of such Holder unless employment of such counsel has been specifically authorized in writing by such Holder. Such Holder shall not be liable to indemnify any Person for any settlement of any such action effected without such Holder's written consent. (c) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which the Company exercising its rights under this Article 2 makes a claim for indemnification pursuant to this Section 2.6, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding that this Section 2.6 provides for indemnification, in such case, then, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Holder on the other, and each party's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Shares offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 2.7. Exchange Act Registration. If the Company at any time shall list any class of equity securities of the type which may be issued upon the conversion of the Preferred Stock on any national securities exchange and shall register such class of equity securities under the Exchange Act, the Company will, at its expense, simultaneously list on such exchange and maintain such listing of, the Common Stock. If the Company becomes subject to the reporting requirements of either Section 13 or Section 15(d) of the Exchange Act, the Company will use its diligent efforts to timely file with the Commission such information as the Commission may require under either of said Sections; and in such event, the Company shall use its diligent efforts to take all action as may be required as a condition to the availability of Rule 144 or Rule 144A under the Securities Act (or any successor exemptive rule hereinafter in effect) with respect to such Common Stock. The Company shall furnish to any Holder forthwith upon request (i) a written statement by the Company as to its compliance with the reporting requirements of Rule 7 8 144, (ii) a copy of the most recent annual or quarterly report of the Company as filed with the Commission, and (iii) such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such Registrable Securities without registration. After the occurrence of the Initial Public Offering, the Company agrees to use its diligent efforts to facilitate and expedite transfers of Common Stock pursuant to Rule 144 under the Securities Act, which efforts shall include timely notice to its transfer agent to expedite such transfers of Common Stock. 2.8. Further Obligations of the Company. Whenever under the preceding Sections of this Article 2, the Company is required hereunder to register Registrable Shares, it agrees that it shall also do the following: (a) Furnish to each selling Holder such copies of each preliminary and final prospectus and such other documents as said holder may reasonably request to facilitate the public offering of its Registrable Shares; (b) Use its diligent efforts to register or qualify the Registrable Shares covered by said registration statement under the applicable securities or "blue sky" laws of such jurisdictions as any selling Holder may reasonably request; provided, however, that the Company shall not be obligated to qualify to do business in any jurisdictions where it is not then so qualified or to take any action which would subject it to the service of process in suits other than those arising out of the offer or sale of the securities covered by the registration statement in any jurisdiction where it is not then so subject; (c) Furnish to each selling Holder a signed counterpart, addressed to the selling holders, of (i) an opinion of counsel for the Company, dated the effective date of the registration statement, and (ii) "comfort" letters signed by the Company's independent public accountants who have examined and reported on the Company's financial statements included in the registration statement, to the extent permitted by the standards of the American Institute of Certified Public Accountants, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and (in the case of the accountants' "comfort" letters) with respect to events subsequent to the date of the financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' "comfort" letters delivered to the underwriters in underwritten public offerings of securities; (d) Make available for inspection to each selling Holder a copy of all documents filed with and all correspondence from or to the Commission in connection with any such offering of securities; and (e) Cooperate to the extent reasonably requested to obtain all necessary approvals from the National Association of Securities Dealers, Inc. 2.9. Stockholder Acts. Whenever under the preceding Sections of this Article 2 the Holders are registering such shares pursuant to any registration statement, each such Holder 8 9 agrees to (i) timely provide to the Company, at its request, such information and materials as it may reasonably request in order to effect the registration of such Registrable Shares and (ii) convert all shares of Preferred Stock included in any registration statement to shares of Common Stock, such conversion to be effective at the closing of such offering pursuant to such registration statement. 2.10. Expenses. In the case of all Piggy-Back Registrations effected under Section 2.1, two Demand Registrations effected under Section 2.2, and one registration per 12-month period effected under Section 2.3 up to the maximum number specified therein, the Company shall bear all reasonable costs and expenses of each such registration, including, but not limited to, the Company's printing, legal and accounting fees and expenses, Commission and NASD filing fees and "Blue Sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or otherwise bear any portion of the underwriters' commissions or discounts attributable to the Registrable Shares being offered and sold by the Holders, or the fees and expenses of counsel for the selling Holders in connection with the registration of the Registrable Shares. The Company shall pay all expenses in connection with any registration initiated pursuant to this Article 2 which is withdrawn, delayed or abandoned at the request of the Company, except if such withdrawal, delay or abandonment is caused by the fraud, material misstatement or omission of a material fact by a Holder to be included in such registration. 2.11. Market Stand-Off" Agreement. Each Holder hereby agrees that, during the period of duration (up to, but not exceeding, 180 days) specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Securities Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration; provided, however, that: (a) such agreement shall be applicable only during the three-year period following the date of the final prospectus distributed pursuant to the first such registration statement of the Company which covers Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (b) all officers and directors of the Company, all five-percent (5%) security holders, and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period, and each Holder agrees that, if so requested, such Holder will execute an agreement in the form provided by the underwriter containing terms which are essentially consistent with the provisions of this Section 2.11. 9 10 Notwithstanding the foregoing, the obligations described in this Section 2.11 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future. 2.12. Other Registration Rights. The Company shall not grant any registration rights to any other Person which registration rights are senior to the registration rights of the Holders, unless the Company shall first obtain the written consent of a majority-in-interest of the Holders. The Company may grant registration rights in the future to any future purchaser of the Securities of the Company which are on parity with the Holders, without the consent of the Holders, provided that such purchasers agree in writing to be bound by the provisions of this Agreement. The Company has the right to add employees of the Company who have options or Securities of the Company as parties to this Agreement. 2.13. S-8 Registration. Reasonably promptly after completion of the Initial Public Offering, the Company shall use its diligent efforts to file with the Commission a registration statement on Form S-8 (or its equivalent successor form) to register all shares of Common Stock issuable pursuant to options granted under the Company's stock option plans adopted by the Company's Board of Directors and approved by the Company's Stockholders. 2.14. Assignment of Registration Rights. The rights to cause the Company to register Registrable Shares pursuant to this Article 2 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee, provided (i) the Company is, within a reasonable time before such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (ii) that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and (iii) the assignee, in the Company's judgment, is not a competitor of the Company. 2.15. Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Article 2 after the earlier of (i) five (5) years following the consummation of the sale of securities in an Initial Public Offering, (ii) such time as Rule 144 or another similar exemption under the Act is available for the sale of all of such Holder's shares during a three (3)-month period without registration. 2.16. Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Article 2. ARTICLE 3 SALE OF COMPANY 3.1. Sale. If the Board of Directors and the holders of a majority of the outstanding Securities entitled to vote approve a Sale of the Company (the "Approved Sale"), all of the Stockholders shall consent to and raise no objections against an Approved Sale, and if the Approved Sale is structured as a sale of stock or merger, all of the Stockholders shall agree to 10 11 sell their securities on the terms and conditions of the Approved Sale. All of the Stockholders shall take all reasonably necessary and desirable actions in connection with the consummation of the Approved Sale. 3.2. Expenses. The Stockholders shall bear their pro rata share (based upon the number of shares sold) of the costs of any sale of Securities pursuant to an Approved Sale to the extent such costs are incurred for the benefit of all holders of the Company's Securities and are not otherwise paid by the Company or the acquiring party. Costs incurred by the Stockholders on their own behalf shall not be considered costs of the transaction hereunder. 3.3. Termination. The provisions of this Article 3 shall terminate upon the completion of an Initial Public Offering. ARTICLE 4 MISCELLANEOUS 4.1. No Waiver; Cumulative Remedies. No failure or delay on the part of any party to this Agreement in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 4.2. Amendments, Waivers and Consents. Any provision in the Agreement to the contrary notwithstanding, and except as hereinafter provided, changes in, termination or amendments of or additions to this Agreement may be made, and compliance with any covenant or provision set forth herein may be omitted or waived, if the Company shall obtain consent thereto in writing from the holder or holders of at least a majority of the Registrable Shares, provided that no consents shall be effective to reduce the percentage of the Registrable Shares the consent of the holders of which is required under this Section 4.2. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 4.3. Addresses for Notices. All notices, requests, demands and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed, telegraphed or delivered to each applicable party at the address set forth in the records of the Company or at such other address as to which such party may inform the other parties in writing in compliance with the terms of this Section. If to any Stockholder: at such Stockholder's address for notice as set forth in the register maintained by the Company, or at such other address as shall be designated by such Person in a written notice to the other parties complying as to delivery with the terms of this Section. If to the Company: at the address set forth on page 1 hereof, or at such other address as shall be designated by the Company in a written notice to the other parties complying as to delivery with the terms of this Section. 11 12 All such notices, requests, demands and other communications shall, shall be deemed delivered: three days after mailed (which mailing must be accomplished by certified mail, return receipt requested and postage prepaid); when transmitted by successful facsimile transmission; one business day after deposited with a guaranteed overnight courier service (charged to sender); or when delivered in hand or dispatched by telegraph. 4.4. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the Company. This Agreement is not assignable by the Stockholders without the consent of the Company, except as provided for in Section 2.14. 4.5. Entire Agreement. This Agreement constitutes the entire agreement among the parties and supersedes any prior or contemporaneous understandings, representations or agreements concerning the subject matter hereof. 4.6. Severability. The provisions of this Agreement are severable and, in the event that any court of competent jurisdiction one or more of the provisions or part of a provision contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement, but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. 4.7. Confidentiality. Each Stockholder agrees that it will keep confidential and will not disclose, or divulge any confidential, proprietary, secret or non-public information which such Stockholder may obtain from the Company and not use such information other than for the benefit of the Company or in furtherance of the Stockholder's rights as a Stockholder of the Company, provided that no such information shall be deemed to be non-public if it (i) is or becomes generally available to the public other than as a result of a disclosure by the Stockholder or its respective agents, representatives or employees; (ii) is or becomes available to the Stockholder on a non-confidential basis from a source (other than the Company or one of its officers, directors, agents, representatives or employees) that is not prohibited from disclosing such information by a legal, contractual or fiduciary obligation; or (iii) was known to the Stockholder on a non-confidential basis prior to its disclosure to it by the Company and provided further that, any other term of this Agreement to the contrary notwithstanding, the Company shall not be obligated to disclose any information, the disclosure of which it believes in good faith would be detrimental to the Company or its Stockholders. 4.8. Governing Law and Construction. This Agreement will be governed by and construed in accordance with the laws of New York, without regard to the principles of conflicts of law. The language of this Agreement shall be deemed to be the result of negotiation among the parties and their respective counsel and shall not be construed strictly for or against any party. Each party (i) agrees that any action arising out of or in connection with this Agreement shall be brought solely in federal or state courts in New York, New York, (ii) hereby consents to the sole jurisdiction of such courts, and (iii) agrees that, whenever a party is requested to executed one or more documents evidencing such consent, it shall do so immediately. 12 13 4.9. Headings. Article, section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 4.10. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 4.11. Further Assurances. From and after the date of this Agreement, upon the request of any Stockholder or the Company, the Company and the Stockholder shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. 4.12. Aggregation of Stock. All shares of Company stock held or acquired by a Stockholder and its Affiliates and Immediate Family shall be aggregated together for purposes of determining the availability of any rights under this Agreement. 4.13. Attorney's Fees. In the event that any dispute among the parties to this Agreement should result in a legal proceeding, the prevailing party shall be entitled to recover from the other party(ies) to such dispute, all fees, costs and expenses of enforcing any right under or with respect to this Agreement, including without limitation, such fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 13 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the ____________________, 199__. BIGSTAR ENTERTAINMENT, INC. By:________________________________ Title:_____________________________ COMMON STOCKHOLDERS _______________________________ _______________________________ Signature Signature _______________________________ _______________________________ Title Title _______________________________ _______________________________ Printed Name Printed Name _______________________________ _______________________________ Signature Signature _______________________________ _______________________________ Title Title _______________________________ _______________________________ Printed Name Printed Name BIGSTAR RIGHTS AGREEMENT SIGNATURE PAGE EX-10.8 13 AGREEMENT OF LEASE: SEAPORT ASSOCIATES, LP 1 LEASE AGREEMENT BETWEEN SEAPORT ASSOCIATES, LP, AS LANDLORD AND BIGSTAR ENTERTAINMENT, INC, AS TENANT. Premises: 19 FULTON STREET FIFTH (5TH) FLOOR NEW YORK, NEW YORK 10038 Prepared By: The Law Offices of HIRSCH & KATZ, LLP 595 Stewart Avenue Suite 400 Garden City, New York 11530 (516) 227-1117 2 AGREEMENT OF LEASE, made as of the day of February, 1999 by and between SEAPORT ASSOCIATES L.P., a New York limited partnership, having an address at 3000 Marcus Avenue, Lake Success, New York 11042 (hereinafter the "Landlord"), and BIGSTAR ENTERTAINMENT, INC, a New York corporation having an office located at 100 Wall Street, New York, New York 10005 (hereinafter the "Tenant"). The parties agree as follows: 1. DEMISED PREMISES The Landlord does hereby lease to the Tenant and the Tenant does hereby rent from the Landlord the entire Fifth (5th) floor which shall be deemed to contain approximately Seven Thousand, Two Hundred and Twenty-Four (7,224) rentable square feet (hereinafter the "Demised Premises") in the office building located at 19 Fulton Street, New York, New York 10038 (hereinafter the "Building"), together with all fixtures and improvements which at the commencement of this Lease or at any time during the term are attached thereon or installed therein and together with all appurtenances to the premises. The Demised Premises are shown on EXHIBIT "A" hereto. 2. TERM AND COMMENCEMENT (a) The term of this Lease shall be for Forty-Four (44) months, commencing on February 1, 1999 (the "Commencement Date") and expiring at noon on September 30, 2002 (the "Expiration Date"), unless the same shall sooner terminate pursuant to any of the terms, covenants, conditions or agreements of this Lease or pursuant to law. (b) Landlord shall not be liable to Tenant if Landlord cannot deliver possession of the Demised Premises on the Commencement Date due to the holding over by a prior tenant in violation of the terms of said prior tenant's lease. This Lease shall continue, and rent will be waived for the period between the Commencement Date and the date on which Landlord delivers possession. Notwithstanding the foregoing, in the event that Landlord is unable to deliver possession of the Demised Premises on or before February 15, 1999, then in such event, Tenant may serve notice on Lessor of its intention to terminate this Lease and if within seven (7) days thereafter, Landlord shall not have delivered possession of the Demised Premises, then in such events, this Lease shall terminate on the expiration of such seven (7) day period as if such termination date were the Expiration Date, and the Fixed Rent, Additional Rent shall be apportioned as of such date of sooner termination and any prepaid portion of Fixed Rent, Additional Rent and Security Deposit (as hereinafter defined) for any period after such date shall be refunded by Landlord to Tenant. 3. RENT (a) During the term of this Lease Tenant shall pay to Landlord a "Fixed Annual Rent" in advance on the first day of each month of the Term of this Lease at Landlords office, without demand, notice, setoff or deduction, as follows: (i) during and in respect of the period from February 1, 1999 through January 31, 2000, (both dates inclusive) an amount equal to ONE HUNDRED AND SIXTY-SIX THOUSAND, 2 3 ONE HUNDRED AND FIFTY-TWO AND 00/100 ($166,152.00) DOLLARS (exclusive of electric) payable in equal monthly installments of THIRTEEN THOUSAND, EIGHT HUNDRED AND FORTY-SIX AND 001100 ($13,846.00) DOLLARS (exclusive of electric); (ii) during and in respect of the period from February 1, 2000 through January 31, 2001, (both dates inclusive) an amount equal to ONE HUNDRED AND SEVENTY-ONE THOUSAND, ONE HUNDRED AND THIRTY-SIX AND 56/100 ($171,136.56) DOLLARS (exclusive of electric) payable in equal monthly installments of FOURTEEN THOUSAND, TWO HUNDRED AND SIXTY-ONE AND 38/100 ($14,261.38) DOLLARS (exclusive of electric); (iii) during and in respect of the period from February 1, 2001 through January 31, 2002, (both dates inclusive) an amount equal to ONE HUNDRED AND SEVENTY-SIX THOUSAND, TWO HUNDRED AND SEVENTY AND 64/100 ($176,270.64) DOLLARS (exclusive of electric) payable in equal monthly installments of FOURTEEN THOUSAND, SIX HUNDRED AND EIGHTY-NINE AND 22/100 ($14,689.22) DOLLARS (exclusive of electric); and (iv) during and in respect of the period from February 1, 2002 through September 30, 2002, (both dates inclusive) an amount equal to ONE HUNDRED AND TWENTY-ONE THOUSAND, THIRTY-NINE AND 20/100 ($121,039.20) DOLLARS (exclusive of electric) payable in equal monthly installments of FIFTEEN THOUSAND, ONE HUNDRED AND TWENTY-NINE AND 90/100 ($15,129.90) DOLLARS (exclusive of electric). (b) Upon execution hereof, Tenant shall pre-pay the first (1st), third (3rd), fifth (5th), seventh (7th), ninth (9th) and eleventh (11th) monthly installments of Fixed Annual Rent by bank or certified check. 4. SECURITY DEPOSIT; GUARANTY (a) Tenant shall deposit with Landlord, upon execution of this Lease, the sum of One Hundred and Eighty Thousand, Six Hundred and 00/100 ($180,600.00) Dollars by Letter of Credit as provided in paragraph (b) as security for the faithful performance and observance by Tenant of the terms, provisions, conditions and covenants of this Lease (the "Security Deposit"). Tenant agrees that, in the event that Tenant defaults, beyond all applicable grace and cure periods after notice, in respect of any terms, provisions, conditions and covenants of this Lease (including the payment of Fixed Annual Rent or Additional Rent), Landlord may notify the Issuing Bank (as such term is defined in paragraph (b) and thereupon receive all of the monies represented by the said Letter of Credit and use, apply, or retain the whole or any part of such proceeds, as the case may be, to the extent required for the payment of Fixed Annual Rent, Additional Rent, or any other sums as to which Tenant is in default, or for any sum that Landlord may expend or may be required to expend by reason of Tenant's default, in respect of the terms, provisions, conditions and covenants of this Lease (including any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord). In the event that Landlord applies or retains any portion or all of such cash security or proceeds of such Letter of Credit, as the case may be, Tenant shall forthwith restore the amount so retained or applied. (b) Tenant may deliver to Landlord a clean, irrevocable and unconditional Letter of Credit issued by and drawn upon any commercial bank acceptable to Landlord (the "Issuing 3 4 Bank") with offices for banking purposes in the City of New York, which Letter of Credit shall have a term of not less than one year, be in a form and content reasonably satisfactory to Landlord, be for the account of Landlord and be in the amount of One Hundred and Eighty Thousand, Six Hundred and 00/100 ($180,600.00) Dollars. The Letter of Credit shall provide that: (i) the Issuing Bank shall pay to Landlord an amount up to the face amount of the Letter of Credit upon presentation of only the Letter of Credit, a sight draft in the amount to be drawn and an affidavit of default; (ii) the Letter of Credit shall be deemed to be automatically renewed, without amendment, for consecutive periods of one year during the Term of this Lease, unless the Issuing Bank sends written notice ("Non-Renewal Notice") to Landlord by certified or registered mail, return receipt requested, not less than thirty (30) days next preceding the then expiration date of the Letter of Credit that it elects not to have such Letter of Credit renewed; (iii) Landlord, after receipt of the Non-Renewal Notice, shall have the right, exercisable by a sight draft only, to receive the moneys represented by the Letter of Credit (which moneys shall be held by Landlord as a cash deposit pursuant to the terms of this Article 4 pending replacement of such Letter of Credit); and (iv) Upon Landlord's sale of the Property, or Landlord's interest therein, or a leasing of the Property, the Letter of Credit shall be transferable by Landlord as provided in paragraph (c) hereof. (c) In the event of a sale of the Property, or Landlord's interest therein or of a leasing of the Property, Landlord shall transfer the Letter of Credit deposited hereunder to the vendee or lessee, and Landlord shall thereupon be released by Tenant from all liability for the return of such Letter of Credit to a new lessor. Tenant shall execute such documents as may be necessary to accomplish such transfer or assignment of the Letter of Credit. (d) Tenant covenants that it will not assign or encumber, or attempt to assign or encumber the monies or Letter of Credit deposited hereunder as security, and that neither Landlord nor its successors and/or assigns shall be bound by any such assignment, or attempted encumbrance. (e) In the event that Tenant shall fully and faithfully comply with all of the material terms, provisions, covenants and conditions of this Lease, the Security Deposit, or that portion not required to cure any defaults under this Agreement, shall be returned to Tenant within ten (10) days after the date fixed as the end of the Lease or of any extended term, if applicable, and delivery of the entire possession of the Demised Premises to Landlord. (f) Tenant shall deliver, upon execution of this Lease, an Limited Personal Guaranty which shall be attached to this Lease as EXHIBIT "B" from Tenant's principles (the "Guarantors"). 4 5 5. ELECTRIC POWER (a) Landlord shall furnish to Tenant, electric power as provided to Landlord from the public utility company furnishing electric power to the Building at an annual additional charge of FOURTEEN THOUSAND FOUR HUNDRED AND FORTY-EIGHT AND 00/100 ($14,448.00) DOLLARS payable in equal monthly installments of ONE THOUSAND, TWO HUNDRED AND FOUR AND 00/100 ($1,204.00) DOLLARS (the "Electric Charge"). Upon execution hereof, Tenant shall pre-pay the first (1st), third (3rd), fifth (5th), seventh (7th), ninth (9th) and eleventh (11th) monthly installments of Electric Charge by bank or certified check. (b) Tenant shall use such electric power reasonably necessary for lighting and for operation of such equipment as is normally used in ordinary business offices. Tenant's use of electric power in the Demised Premises shall not at any time exceed the capacity of any of the electrical conductors, conduits, and equipment in or otherwise serving the Demised Premises. Tenant shall not make or perform, or permit the making or performing of, any alterations to wiring installations or other electrical facilities in or serving the Demised Premises without the prior written consent of Landlord in each instance (which shall not be unreasonably withheld). Should Landlord grant any such consent, all additional risers or other equipment required therefor shall be installed by Landlord and the cost thereof shall be paid by Tenant upon Landlords' demand as Additional Rent. (c) Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the Demised Premises by reason of any requirement, act or omission of the public utility serving the Building and/or the Demised Premises with electricity or for any other reason not attributable to Landlord. (d) Landlord shall furnish and install the replacement lighting tubes, lamps, bulbs and ballasts in the Demised Premises, at Tenant's expense. 6. ADDITIONAL RENT; LATE CHARGES (a) Any charge or sum due Landlord under this Lease shall be payable as "Additional RENT." If Tenant fails to pay any Additional Rent after the expiration of any applicable grace, notice and cure period, Landlord shall have the same rights as in the case of Tenant's nonpayment of Fixed Annual Rent. (b) Tenant shall pay Landlord interest at an annual rate of 2% above the prime rate, as set by Citibank, N.A., or its successor, on any sum not paid within ten (10) days of when such sum is due. (c) Tenant shall pay (i) all occupancy and rent taxes in respect of Tenant's occupancy of the Demised Premises, if applicable, (ii) license and permit fees required for Tenant's operations, and (iii) all New York State and City sales and compensating use taxes required to be paid by Tenant during the course of its business to the extent that Tenant is not entitled to an exemption because (A) Tenant is an organization exempt from such taxes or (B) Tenant is entitled to such exemption by virtue of the exemption for "capital improvements" provided for in Section 1101 (b) (9) of the New York State Tax Law. 5 6 7. USE AND CONDITION (a) The Demised Premises shall be used solely for general and executive offices. If Tenant's use as provided for herein is prohibited by Landlord, Tenant may terminate this Lease. Landlord shall not prohibit such use except upon a bona fide default notice duly given from the City of New York or The South Street Seaport Corporation, their successors or assigns, based upon the City Lease or the Office Development Lease (said Leases being defined in Section 13(a)) or any other agreement, law, rule or ordinance by which the Building, Landlord or Tenant may be bound. (b) In recognition of the historic and cultural importance of the South Street Seaport and in accordance with the provisions of the Office Development Lease (as hereinafter defined), Tenant shall use the Demised Premises exclusively as offices and Tenant shall neither use nor occupy, nor permit or suffer the Demised Premises or any part thereof, to be used or occupied for any unlawful or illegal business, use or purpose, or for any business, use or purpose which is immoral or disreputable or extra-hazardous, or in such a manner as to constitute a nuisance of any kind (public or private) or that would in any way adversely affect the public standing or good reputation of Landlord or any other person associated with South Street Seaport. (c) Landlord makes no representations, express or implied, as to the condition of the Demised Premises and Tenant agrees to accept the same in "AS IS" condition on the Commencement Date. Landlord shall have no obligation to perform any work in order to prepare the Demised Premises for Tenant's occupancy. (d) Except as otherwise specifically provided for in Section 2(b) of this Lease, Tenant hereby waives any right to terminate, cancel or rescind this Lease by reason of Owner's failure to deliver possession of the Demised Premises or otherwise perform its obligations under this Article, which Tenant might otherwise have pursuant to any law now or hereafter in force or otherwise. Tenant further waives the right to recover any damages which may result from Landlord's failure to deliver possession of the Demised Premises or otherwise to perform its obligations under this Article. The provisions of this Article shall be considered an express provision to the contrary pursuant to New York REAL PROPERTY LAW Section 223-(a) governing delivery of possession of the Demised Premises and any law providing for such a contingency in the absence of such express agreement now or hereafter enacted shall have no application is such case to the extent inconsistent with this Lease. 8. TENANT'S ALTERATIONS (a) From and after the date on which Tenant enters into occupancy or possession of the Demised Premises and throughout the Term of this Lease, Tenant shall, have the right, after obtaining Landlords written consent, which consent shall not be unreasonably withheld, at Tenant's own cost and expense, to make alterations, additions and improvements which are nonstructural and which do not affect utility services or plumbing or electrical lines, including Tenant's changes to wall or ceiling finishes or elements (collectively referred to as "Alterations"), in or to the Demised Premises as Tenant shall deem necessary or desirable in connection with the conduct of its business, subject, however, to Tenant's compliance with the requirements in Section 8(b). 6 7 (b) The performance of any such nonstructural Alteration is subject, however, to the following requirements: (i) The plans and specifications for all Tenant's Alterations shall have been approved in writing by Landlord, which approval shall not be unreasonably withheld. (ii) The construction company or contractor for Tenant's Alterations shall have been approved in writing by Landlord, which approval shall not be unreasonably withheld. (iii) Tenant's Alterations shall be made promptly in a good and workmanlike manner. (iv) Tenant shall pay for any reinforcement of the floors or other parts of the Building which is necessitated by installation of Tenant's safes or other Tenant's Alterations and Landlord shall provide access for Tenant to do such work. (v) The paid bills and other written documents pertaining to Tenant's Alterations shall be submitted to Landlord evidencing payment for Tenant's Alterations. Tenant acknowledges and agrees that if Tenant defaults under the terms and provisions of this Article 8, such default shall be a material default under this Lease. (vi) Tenant shall, before performing any Tenant's Alterations, at its own expense, obtain all permits, approvals, and certificates required by any governmental authority and shall promptly deliver copies of same to Landlord; and at the time such Tenant's Alterations are done, such Tenant's Alterations shall be made in strict conformance to the requirements of all applicable laws, codes, regulations, insurance policies and requirements of all governmental authorities including but not limited to those laws relating to Landmark properties. Tenant shall carry and require Tenant' s contractors and subcontractors who perform the Tenant's Alterations involved to carry workmen's compensation, general liability and personal and property damage insurance reasonably acceptable to Landlord and to deliver to Landlord certificates of such insurance prior to the commencement of Tenant's Alterations. Tenant agrees to indemnify and hold harmless Landlord from and against all loss, damage, liability (whether in contract or tort), and expense, including court costs and attorneys' fees, caused by, or arising from or relating to the work involved, including any liability for labor or materials supplied for such alterations. Tenant shall keep the Demised Premises free from mechanics' liens of any kind by obtaining waivers thereof and by removing or bonding any lien filed, within ten (10) days from the filing thereof. (c) Prior to granting its consent to any Tenant's Alteration, Landlord may impose reasonable conditions (in addition to those expressly provided in this Lease) to guaranty completion of and payment for any Alteration or restoration of the Demised Premises. Tenant shall make no structural alterations, without Landlords prior written consent, which consent shall not be unreasonably withheld or delayed. (d) Tenant's Alterations to the Demised Premises shall, upon installation, become the property of the Fee Owner and a part of the Demised Premises and shall remain upon and be surrendered with the Demised Premises without compensation to Tenant unless Landlord advises Tenant in writing that any such Alteration or Alterations must be removed at the end of the 7 8 Term. If Landlord requires removal, Tenant shall be responsible, at its sole cost and expense, to restore the Demised Premises to their condition prior to performance of the Alterations. (e) Tenant shall bear any cost and expense for changes to the sprinkler system required by law as a result of any Alterations made by or for the benefit of Tenant in the Demised Premises. (f) Landlord shall not be liable in any way for any injury, loss or damage which may occur to any of Tenant's decorations or installations or to any of Tenant's other property, the same being solely at Tenant's risk. 9. HEATING VENTILATING AND AIR CONDITIONING (HVAC) (a) Except as otherwise specifically provided for herein, Landlord shall supply: (i) air-conditioning (between May 31st and October 1st in each year), heating (between October 1st and May 31st in each year) and ventilation from 8:00 a.m. to 6:00 p.m. Monday through Saturday; (ii) elevator service twenty-four hours a day, seven days a week, (iii) water for ordinary lavatory and drinking purposes, but if Tenant uses or consumes water for any other purposes or in unusual quantities (of which fact Landlord shall be the reasonable judge), Landlord may install a water meter at Tenant's expense in good working order and repair to register such water consumption and Tenant shall pay for water consumed as shown on said meter as Additional Rent as and when bills are rendered. (b) Tenant agrees at all times to use reasonable efforts to cooperate fully with Landlord and to abide by all regulations and requirements which Landlord may reasonably prescribe for the proper functioning and protection of the HVAC system. 10. INTERRUPTION OF SERVICES Landlord reserves the right to stop services of any heating, plumbing, elevator, air conditioning or power systems, or cleaning or other services, in order to make repairs, alterations, replacements or improvements necessary in the judgment of Landlord for as long as may be reasonably required by reason thereof or by reason of strikes, accidents, laws, orders or regulations or any other reason beyond the control of Landlord and Landlord shall use its best efforts to restore services as soon as possible. Tenant shall not be entitled to an abatement of rent in the event that Landlord stops services for the reasons specified herein. 11. REPAIRS Tenant shall, throughout the term of this Lease, take good care of the Demised Premises and the fixtures therein (unless Landlord is obligated to maintain pursuant to this Lease) and at Tenant's sole cost and expense, make all repairs thereto as and when needed to preserve them in good working order and condition, reasonable wear and tear excepted. Landlord shall maintain and repair the outside, public and structural portions of the Building and the plumbing, heating, ventilation, electrical, sprinkler, air conditioning and water systems. If Tenant fails after thirty (30) days notice to proceed with due diligence to make repairs required to be made by Tenant, the same may be made by Landlord at the expense of Tenant and the expenses thereof incurred by Landlord shall be collectible as Additional Rent after rendition of a bill or statement therefor. 8 9 12. REQUIREMENTS OF LAW FIRE INSURANCE, FLOOR LOADS (a) Prior to the Commencement Date, if Tenant is then in possession, and at all times thereafter, Tenant, at Tenant's sole cost and expense, shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters or any similar body which shall impose any violation, order or duty upon Landlord or Tenant with respect to the Demised Premises or the Building arising out of Tenant's activities in connection with the permitted use hereunder, including but not limited to the Americans with Disabilities Act. Nothing herein shall require Tenant to make structural repairs unless Tenant has by its manner of use of the Demised Premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after securing Landlord to Landlords reasonable satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorneys fees, by cash deposit or by surety bond in an amount and with a company reasonably satisfactory to Landlord, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Landlord to prosecution for a criminal offense or constitute a default under any Lease or mortgage under which Landlord may be obligated, or cause the Demised Premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the Demised Premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Landlord with respect to the Demised Premises or the Building, or which shall or might subject Landlord to any liability or responsibility to any person or for property damage, nor shall Tenant keep anything in the Demised Premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and in such quantity so as not to increase the rate for fire insurance applicable to the Building, nor use the Demised Premises in a manner which will increase the insurance rate for the Building or any property located therein. Landlord represents that the permitted use does not violate the provisions of this Article. Tenant shall pay all costs, expenses, fines, penalties or damages, which may be imposed upon Landlord by reason of Tenant's failure to comply with the provisions of this Article and if by reason of such failure the fire insurance rate shall, at the beginning of this Lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Landlord, as Additional Rent hereunder, for that portion of all fire insurance premiums thereafter paid by Landlord which shall have been charged because of such failure by Tenant, and Tenant shall make such reimbursement upon the first day of the month following such outlay by Landlord. Tenant shall not place a load upon any floor of the Demised Premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Landlord reserves the right to designate the height and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in setting sufficient, in Landlords reasonable judgment to absorb and prevent vibration, noise and annoyance. (b) Tenant shall not release, discharge or dispose of, or permit, or suffer any release, discharge or disposal of any Hazardous Material (as hereinafter defined) at the Demised Premises in violation of any Environmental Law (as hereinafter defined). Tenant shall not permit 9 10 or suffer the manufacture, generation, storage, transmission or presence of any Hazardous Material over or upon the Demised Premises in violation of any Environmental Law. Tenant shall: (i) promptly, upon learning thereof, notify Landlord of any violation of, or non-compliance with, potential violation of or non-compliance with, or liability or potential liability under, any Environmental Law concerning the Demised Premises, (ii) promptly make (and deliver to Landlord copies of) all reports or notices that Tenant is required to make under any Environmental Law concerning the Demised Premises and maintain in current status all permits and licenses required under any Environmental Law concerning the Demised Premises, (iii) immediately comply with any orders, actions or demands of any Governmental Authority (as herein defined) with respect to the discharge, clean-up or removal of Hazardous Materials at or from the Demised Premises due to a breach of a covenant set forth herein (iv) pay when due the cost of all environmental consultants, laboratory analysis, removal of, treatment of, or the taking of any remedial action (including abatement and/or disposal) with respect to, any Hazardous Material on the Demised Premises which is required by an Environmental Law due to a breach of a covenant set forth herein, (v) keep the Demised Premises free of any lien imposed pursuant to any Environmental Law in respect of a breach of a covenant set forth herein, (vi) from time to time, upon the request of Landlord, execute such affidavits, certificates and statements concerning Tenant's knowledge and belief concerning the presence of Hazardous Materials on the Demised Premises and (vii) otherwise comply with all Environmental Laws concerning the Demised Premises. 13. SUBORDINATION (a) The Lease between The City of New York, as lessor ("Fee Owner"), and the South Street Seaport Museum, as lessee, dated as of December 15, 1981, is herein referred to as the "City Lease." The "Office Development Lease" shall mean: (i) that certain lease dated as of October 27, 1983 between The South Street Seaport Corporation, as landlord, and Seaport Associates, LP, as Tenant, a memorandum of which was recorded in the Office of the Register of the City of New York on February 6, 1984 in Reel 762 at Page 740, as thereafter supplemented and amended by that certain First Supplement of Lease dated as of December 29, 1983, First Amendment of Lease dated as of March 15, 1988 and Second Amendment of Lease dated as of November 23, 1998, as the same may have thereafter been supplemented or amended; and (ii) that certain Lease Agreement dated as of March 15, 1988 made by and between The South Street Seaport Corporation, as landlord, and Seaport Associates, LP, as tenant, a memorandum of which was recorded in the Office of the Register of the City of New York on March 28, 1988 in Reel 1383 at Page 106, as thereafter supplemented and amended by that certain First Amendment to Lease dated as of November 23, 1998, as the same may have thereafter been supplemented or amended. If any provision of this Lease shall conflict or be inconsistent with any provisions of the City Lease or the Office Development Lease, the provisions of the City Lease and/or the Office Development Lease shall control and this Lease shall be deemed amended accordingly. (b) This Lease is subject and subordinate to all the terms and conditions of the City Lease, the Office Development Lease and any mortgage which may now or hereafter affect the City Lease, the Office Development Lease or the real property of which the Demised Premises are a part and to all renewals, modifications, consolidations, substitutions, replacements and 10 11 extensions of any such leases and mortgages. In confirmation of such subordination, Tenant shall promptly execute any certificate Landlord may request. (c) If, by reason of any default on the part of Landlord or The South Street Seaport Corporation (the "Seaport Corporation") or for any other reason, this Lease, the Office Development Lease or the City Lease is terminated by summary proceedings or otherwise, or if Landlord is ousted from possession through foreclosure proceedings brought by any present or future permitted mortgagee, Tenant, at the option and request of Landlord, the Seaport Corporation, the Fee Owner, such mortgagee or a purchaser at foreclosure of a mortgage, shall attorn to Landlord, the Seaport Corporation, the Fee Owner, such mortgagee or purchaser, as the case may be, as Tenant's landlord under this Lease for the balance of the term remaining on such Lease subject to all the terms of this Lease. The foregoing provision shall be self-operative and no further instrument or document shall be necessary unless required by Landlord, the Seaport Corporation, the Fee Owner or such mortgagee or purchaser. (d) Tenant shall execute and deliver, at any time and from time to time, upon the request of Landlord, or of the lessor under such underlying lease, an instrument which includes only the executory provisions of this Lease and which may be necessary or appropriate to evidence such attornment. Tenant hereby waives the provisions of any statute or rule of law now or hereafter in effect which may give or purport to give Tenant any right of election to terminate this Lease or to surrender possession of the Demised Premises in the event any proceeding is brought by The Seaport Corporation to terminate the Office Development Lease, or by the Fee Owner to terminate the City Lease, or by any present or future permitted mortgagee to foreclose any mortgage, and Tenant agrees that this Lease shall not be affected in any way whatsoever by any such proceeding provided that Tenant's possession of the Demised Premises under the terms of this Lease is not disturbed. (e) The foregoing provisions of this Article 13 shall inure to the benefit of Landlord, The Seaport Corporation, the Fee Owner, any present or future permitted mortgagee or a purchaser at foreclosure and their respective successors and assigns. 14. PROPERTY - LOSS, DAMAGE REIMBURSEMENT, INDEMNITY Landlord or its agents shall not be liable for any damage to property of Tenant or of others entrusted to Landlords employees or agents, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, nor shall Landlord or its agents be liable for any such damage caused by other tenants or persons in, upon or about said Building or caused by operations in construction of any private, public or quasi-public work, unless caused by or due to the gross negligence or willful misconduct of Landlord, its agents, servants, employees, invitees, licensees or contractors. Except for Tenant's business equipment and inventory, Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the Building without Landlords prior written consent. If such safe, machinery, equipment, bulky matter or fixtures requires special handling, all work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto and shall be done during such hours as Landlord may designate. Tenant shall indemnify and save harmless Landlord against and from all liabilities, obligations, damages, penalties, 11 12 claims, costs and expenses, including reasonable attorneys' fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, servants, contractors, employees, invitees, or licensees, of any covenant or condition of this Lease, or the carelessness, negligence or improper conduct of Tenant, Tenant's agents, servants, contractors, employees, invitees or licensees. Tenant's liability under this Lease extends to the acts and omissions of any subtenant, and any agent, servant, contractor, employee, invitee or licensee of any subtenant. In case any action or proceeding is brought against Landlord by reason of any such claim, Tenant, upon written notice from Landlord, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved in writing by Landlord, such approval not to be unreasonably withheld or delayed. 15. DESTRUCTION, FIRE AND OTHER CASUALTY (a) If the Demised Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Landlord and this Lease shall continue in full force and effect except as hereinafter set forth. (b) If the Demised Premises are partially damaged or rendered partially unusable by fire or other casualty, the Demised Premises may be restored, at Landlords option, by and at the expense of Landlord and the rent, until such restoration shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the Demised Premises which is usable. (c) If all or substantially all of the Demised Premises are damaged or rendered unusable, the rent shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the Demised Premises shall have been restored by Landlord, subject to Landlords right to elect not to restore the same as hereinafter provided. (d) If the Demised Premises are rendered substantially unusable, unless Landlord is obligated under terms of any other agreement to restore the Demised Premises, Landlord shall not be obligated to restore the Demised Premises or the Building. If the Building shall be so damaged that Landlord shall decide not to restore it, then in such event, Landlord may elect to terminate this Lease by written notice to Tenant within thirty (30) days after fire or other casualty specifying a date for the expiration of this Lease, which date shall not be more than thirty (30) days after the giving of such notice and upon the date specified in such notice, the term of this Lease shall expire as fully and completely as if such date were the date set forth above for the termination of this Lease and Tenant shall forthwith quit, surrender and vacate the Demised Premises, without prejudice however to Landlord's rights and remedies against Tenant under the Lease provisions in effect prior to such termination, and any rent owing shall be paid up to the date that the Demised Premises were rendered substantially unusable and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant (provided Tenant is not in default under any of the term of this Lease). Unless Landlord shall serve a termination notice as provided for herein Landlord shall make the restoration under the conditions of paragraphs (b) and (c) above, with all reasonable expedition subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Landlords control. In the event that Landlord elects to rebuild and has not completed the making of the required repairs and restored and rebuilt the Demised Premises and/or access thereto within twelve (12) months from the date of such damage or destruction to the condition the 12 13 Demised Premises were in on the Commencement Date (except for Tenant's property), Tenant may serve notice on Landlord of its intention to terminate this Lease and if within thirty (30) days thereafter, Lessor shall not have substantially completed the making of the required repairs and restored and rebuilt the Demised Premises to the condition the Demised Premises were in on the Commencement Date (except for Tenant's property), then in such events, this Lease shall terminate on the expiration of such thirty (30) day period as if such termination date were the Expiration Date, and the Fixed Rent and Additional Rent shall be apportioned as of such date of sooner termination and any prepaid portion of Fixed Rent and Additional Rent for any period after such date shall be refunded by Landlord to Tenant. After any such casualty, Tenant shall cooperate with Landlords restoration by removing from the Demised Premises, as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture and other property, if required by Landlord for the restoration of the Building. (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent of insurance required under the terms of this Lease and to the extent permitted by law, Landlord and Tenant each hereby releases and waives all right of recovery against the other and any such right of recovery by any one claiming through or under each of them by way of subrogation or otherwise. Tenant acknowledges that Landlord will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances owned or used by Tenant and agrees that Landlord will not be obligated to repair any damage thereto or replace the same unless otherwise required under the provisions of this Lease. (f) The parties agree that the provisions of this Article shall govern and control in lieu of Section 227 of the Real Property Law. 16. EMINENT DOMAIN (g) If all or substantially all of the Demised Premises are taken for public or quasi-public purposes, then this Lease shall terminate as of the date Tenant is required to quit the Demised Premises. (h) In the event of any taking, the proceeds of all awards relating thereto shall be payable to Landlord. However, Tenant shall have the right to assert its claim for that portion of the award related to the loss of or damage to its trade fixtures or removable personal property. 17. ASSIGNMENT, SUBLETTING OR MORTGAGING (a) Tenant shall not, whether voluntarily or involuntarily: (i) assign or otherwise transfer this Lease, (ii) sublet the Demised Premises or any part thereof, or allow the same to be used, occupied or utilized by anyone other than Tenant, or (iii) mortgage, pledge, encumber or otherwise hypothecate this Lease in any manner whatsoever, without in each instance obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. (b) Any proposed assignee, sublessee or transferee, shall in any event: 13 14 (i) be as credit worthy a tenant as Tenant hereunder, taking into consideration any guaranty of this Lease, and demonstrate financial responsibility reasonably necessary to fulfill its obligations under this Lease; (ii) occupy the Demised Premises for the Permitted Use and only the Permitted Use, as described in this Lease; and (iii) in the reasonable opinion of Landlord, be a tenant whose occupancy will be in keeping with the dignity and character of the Building and whose occupancy will not be more hazardous than that of Tenant or impose any additional burden upon Landlord in the maintenance and operation of the Building. (c) In connection with any proposed assignment sublease or transfer, Tenant shall pay to the Landlord on demand the reasonable costs (including attorneys fees) that may be incurred by the Landlord, including, without limitation, the reasonable costs of making investigations as to the acceptability of the proposed assignee or sublessee. (d) In the event of any assignment or sublease of the Demised Premises which requires the payment of Fixed Rent, Additional Rent and other charges in excess of the amounts payable to the Landlord as set forth in this Lease, then one-half of the excess or profit shall be paid to the Landlord and shall be payable to Landlord as Additional Rent and shall be due and payable to Landlord at such times as due and payable by such assignee or subtenant to the Tenant. In the event the Tenant fails to make payment of such excess or profit in violation of this Lease, Landlord may collect such rent directly from the assignee or subtenant. (e) Regardless of Landlord's consent, no subletting, assignment or other hypothecation of this Lease will release Tenant from Tenant's obligations hereunder or alter the primary liability of Tenant to pay the rental and to perform all other obligations to be performed by Tenant under this Lease, unless specifically released in writing by Landlord. 18. ACCESS TO PREMISES (a) Landlord and Fee Owner and their respective agents shall have the right (but shall not be obligated) to enter the Demised Premises in any emergency at any time, and, at other times, upon reasonable notice, to examine the same and to make such repairs, replacements and improvements as Landlord may deem necessary or reasonably desirable to the Demised Premises or to any other portion of the Building or as may be required or permitted by this Lease, the City Lease or the Office Development Lease or which Landlord may elect to perform following Tenant's failure to make repairs or perform any work which Tenant is obligated to perform under this Lease, or for the purpose of complying with laws, regulations and other directions of governmental authorities. (b) Any alterations or repairs done by Landlord or Fee Owner shall be performed in such manner so as to minimize interference with Tenant's use and enjoyment of the Demised Premises. Landlord may, during the progress of any work in the Demised Premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. 14 15 (c) Throughout the Term hereof Landlord shall have the right to enter the Demised Premises at reasonable hours, upon reasonable notice, for the purpose of inspecting the Demised Premises or of showing the same to prospective purchasers or mortgagees of the Building or of Fee Owner's interest in the property, and during the last six (6) months of the Term, or if this Lease be renewed or extended then during the last six (6) months of such renewed or extended term, for the purpose of showing the same to prospective tenants and may, during said six-month period, place upon the Demised Premises the usual notices "To Let" and "For Sale", which notices Tenant shall permit to remain thereon without molestation. (d) If during the last month of the Term, Tenant shall have removed all or substantially all of Tenant's property therefrom, and notified Landlord, Landlord may immediately enter, alter, renovate or redecorate the Demised Premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation and such act shall have no effect on this Lease or Tenant's obligations hereunder. Landlord shall have the right at any time, without the same constituting an eviction and without incurring liability to Tenant therefor, to redesign; alter, and change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets, or other public parts of the Building and to change the name, number or designation by which the Building may be known, provided, however, that same does not materially and adversely interfere with Tenant's ability to conduct its business in the Demised Premises. 19. BANKRUPTCY (a) If on the Commencement Date, or if at any time during the Term hereof, (i) Tenant admits in writing its inability to pay its debts, or (ii) Tenant makes an assignment for the benefit of creditors or petitions for or enters into an arrangement with creditors, or (iii) a proceeding or arrangement for the relief of Tenant's debts under the laws of the United States or of any state or foreign government is commenced and is not dismissed within thirty (30) days of commencement, or (iv) a custodian, trustee, receiver or other agent is appointed or authorized to take charge of all or part of Tenant's property pursuant to an arrangement or proceeding for the relief of Tenant's debts under the laws of the United States or of any state or foreign government or otherwise and is not removed within thirty (30) days, this Lease, at the option of Landlord, may be canceled and terminated by written notice to Tenant and whether such cancellation and termination occur prior to or during the Term, neither Tenant nor any person claiming through or under Tenant by virtue, of any statute or rule of law or of any order of any court or other body having jurisdiction, shall thereafter be entitled to possession or to remain in possession of the Demised Premises but shall forthwith quit and surrender said Demised Premises, and Landlord, in addition to other rights and remedies Landlord has by virtue of any other provision herein or elsewhere in this Lease contained or by virtue of any statute or rule of law, may retain as liquidated damages any rent, security deposit or moneys received from Tenant or others on behalf of Tenant. (b) In the event of the termination of this Lease pursuant to paragraph (a) hereof, Landlord shall forthwith, notwithstanding any other provisions of this Lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between(i) the Fixed Annual Rent and Additional Rent payable hereunder for the later of the first full month of the Term of this Lease or the month immediately preceding such termination, 15 16 multiplied by the number of months and partial months during the period that would otherwise have constituted the balance of the Term of this Lease, and (ii) the fair and reasonable rental value of the Demised Premises for the same number of months and partial months, both discounted to the date of termination at the rate of 4% per annum to determine present worth. If such Premises or any part hereof be re-let by Landlord for the unexpired Term of said Lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such re-letting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the reletting. Nothing herein contained shall limit or prejudice the right of Landlord to prove and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. 20. DEFAULT (a) If Tenant defaults in fulfilling any of the covenants of this Lease other than the covenants for payment of Fixed Annual Rent or Additional Rent, or if the Demised Premises become vacant or deserted, or if the Demised Premises are damaged by reason of negligence or carelessness of Tenant, its agents, servants, contractors, employees, invitees or licensees and such damage is not promptly repaired by Tenant, or if any execution or attachment shall be issued against Tenant or any of Tenant's property, or if a receiver or custodian is appointed for all or a portion of Tenant's property or is appointed for or takes possession of all or any portion of the Demised Premises and is not removed within thirty (30) days, or if Tenant shall default with respect to any other lease between Landlord and Tenant, in any one or more of such events, upon Landlord serving a written ten (10) days notice upon Tenant specifying the nature of said default and if, upon the expiration of such ten (10) days, Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within such ten (10) day period, and if Tenant shall not have diligently commenced curing such default within such ten (10) day period and shall not thereafter with reasonable diligence and in good faith proceed to remedy or cure such default, then Landlord may serve a written five (5) days' notice of cancellation of this Lease upon Tenant, and upon the expiration of such five (5) days, this Lease and the Term hereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this Lease and the Term hereof and Tenant shall then quit and surrender the Demised Premises to Landlord but Tenant shall remain liable as herein provided. (b) If the notice provided for in paragraph (a) hereof shall have been given, and the Term shall expire as aforesaid, or if Tenant shall default in the payment of the Fixed Annual Rent, Additional Rent or any part thereof or if Tenant shall default in any other payment herein required within ten (10) days after notice, or if the Lease is terminated for failure of a Guaranty as provided in Article 4 hereof, then and in any of such events Landlord may, without notice, re-enter the Demised Premises by summary proceedings or otherwise, dispossess Tenant and the legal representatives of Tenant and any other occupant of the Demised Premises and remove their effects and hold the premises as if this Lease had not been made. Tenant hereby waives the service of Notice of Intention to institute legal proceedings to that end unless such notice is 16 17 required by law. If Tenant shall default hereunder prior to the date fixed as the commencement of any renewal or extension of this Lease, and such default has not been cured, Landlord may cancel and terminate such renewal or extension agreement. 21. REMEDIES OF LANDLORD AND WAIVER OF REDEMPTION (a) In case of any such default as provided in Article 20 above, (i) The Fixed Annual Rent and all Additional Rent shall become due thereupon and be paid up to the time of such expiration, together with such expenses as Landlord may incur for legal expenses, attorneys fees, brokerage and/or putting the Demised Premises in good order, or for preparing the same for re-rental; (ii) Landlord may re-let the Demised Premises or any part or parts thereof, either in the name of Landlord or otherwise, for a term or terms which may at Landlords option be less than or exceed the period which would otherwise have constituted the balance of the Term of this Lease and may grant concessions or free rent or charge a higher rental than that in this Lease; and (iii) Tenant or the legal representatives of Tenant shall also pay Landlord, for the failure of Tenant to observe and perform Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the Demised Premises for each month of the period which would otherwise have constituted the balance of the Term of this Lease. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent days specified in this Lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Landlord to collect the deficiency for any other month by a similar proceeding. (b) In place and instead of holding Tenant liable upon the several rent days and otherwise as provided in the preceding paragraph, Landlord may elect to recover from Tenant forthwith, as damages and not as a penalty, the liquidated damages provided for in paragraph (b) of Article 19 hereof as if this Lease had been terminated pursuant to paragraph (a) of Article 19 on the date of the expiration of the term under Article 20 hereof. (c) In addition to the amounts required to be paid by Tenant under the preceding paragraphs of this Article 21, Tenant shall pay to Landlord, when incurred, all expenses of Landlord in connection with re-letting, such as legal expenses, attorneys' fees, brokerage and advertising expenses and for keeping the Demised Premises in good order or for preparing the same for re-letting. Landlord, in putting the Demised Premises in good order or preparing the same for re-rental, may, at Landlord's option, make such alterations, repairs, replacements, and/or decorations in the Demised Premises as Landlord in Landlords sole judgement considers advisable and necessary for the purpose of re-letting the Demised Premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from any liability hereunder. (d) The failure of Landlord to re-let the Demised Premises or any part or parts thereof shall not release or affect Tenant's liability hereunder. Landlord shall in no event be liable in any 17 18 way whatsoever for failure to re-let the Demised Premises, or in the event that the Demised Premises are re-let, for failure to collect the rent under such re-letting; and in no event shall Tenant be entitled to receive the excess, if any, of any net rents collected over the sums payable by Tenant to Landlord hereunder by reason of a re-letting of the Demised Premises. (e) In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Landlord shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this Lease of any particular remedy shall not preclude Landlord from pursuing any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Landlord obtaining possession of the Demised Premises by reason of the violation by Tenant of any of the covenants and conditions of this Lease or otherwise. 22. FEES AND EXPENSES (a) If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions of this Lease, then, unless otherwise provided elsewhere in this Lease, Landlord may immediately or at any time thereafter and upon reasonable notice perform the same for the account of Tenant and if Landlord, in connection therewith or in connection with any default by Tenant in the covenant to pay Fixed Annual Rent or Additional Rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including, but not limited to, reasonable attorneys' fees in instituting, prosecuting or defending any action or proceeding (provided that Landlord is the successful party in such action or proceeding), such sums paid or obligations incurred, with interest at 2% above the prime lending rate of Citibank, N.A. or its successor, shall be deemed to be Additional Rent hereunder and shall be paid by Tenant to Landlord within ten (10) days of rendition of any bill or statement to Tenant therefor. (b) Notwithstanding the foregoing, in the event that either party to this Lease shall institute, prosecute or defend any action or proceeding in connection with its respective obligations under this Lease, the prevailing party shall be entitled to reasonable legal fees. 23. NO REPRESENTATIONS BY LANDLORD Neither Landlord nor Landlords agents have made any representations or promises with respect to the physical condition of the Building, the land upon which it is erected or the Demised Premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the Demised Premises except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease. All understandings and agreements heretofore made between Landlord and Tenant with respect to the subject matter of this Lease are merged in this Lease, which alone fully and completely expresses the agreement between Landlord and Tenant with respect to the subject matter of this Lease, and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of this Lease in whole or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. 18 19 24. SOUTH STREET SEAPORT DISTRICT; FULTON FISH MARKET (a) The South Street Seaport District is a mixed use cultural and commercial complex involving public entertainment and activities throughout the District. Tenant hereby waives all claims that traffic, pedestrian or vehicular, and cultural and commercial entertainment and activities taking place in the District disturb or disrupt Tenant's right to quiet enjoyment of the Demised Premises or constitute a violation of any other obligation of Landlord under the terms of this Lease. (b) The Fulton Fish Market is part of the historic South Street Seaport District. Tenant hereby waives all claims that fish odors or noise emanating from the South Street Seaport District, whether made by the fish market, the public or by performers, disturb or disrupt Tenant's right to quiet enjoyment of the Demised Premises or constitute a violation of any other obligation of Landlord under the terms of this Lease. 25. NO WAIVER The failure of Landlord to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Lease or of any of the Rules and Regulations set forth as EXHIBIT "C' attached hereto and made a part hereof or as hereafter adopted by Landlord, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach and no provision of this Lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlords right to recover the balance of such rent or pursue any other remedy provided in this Lease. No act or thing done by Landlord or Landlord's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or Landlord's agent shall have any power to accept the keys to said premises prior to the termination of the Lease and the delivery of keys to any such agent or employee shall not operate as a termination of the Lease or a surrender of the Demised Premises. No payment by Tenant shall be deemed a waiver of Tenant's rights pursuant to the Lease. 26. WAIVER OF TRIAL BY JURY It is mutually agreed that the parties hereto waive trial by jury in any action brought by either of the parties hereto against the other (except for personal injury or property damage) in any way connected with this Lease. It is further mutually agreed that in the event Landlord commences any summary proceeding for possession of the Demised Premises, Tenant will not interpose any counterclaim unless Tenant would be forever barred from litigating such counterclaim or other claim in any future action. 19 20 27. DEFINITIONS (a) The term, "business days" as used in this Lease shall mean all days except Saturdays, Sundays and legal holidays observed by the government offices of the State of New York or United States of America and those designated as holidays by the applicable building service union employees service contract. (b) The term "Environmental Laws" shall mean any and all federal, state, local, or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning environmental conditions at the Demised Premises, Building or Property as now or may at any time hereafter be in effect, including but not limited to and without limiting the generality of the foregoing, The Clean Water Act also known as the Federal Water Pollution Control Act, 88 U.S.C. Section Section 1251 et seq., the Toxic Substance Control Act, 15 U.S.C. Section Section 2601 et seq., the Clean Air Act, 42 U.S.C. Section Section 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section Section 186 et seq., the Safe Drinking Water Act, 42 U.S.C. Section Section 300f et seq., the Surface Mining Control and Reclamation Act, Section 1201 et seq., 80 U.S.C. Section 1201 et seq., the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986 ("SARA"), Public Law 99-499, 100 Stat. Section 1818, the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section Section 1101 et seq. the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section Section 6901 et seq., and the Occupational Safety and Health Act as amended ("OSHA"), 29 U.S.C. Section 655 and Section 657, together with any amendments thereto, regulations promulgated thereunder and all substitutions thereof. (c) The term "Hazardous Material" shall mean (i) Any hazardous, toxic or dangerous waste, substance or material defined as such in (or for the purpose of) CERCLA, SARA, RCRA, or any other Environmental Law as now or at any time hereafter in effect; (ii) any other waste, substance or material that exhibits any of the characteristics enumerated in 40 C.F.R- Section Section 261.20 through 261.24, inclusive, and those extremely hazardous substances listed under Section 902 of SARA that are present in threshold planning or reportable quantities as defined under SARA and toxic or hazardous chemical substances that are present in quantities that exceed exposure standards as those terms are defined under Section 6 and 8 of OSHA and 29 C.F.R. Part 1910; (iii) any asbestos or asbestos containing substances whether or not the same are defined as hazardous, toxic, dangerous waste, a dangerous substance or dangerous material in any Environmental Law; (iv) "Red Label" flammable materials; (v) all laboratory waste and by-products; and (vi) all biohazardous materials. (d) The term "Landlord" as used in this Lease means only the owner, or the mortgagee in possession, for the time being, of the land and Building (or the owner of a lease of the Building or of the land and Building), so that in the event of any conveyance, sale or sales of said land and Building or of said lease (including a termination hereof), or in the event of a lease of the Building, or of the land and Building, such Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder. (e) The term "office," or "offices," wherever used in this Lease, shall not be construed to mean premises used as a store or stores, for the sale, at any time, of goods, wares or 20 21 merchandise, of any kind, or as a shop, booth or other stand, barber shop, or for other similar purposes or for manufacturing. (f) The words "re-enter" and "re-entry" as used in this Lease are not restricted to their technical legal meaning. (g) The term "substantially complete" and words of similar import shall be deemed to mean, with regard to construction work, completion but for such minor details of work, the non-completion of which would not materially interfere with the utility of the affected space and if a certificate is issued by an independent architect or engineer stating that the work is substantially complete, then such determination shall be conclusive and binding upon the parties to this Lease. (h) The term "Tenant's Delays" shall mean: (i) any and all delays caused by or attributable to any action or failure or refusal of Tenant to perform a duty of, Tenant or any person claiming through or under Tenant, or any agent, servant, employee, director, shareholder, contractor or invitee of Tenant or any such person, and (ii) any delays included by Landlord in substantially completing the Work by reason of Extra Work and/or changes requested by Tenant in connection with the Work that were not reflected on the Plans. (i) The term "Unavoidable Delays" shall mean any and all delays beyond Landlord's reasonable control, including Tenant's Delays, governmental restrictions, governmental preemption, strikes, labor disputes, lockouts, shortages of labor and materials, enemy action, civil commotions, riot, insurrection and fire, other casualty and other acts of God. 28. ADJACENT EXCAVATION - SHORING If an excavation shall be made upon land adjacent to the Demised Premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the Demised Premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the Building from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Landlord unless Landlord is guilty of willful misconduct. 28. RULES AND REGULATIONS Tenant and Tenant's agents, servants, contractors, employees, invitees, and licensees shall observe faithfully, and comply strictly with the Rules and Regulations attached hereto as EXHIBIT "C' and such other and further reasonable rules and regulations as Landlord or Landlords agents may from time to time adopt; provided however, that such rules or regulations do not impair Tenant's rights under this Lease or alter the permitted use. Notice of any additional rules and regulations shall be given in such manner as Landlord may elect. Nothing herein contained shall be construed to impose upon Landlord any duty or obligation to enforce any rules and regulations or terms, covenants or conditions in any other lease as against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its agents, servants, contractors, employees, invitees or licensees. 21 22 30. BROKER Tenant wants and represents to Landlord that it has not dealt with any broker in connection with the Demised Premises or the negotiation or execution of this Lease except for Legacy Real Estate, Inc. (the "Broker"). Tenant agrees to pay the Broker all commissions in accordance with the terms of separate agreement. Tenant agrees that should any claim be made for commissions or finders fee or similar fee by the Broker or any other broker or other person arising by, through or on account of any act of Tenant or Tenant's representative, Tenant shall indemnify and hold Landlord harmless from and against any and all such claims, liabilities, costs or expenses (including reasonable attorneys' fees) in connection therewith. 31. INSURANCE (a) Tenant in its own name as insured shall secure and maintain insurance coverage for and relating to the Demised Premises which shall be effective from Tenant's entry into the Demised Premises and throughout the term of this Lease as follows: (i) Comprehensive general liability insurance including coverage for all occurrences in and about the Demised Premises with the following minimum coverage limits: (1) for bodily and personal injury or wrongful death to one person, $1,000,000.00; and (2) for injury or wrongful death from any one accident, $1,000,000.00; and (3) for all damages arising out of injury to or destruction of property in any one accident, $1,000,000.00; (ii) All Risk insurance to cover Tenant's leasehold improvements, alterations, fixtures, equipment, machinery, furniture and all other property of Tenant in the Demised Premises in such amount that Tenant shall not be a co-insurer and sufficient to cover replacement costs of all such improvements, alterations, fixtures, equipment, machinery, furniture and other Tenant property; (iii) Worker's Compensation covering all persons employed by Tenant in the Demised Premises, as required by applicable law; (iv) Business interruption insurance in the amount required to enable Tenant to meet its obligations under this Lease. (b) All insurance coverage required under this Article 31 shall be issued by New York licensed insurance companies, reasonably satisfactory to Landlord. (c) If Landlord reasonably determines during the Term hereof that the foregoing minimum limits set forth in paragraph (a) above have become unsatisfactory, and Landlord gives notice to Tenant of such determination, then Tenant shall thereafter promptly obtain insurance which has limits in accordance with such determination and which otherwise conforms to the provisions of this Lease concerning such insurance. If insurance provided for in this Article is 22 23 affected by a policy of blanket insurance, said policy shall specify the amount of the total insurance allocated to the Demised Premises, which will not be less then the amount required by this Article 31. Any blanket insurance policy shall, as to the Demised Premises, comply with all other provisions of this Article 31. (d) Every policy of liability insurance required under this Article 31 shall name as additional insureds Landlord, The South Street Seaport Corporation, the South Street Seaport Museum, the New York City Economic Development Corporation and the City of New York, their respective successors or assigns (the "Additional Insureds"), and shall waive all rights to subrogation against and indemnification from said Additional Insureds. Every insurance policy obtained by Tenant in accordance with the terms of this Article shall also include provisions that no act or omission of any party insured thereunder shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained and that the policy shall not be invalidated should any of the insureds waive, in writing, prior to a loss, any and all rights of recovery against any party for losses covered by such policies. (e) Tenant waives all rights to recover against the Additional Insureds or against the officers, directors, shareholders, partners, joint ventures, employees, agents, invitees or business visitors of said Additional Insureds, or any of them or against any other tenant or occupant of the Building for any loss or damage arising from any cause covered by any insurance required to be carried by Tenant pursuant to this Article 31. Tenant shall cause its insurer or insurers to issue appropriate waiver of subrogation rights endorsements to all policies of insurance carried in connection with the Building or the Demised Premises or the contents of either of them Tenant will cause all other occupants of the Demised Premises claiming by, under of through Tenant to execute and deliver to Landlord's waiver of claims similar to the waiver in this Article and to obtain such waiver of subrogation rights endorsements. (f) A certified copy of any policy of liability insurance required under this Article 31, or a certificate or certificates evidencing the existence thereof, or binders therefor, shall be delivered to Landlord prior to Tenant's entry into the Demised Premises. If any binder is delivered, it shall be replaced within thirty (30) days by a certified copy of the policy or a certificate. Each such copy or certificate shall contain a valid provision or endorsement that the policy may not be canceled, terminated, changed or modified without giving fifteen (15) days' written advance notice thereof to Landlord. A renewal policy shall be delivered to Landlord at least fifteen (15) days prior to the expiration date of each expiring policy, except for any policy expiring after the term of this Lease. (g) Landlord shall use its best efforts to cause to be included in any fire insurance policies for the Building appropriate clauses pursuant to which the insurers (i) waive all right of subrogation against Tenant with respect to losses payable under such policies and/or (ii) agree that such policies shall not be invalidated should the insured waive in writing prior to a loss any and all rights of recovery against any party for losses covered by such policies. 32. SIGNS 23 24 Tenant shall not erect or maintain any signs on the Building or on any part of the outside of the Demised's Premises or the inside of the Demised Premises if such is visible from the outside of the Demised Premises without the prior written consent of Landlord. 33. LANDLORD'S RIGHT TO ALTER PUBLIC SPACES Landlord reserves the right in its sole discretion to redesign or alter from time to time any and all spaces in the Building which are not leased to specific tenants, provided however, that such alterations do not materially impair Tenant's use of the Demised Premises. 34. INDEMNIFICATION OF LANDLORD AND FEE OWNER To the extent not covered by Landlord's insurance, Tenant shall indemnify and hold Landlord and its agents and the Fee Owner, the City of New York, the New York City Economic Development Corporation, the South Street Seaport Museum, and The South Street Seaport Corporation, and their respective successors and assigns ("Indemnified Persons") harmless against all loss, damage and expense (including attorneys' fees) at any time suffered or incurred by Landlord or Indemnified Persons as a result of any demand, claim, cause of action, suit, judgment, execution or liability arising from or in connection with any injury, loss or damage suffered by any person or property (1) while on the Demised Premises or (2) as a result of any act or omission by Tenant or Tenant's agents, servants, contractors, employees, guests, invitees or licensees. Tenant agrees that Landlord and Indemnified Persons shall not be liable to Tenant or any of its agents, servants, contractors, employees, guests, invitees or licensees on account of any loss, damage or injury suffered by any of them due to any defect or failure in the Demised Premises or the real property of which they are part, including without limitation any defect in or failure of any part of the heating, air conditioning, ventilating, plumbing or electrical systems or any appurtenance to the Demised Premises such as stairways, halls, roofs and elevators. In no event shall Landlord or Indemnified Persons be liable to Tenant or any other party for any remote, incidental or consequential damages to person or property resulting from any condition in the Demised Premises or the real property of which they are part or any act or omission by Landlord or Indemnified Persons or any other party. 35. LIABILITY OF LANDLORD (a) Tenant shall look only to Landlord's estate and interest in the land and Building for the collection of any judgment (or other judicial process requiring the payment of money by Landlord) in the event of any default by Landlord under this Lease, and no other property or other assets of Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder or Tenant's use and occupancy of the Demised Premises. Nothing contained in this Article shall be construed to permit Tenant to offset against rents due a successor landlord, a judgment (or other judicial process) requiring the payment of money by reason of any default of a prior Landlord. Under no circumstances shall Tenant look to the City of New York, The New York City Economic Development Corporation, The South Street Seaport Museum or The South Street Seaport Corporation, for the satisfaction of any of Tenant's remedies against the Landlord. 24 25 (b) Tenant hereby agrees for itself and its successors and assigns that in the event of any actual or alleged failure, breach or default by Landlord under the terms of this Lease occurring while Seaport Associates or any other limited partnership (for purposes of this Section, "such limited partnership") is Landlord hereunder: (i) the sole and exclusive remedy shall be against such limited partnership and its partnership assets; (ii) no partner, general or limited, of such limited partnership shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of such limited partnership); (iii) no service of process shall be made against any partner, general or limited, of such limited partnership (except as may be necessary to secure jurisdiction of such limited partnership); (iv) no partner, general or limited, of such limited partnership shall be required to answer or otherwise plead to any service of process (except as may be necessary to secure jurisdiction of such limited partnership); (v) except as may be necessary to secure judgment against such limited partnership, no judgment will be taken against any partner, general or limited, of such limited partnership and any judgment taken against any partner, general or limited, of such limited partnership may be vacated and set aside at any time nunc pro tunc; (vi) no writ of execution will ever be levied against the personal assets of any partner, general or limited, of such limited partnership; (vii) these covenants and agreements are enforceable both by such limited partnership and also by any partner, general or limited, of such limited partnership; and (viii) any violation of this Section 35(b) or any of its subparts shall entitle the aggrieved partner(s), general of limited, of such limited partnership to recover damages (including, without limitation, legal fees and expenses) from and against Tenant, its successors and assigns. 36. DISCHARGE OF LIENS; BONDS (a) Tenant shall not create, suffer or permit to be created or to remain any lien, encumbrance or charge upon the Demised Premises, or any part thereof, or this Lease, and Tenant shall not suffer any other matter or thing whereby the estate, rights or interest of Landlord or Fee Owner in the Demised Premises or any part thereof or in this Lease might be impaired. Tenant shall, to the extent permitted by law, obtain and deliver to Landlord, written and unconditional waivers of mechanic's liens upon the real property in which the Demised Premises are located, for all work, labor and services to be performed and materials to be finished in connection with such work, signed by all contractors, subcontractors, materialmen and laborers that become involved in such work. 25 26 (b) If any mechanic's, laborer's or materialman's or other lien at any time shall be filed against the Demised Premises or any part thereof, as a result of Tenant's work, Tenant, within thirty (30) days after the filing thereof, shall cause the same to be vacated or discharged of record by payment, deposit, bond, order of a court of competent jurisdiction or otherwise. If Tenant shall fail to cause such lien to be vacated or discharged within the period aforementioned, and if such lien shall continue for an additional ten (10) days after notice by Landlord to Tenant, then, in addition to any other right or remedy of Landlord hereunder, Landlord may, but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit or by bonding proceedings, and in any such event, Landlord shall be entitled, if Landlord shall so elect, to compel the prosecution of an action for the foreclosure of such lien by the lien or and to pay the amount of the judgment in favor of the lien or with interest, costs and allowances. Any amount so paid by Landlord, and all costs and expenses, including, but not limited to, attorneys' fees and disbursements, incurred by Landlord in connection therewith, together with interest thereon from the date of Landlords making of the payment or incurring of the costs and expenses shall constitute Additional Rent payable by Tenant under this Lease and shall be paid by Tenant to Landlord within ten (10) days of Landlords demand for such payment. 37. ESTOPPEL CERTIFICATE (a) Tenant agrees, at any time and from time to time upon not less than five (5) business days' notice given by Landlord, The South Street Seaport Corporation or Fee Owner, to execute, acknowledge and deliver to Landlord, The South Street Seaport Corporation or Fee Owner (or any other parties specified by either of them led by either of them) a statement certifying (i) whether this Lease is unmodified and in full force and effect (or if there have been any modifications or supplements or other agreements executed pursuant to the terms of this Lease that the same, as modified and/or supplemented, is in full force and effect and stating the modifications and/or supplements), (ii) the date to which the Rent payable by Tenant hereunder has been paid, including Fixed Annual Rent, Additional Rent, and any extra charges, (iii) whether to the best knowledge of the person executing such certificate there is then any existing default in the performance of Landlord's obligations under this Lease and, if so, specifying each such default, (iv) whether to the best knowledge of the person executing such certificate there then exists any setoffs or defenses to the enforcement of this Lease by Landlord or any claims by Tenant against Landlord, and (v) any other existing condition or status concerning this Lease, it being intended that any such statement may be relied upon by Landlord, The South Street Seaport Corporation, Fee Owner and/or such other parties as Landlord, The South Street Seaport Corporation or Fee Owner shall have designated. (b) The foregoing provision shall inure to the benefit of Landlord, The South Street Seaport Corporation, Fee Owner and any present or future permitted mortgagees and their respective successors and assigns. 38. NO MEMORANDUM Tenant acknowledges that it has been informed by Landlord that it may not record this Lease or any memorandum hereof or cause the same to be placed of record in any manner and 26 27 agrees that any recording or attempted recording of this Lease shall constitute a material default hereunder. 39. NO DISCRIMINATION Tenant covenants and agrees that it shall neither commit nor permit discrimination or segregation by reason of race, creed, color, religion, national origin, ancestry, sex, age, disability or marital status in any assignment of its interest under this lease or in the subletting, use or occupancy of the Demised Premises or any part thereof, or in connection with the maintenance, repair or alteration of the Demise Premises or any part thereof, or in any other instrument, agreement or transaction affecting the premises, and that it shall comply with all federal, state and municipal laws, ordinances, rules, codes, orders, regulations and executive orders from time to time in effect prohibiting any such discrimination or segregation and/or requiring affirmative action with respect to the same. 40. NO MODIFICATION Neither this lease nor any of its provisions may be waived, change, modified or terminated orally, but only by a written instrument of waiver, change, modification or termination executed by the party against whom enforcement is sought. 41. BILLS AND NOTICES Except as otherwise in this Lease expressly provided, any notice, bill, statement, demand, consent, approval or other communication required or permitted to be given, rendered or made by either party to the other party shall be in writing and shall be deemed to have been properly given or rendered or made if hand delivered, or delivered by any nationally recognized overnight delivery service, or sent by registered or certified mail, return receipt requested, to the respective party at the following address: (a) If to Landlord: Seaport Associates L.P. 3000 Marcus Avenue, Suite IW5 Lake Success, New York 11042 Attention: Alan B. Wolpert with a copy to: Hirsch & Katz, LLP 595 Stewart Avenue, Suite 400 Garden City, New York 11530 Attention: Steven C. Hirsch, Esq. (b) If to Tenant: BigStar Entertainment, Inc. 19 Fulton Street New York, New York 10038 with a copy to: Karp & Kalamotousakis, LLP 350 Fifth Avenue, Suite 703 New York, New York 10118 Attention: Chad Karp, Esq. 27 28 Either party may change its address for the purpose of this Article 41 by written notice to the other party. 42. SUCCESSORS AND ASSIGNS The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided in this Lease, their respective successors and assigns. 43. EXECUTION AND DELIVERY OF LEASE This Lease shall not be binding upon Landlord or Tenant until Landlord shall execute and deliver to Tenant a fully executed counterpart. 44. QUIET ENJOYMENT So long as Tenant pays the Fixed Annual Rent and Additional Rent and observes and performs all the terms, covenants and conditions on Tenant's part to be observed and performed under this Lease, Tenant may peaceably and quietly enjoy the Demised Premises, subject, nevertheless, to the terms and conditions of Us Lease and of any underlying leases. 45. INABILITY TO PERFORM This Lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in no wise be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make or is delayed in making any repairs, additions, alterations or decorations required or permitted under this Lease or is unable to supply or is delayed in supplying any equipment or fixtures if Landlord is prevented or delayed from so doing by reason of strike or labor troubles or any other cause whatsoever beyond the control of Landlord, including but not limited to, government preemption in connection with a National Emergency, or any rule, order or regulation of any department or subdivision of any government agency. 46. HOLDING OVER If Tenant holds over in possession after the expiration or sooner termination of the original Term or of any extended term of this Lease, such holding over shall not be deemed to extend the term or renew the Lease, but such holding over thereafter shall continue upon the covenants and conditions herein set forth except that the charge for use and occupancy of such holding over for each calendar month or part hereof (even if such part shall be a small fraction of a calendar month) shall be the sum of: (i) one twelfth (1/12th) of the highest annual rent provided for in Article 3 of this Lease, times two (2), PLUS 28 29 (ii) one twelfth (1/12th) of all other items of annual Additional Rent, which annual Additional Rent would have been payable pursuant to this Lease had this Lease not expired, times two (2), PLUS (iii) those other items of Additional Rent which would have been payable monthly pursuant to this Lease, had this Lease not expired, times two (2), which total sum Tenants agree to pay Landlord promptly upon demand, in full, without set-off or deduction. Neither the billing nor the collection of use and occupancy charges in the above amount shall be deemed a waiver of any right of Landlord to collect damages for Tenant's failure to vacate the Demised Premises after the expiration or sooner termination of this Lease. The aforesaid provisions of this Article shall survive the expiration or sooner termination of this Lease. 47. USE OF SOUTH STREET SEAPORT TRADENAME South Street Seaport is a registered trademark of the South Street Seaport Museum, Tenant shall be permitted to use the name "South Street Seaport" on its letterhead and in advertising or other promotional materials solely as a means of identifying the location of the Tenant. Tenant shall not use the name "South Street Seaport" or any variation thereof without the prior written consent of the South Street Seaport Museum except as specified in this Article. 48. AUTHORITY (a) If Tenant is a corporatior-4 each person executing this Lease on behalf of Tenant hereby covenants, represents and warrants that Tenant is duly qualified to do business in the Sate of New York; and (i) that Tenant has full right and authority to enter into this Lease, and (ii) that each person executing this Lease on behalf of Tenant is an officer of Tenant and is duly authorized to execute, acknowledge and deliver this Lease to Landlord. (b) Landlord represents and warrants: (i) that it is a limited partnership duly organized and in good standing under the laws of the State of New York, (ii) that it has all requisite authority to execute and to enter into this Lease and that the execution of this Lease will not constitute a violation of any internal by-law, agreement or other rule of governance, (iii) that the individual executing this Lease on behalf of Landlord is so authorized, and (iv) that Landlord does not need bankruptcy court or any other approval to enter into this Lease. 49. HEADINGS Headings contained herein and the Table of Contents hereto are for convenience and reference only and do not define, limit or describe the scope or intent of any provision of this Lease. 50. SEVERABILITY In the event any term, covenant or provision of this Lease or the application thereof to a person or circumstance shall be to any extent illegal, invalid or unenforceable, the remainder thereof or the application of such term, covenant or provision to persons or circumstances other 29 30 than those as to which it is held illegal, invalid or unenforceable shall not be affected thereby and each term, covenant or provision of this Lease shall be valid and enforceable to the full extent permitted by law. 50. GOVERNING LAW This Lease shall be construed and interpreted according to the Laws of the State of New York. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. SEAPORT ASSOCIATES, LP, Landlord, By: Beacon General Partners, Inc., its managing general partner By: /s/ Alan B. Wolpert --------------------------------------- Name: Alan B. Wolpert Title: President BIGSTAR ENTERTAINMENT, INC., Tenant By: /s/ David Friedensohn --------------------------------------- Name: David Friedensohn Title: CEO 30 31 LEASE AGREEMENT BETWEEN SEAPORT ASSOCIATES, IF, AS LANDLORD AND BIGSTAR ENTERTAINMENT, INC, AS TENANT. Premises: 19 FULTON STREET FIFTH (5TH) FLOOR NEW YORK, NEW YORK 10038 EXHIBIT "A" PLAN OF THE DEMISED PREMISES 32 [PLAN OF DEMISED PREMISES] 33 LEASE AGREEMENT BETWEEN SEAPORT ASSOCIATES, IF, AS LANDLORD AND BIGSTAR ENTERTAINMENT, INC, AS TENANT. Premises: 19 FULTON STREET FIFTH (5TH) FLOOR NEW YORK, NEW YORK 10038 EXHIBIT "B" LIMITED PERSONAL GUARANTY 34 FOR VALUE RECEIVED, and as consideration for, and as an inducement for the granting, execution and delivery of the lease between SEAPORT ASSOCIATES, LP ("Landlord") and BIGSTAR ENTERTAINMENT, INC, as Tenant, dated January ____, 1999 (the "Lease") for entire Fifth (5th) floor in building known as and located at 19 Fulton Street, New York, New York 10038 which shall be deemed to consist of Seven Thousand, Two Hundred and Twenty-Four (7,224) rentable square feet (the "Premises"), and in further consideration of the stun of One ($1.00) Dollar and other good and valuable consideration paid by the Landlord to the undersigned the receipt and sufficiency of which are hereby acknowledged, the undersigned, DAVID FRIEDENSOHN, having an office at 100 Wall Street, New York, New York 10005, ("Guarantor") hereby guarantees to Landlord, its successors and assigns, the full and prompt payment of Fixed Annual Rent, Electric Charge, and Additional Rent (as such terms are defined in the Lease) under the Lease, and hereby further guarantees the full and timely performance and observance of all the covenants, terms, conditions and agreements therein provided to be performed and observed by Tenant, its successors and assigns, and the Guarantor hereby covenants and agrees to and with Landlord, it successors and assigns, that if default shall at any time be made by Tenant, its successors or assigns, in the payment of any Fixed Annual Rent, Electric Charge, or Additional Rent or if Tenant should default in the performance and observance of any of the terms, covenants and provisions or conditions contained in the Lease, the Guarantor shall and will forthwith pay Fixed Annual Rent, Electric Charge, and Additional Rent due to Landlord, its successors and assigns, and any arrears thereof, and shall and will forthwith faithfully perform and fulfill all of such terms, covenants, conditions and provisions, and will forthwith pay to Landlord all damages that may arise in consequence of any default by Tenant, its successors and assigns, under the Lease, including, without limitation, all attorneys' fees and disbursements incurred by Landlord or caused by any such default and/or by the enforcement of this Guaranty. This Guaranty is an absolute and unconditional guaranty of payment and of performance. It shall be enforceable against Guarantor, its successors and assigns, without the necessity of any suit or proceedings on Landlords part of any kind or nature whatsoever against Tenant, its successors and assigns and without the necessity of any notice of non-payment, non-performance or non-observance or of any notice of acceptance of this Guaranty or of any other notice or demand to which Guarantor might otherwise be entitled, all of which Guarantor hereby expressly waives; and Guarantor hereby expressly agrees that the validity of this Guaranty and the obligations of Guarantor hereunder shall not be terminated, affected, diminished or impaired by reason of the assertion or the failure to assert by Landlord against Tenant, or against Tenant's successors or assigns, of any of the rights or remedies reserved to Landlord pursuant to the provisions of the Lease. This Guaranty shall be a continuing guaranty, and the liability of the Guarantor hereunder shall in no way be affected, modified or diminished by reason of any assignments, renewal, modification or extension of the Lease or by reason of any modification or waiver of or change in any of the terms, covenants, conditions or provisions of the Lease by Landlord and Tenant, or by reason of any extension of time that may be granted by Landlord to Tenant, its successors or assigns, or by reason of any dealings or transactions or matter or thing occurring between 35 Landlord and Tenant, its successors or assigns, or by reason of any bankruptcy, insolvency, reorganization, arrangements, assignment for the benefit of creditors, receivership or trusteeship affecting Tenant, whether or not notice thereof or of any thereof is given to the Guarantor. All of Landlords right and remedies under the Lease or under this Guaranty are intended to be distinct, separate and cumulative and no such right or remedy therein or herein mentioned is intended to be an exclusion of or a waiver of any of the others. As a further inducement to Landlord to make and enter into the Lease and in consideration thereof, Landlord and the Guarantor covenant and agree that in any action or proceedings brought on, under or by virtue of this Guaranty, Landlord and the Guarantor shall and do hereby waive trial by jury. This Guaranty shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed wholly therein. Notwithstanding the foregoing, Guarantors shall have no liability to Landlord under this Guaranty in the event of default under the Lease by Tenant, provided that: (i) Tenant surrenders possession of the Premises to Landlord in accordance with the provisions of the Lease AND (ii) on the date that Tenant surrenders possession of the Premises to Landlord in accordance with the provisions of the Lease, all sums due and owing Landlord as of that date have been paid in full. Landlord agrees to provide Guarantor with a statement of the amount due on or before the date that Tenant surrenders possession of the Premises to Landlord, provided, however, that furnishing such a statement shall not be deemed a waiver of any of Landlords rights against Guarantor to collect all sums due and owing Landlord as of the date that Tenant surrenders possession of the Premises to Landlord. IN WITNESS HEREOF, the undersigned Guarantors has executed and delivered this Limited Personal Guaranty this day of January, 1999. /s/ David Friedensohn --------------------------------- Name: DAVID FRIEDENSOHN, Guarantor STATE OF NEW YORK ) )SS.: COUNTY OF NEW YORK ) On the 3 day of February, 1999, before me personally came DAVID FRIEDENSOHN, to me known, who being by me duly sworn, did depose and say that he maintains an office at 100 Wall Street, New York, New York 10005 and that he executed the foregoing instrument, and to me such person duly acknowledged that he executed the same. /s/ Ronald Minias ------------------ Notary Public 36 LEASE AGREEMENT BETWEEN SEAPORT ASSOCIATES, IF, AS LANDLORD AND BIGSTAR ENTERTAINMENT, INC, AS TENANT. Premises: 19 FULTON STREET FIFTH (5TH) FLOOR NEW YORK, NEW YORK 10038 EXHIBIT "C" RULES AND REGULATIONS 37 RULES AND REGULATIONS 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress or egress from the Demised Premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Landlord. There shall not be used in any space, or in the public hall of the Building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. 2. The water and wash closets and plumbing fixtures shall not be used for any purpose other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the Building, and no Tenant shall sweep or throw or permit to be swept or thrown from the Demised Premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the Building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Demised Premises, or permit or suffer the Demised Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, and/or vibrations, or interfere in any way with other Tenants or those having business therein, nor shall any animals or birds be kept in or about the Building. Smoking or carrying lighted cigars or cigarettes anywhere in the Building is strictly prohibited. 4. No awnings or other projections shall be attached to the outside walls of the Building. 5. No Tenant shall mark, paint, drill into, or in any way deface any part of the Demised Premises or the Building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct. No Tenant shall lay carpet or any other floor covering, so that the same shall come in direct contact with the floor of the Demised Premises. If carpet or other similar floor covering is desired to be used an interlining of builder's deadening felt and/or padding approved by Landlord shall be first installed and the carpet or other floor shall be installed using a tackless method. The use of cement or other similar adhesive material is expressly prohibited. 6. No additional locks or bolts of any kind shall be placed upon any of the doors or window by any Tenant, nor shall any changes be made in existing locks or mechanisms thereof Each Tenant must, upon the termination of its tenancy, restore to Landlord all keys of offices and toilet 38 rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Landlord the cost thereof. 7. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the Demised Premises and/or Building only on the elevators and through the entrances and corridors designated for such purposes by Landlord, and only during hours and in a manner approved by Landlord. Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of these Rules and Regulations of the Lease or which these Rules and Regulations are a part. 8. Canvasing, soliciting and peddling in the Building is prohibited and each Tenant shall cooperate to prevent the same. 9. Landlord reserves the right to exclude from the Building between the hours of 6:00 p.m. and 8:00 am. and at all hours on Sundays, and legal holidays all persons who do not present a pass to the Building signed by Tenant. Landlord will furnish passes to persons for whom any Tenant requests same in writing. Each Tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Landlord for all acts of such persons. 10. Landlord shall have the right to prohibit any advertising by any Tenant which in Landlords opinion, tends to impair the reputation of the Building or its desirability as a Building of offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 11. Tenant shall not bring or permit to be brought or kept in or on the Demised Premises, any inflammable, combustible or explosive fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the Demised Premises. 12. If the Building contains central air conditioning and ventilation, Tenant agrees to keep all windows closed at all times and to abide by all rules and regulations issued by the Landlord with respect to such services. 13. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the Demised Premises and/or the Building without Landlords prior written consent. If such safe, machinery, equipment, bulky matter or fixtures requires special handling, all work in connection therewith shall comply with all legal requirements, insurance requirements and/or Environmental Laws and shall be done during such hours as Landlord may designate. EX-23.2 14 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated May 5, 1999 for BigStar Entertainment, Inc. included in or made a part of this registration statement. ARTHUR ANDERSEN LLP New York, New York May 6, 1999 EX-27 15 FINANCIAL DATA SCHEDULE
5 1 US DOLLARS YEAR DEC-31-1998 MAR-10-1998 DEC-31-1998 1 816,124 0 66,121 5,000 0 885,956 482,342 30,208 1,338,090 1,823,782 0 0 0 6,232 (500,729) 1,338,090 789,107 789,107 693,831 693,831 3,344,101 0 (7,154) (3,241,671) 0 (3,241,671) 0 0 0 (3,241,671) (0.60) (0.60)
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