<PAGE>
Rule No. 424(b)(1)
Registration No. 333-24681
ON STAGE ENTERTAINMENT, INC.
1,400,000 Shares of Common Stock and
Redeemable Warrants to Purchase 1,400,000 Shares of Common Stock
On Stage Entertainment, Inc. (the "Company") is offering hereby 1,400,000
shares (the "Shares") of the common stock, par value $.01 per share, of the
Company (the "Common Stock") and redeemable warrants to purchase 1,400,000
shares of Common Stock (the "Warrants"). The Shares and Warrants may be
purchased separately and will be separately transferrable immediately upon
issuance. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at a price of $5.50, subject to adjustment in certain
circumstances, at any time commencing August 13, 1998 (or such earlier date as
to which the Underwriter consents) through and including August 13, 2002. The
Warrants are redeemable by the Company, at any time, commencing August 13, 1998,
upon notice of not less than 30 days, at a price of $.10 per Warrant, provided
that the closing bid quotation of the Common Stock on all 20 trading days ending
on the third trading day prior to the day on which the Company gives notice (the
"Call Date") has been at least 150% (currently $8.25, subject to adjustment) of
the then effective exercise price of the Warrants and the Company obtains the
written consent of the Underwriter to such redemption prior to the Call Date.
See "Description of Securities."
Prior to this offering, there has been no public market for the Common
Stock or Warrants and there can be no assurance that any such market will
develop. The Shares and Warrants will be quoted on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "ONST" and "ONSTW," respectively. The offering
prices of the Shares and Warrants and the exercise price of the Warrants were
determined pursuant to negotiation between the Company and the Underwriter and
do not necessarily relate to the Company's book value or any other established
criteria of value. For a discussion of the factors considered in determining the
offering prices of the Shares and Warrants and the exercise price of the
Warrants, see "Underwriting."
------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 9 AND "DILUTION" ON PAGE 19.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
===============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
Per Share ......... $5.00 $.50 $4.50
- -------------------------------------------------------------------------------
Per Warrant ...... $.10 $.01 $.09
- -------------------------------------------------------------------------------
Total (3) ......... $7,140,000 $714,000 $6,426,000
===============================================================================
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance and to sell to the Underwriter warrants
(the "Underwriter's Warrants") to purchase up to 114,500 shares of Common
Stock and/or 140,000 Warrants. In addition, an aggregate of 25,500 shares of
Common Stock issued in connection with the Company's bridge financing have
been included as compensation to the Underwriter. The Company has also
agreed to indemnify the Underwriter against certain liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
Underwriter's nonaccountable expense allowance in the amount of $214,200
($246,330 if the Underwriter's over-allotment option is exercised in full),
estimated at $706,000.
(3) The Company has granted to the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
210,000 shares of Common Stock and/or 210,000 Warrants on the same terms set
forth above, solely for the purpose of covering over-allotments, if any. If
the Underwriter's over-allotment option is exercised in full, the total
price to public, underwriting discounts and commissions, and proceeds to
Company will be $8,211,000, $821,100 and $7,389,900, respectively. See
"Underwriting."
<PAGE>
------------------
The Shares and Warrants are being offered, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to approval of
certain legal matters by counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the offering and
to reject any order in whole or in part. It is expected that delivery of
certificates representing the Shares and Warrants will be made against payment
therefor at the offices of the Underwriter, 650 Fifth Avenue, New York, New
York 10019, on or about August 19, 1997.
Whale Securities Co., L.P.
The date of this Prospectus is August 13, 1997
<PAGE>
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish its stockholders with annual
reports containing audited financial statements and such other periodic reports
as the Company deems appropriate or as may be required by law.
------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON STOCK AND WARRANTS.
SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK AND WARRANTS IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PHOTO
[Company Logo and pictures of seven sites
at which legends is preformed]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. Except as otherwise noted, all
information contained in this Prospectus, including per share data and
information relating to the number of shares outstanding, gives retroactive
effect to the 1-for-1.814967 reverse split of the Common Stock effected on
March 18, 1997 (the "Reverse Split") and assumes no exercise of the
Underwriter's over-allotment option to purchase up to 210,000 additional shares
of Common Stock and/or 210,000 additional Warrants from the Company. See
"Underwriting" and Note 9 of Notes to Financial Statements.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
The Company
The Company develops and produces live theatrical productions for domestic
and international audiences. The Company markets its productions, directly and
through ticket wholesalers, to audiences at theaters in resort and urban
tourist locations. The Company also markets its productions to commercial
clients, which include casinos, corporations, fairs and expositions, theme and
amusement parks, and cruise lines. The Company's flagship Legends in Concert(R)
production ("Legends") is a live tribute show featuring recreations of past and
present music and motion picture superstars through the use of impersonators
and is the longest running independently produced production in Las Vegas. The
Company currently has resident Legends productions at the Imperial Palace Hotel
and Casino (the "Imperial Palace") in Las Vegas, Nevada; Bally's Park Place
Hotel and Casino ("Bally's Park Place") in Atlantic City, New Jersey; the
Surfside Theater in Myrtle Beach, South Carolina; and the Coliseum Theater in
Daytona Beach, Florida; and on a Premier Cruise Lines ship which sails out of
Cape Canaveral, Florida. In addition, the Company will have a resident Legends
production at the Estrel Residence and Congress Hotel in Berlin, Germany,
beginning September 12, 1997. The Company also produces limited-run Legends
shows and corporate events and has performed in locations such as the Illinois
State Fair, MGM Theme Park and Dollywood Theme Park; in locations as far away
as Australia, Russia, China, Africa, Japan and the Philippines; and for major
corporate clients such as McDonald's Corporation ("McDonald's"), Hewlett
Packard, Inc. ("Hewlett Packard"), Pitney Bowes, Inc. ("Pitney Bowes"), Levi
Strauss Associates, Inc. ("Levi Strauss") and Texaco Inc. ("Texaco"). For the
years ended December 31, 1995 and 1996, and for the three months ended March
31, 1997, net revenue attributable to Legends productions (including both
resident and limited-run engagements) and the sale of related Legends
merchandise represented approximately 86%, 98% and 94%, respectively, of the
Company's net revenue.
Full-scale Legends shows utilize state-of-the-art sound, lighting, and
special effects, incorporate backup singers and dancers and feature live
orchestras. Smaller-scale Legends shows, such as those performed for corporate
events, typically use taped orchestra music. Vocals, however, are performed
live in all Legends shows; there is no lip-synching nor are any vocal tapes
utilized. In addition to Legends, the Company has developed and produced 15
other theatrical productions since its founding in 1985, including other
tribute-type shows and a variety of musical reviews, magic, ice and specialty
shows. All of the Company's shows are designed to appeal to a broad spectrum of
attendees by offering affordable, quality entertainment incorporating
experienced talent and state-of-the-art special effects and staging. By
offering multiple productions in addition to Legends, the Company seeks to run
more than one show in highly visited tourist markets, thereby generating both
increased operating margins and greater market share. In addition, since the
Company currently has access to over 70 different Legends tribute acts
(including tributes to Elvis Presley, Marilyn Monroe, Michael Jackson, Barbara
Streisand, the Blues Brothers and Madonna, to name but a few), it can tailor
each tribute show to suit the unique demographics of any audience and the size
of any venue, and has been able to attract repeat business by varying regularly
the composition of the acts in its shows.
3
<PAGE>
In addition to benefitting from what the Company believes to be the
expanding market for live entertainment, the Company is seeking to grow by
increasing its market share. The Company has identified several ways to achieve
this additional growth, including opening resident Legends shows in new
markets, acquiring other brand-name theatrical productions and acquiring small
independent production companies. The Company's objective is to become a
leading worldwide producer of affordable live theatrical productions which have
mass market appeal by the implementation of both a "roll-out" and "roll-up"
strategy. The key elements of this business expansion strategy include:
o Roll-Out of Legends into New Tourist Markets -- The Company has experienced a
high degree of success to date with its Legends production and, as part of
its "roll-out" strategy, has identified over 30 additional resort and urban
tourist locations worldwide where it believes the potential exists for the
Company to successfully produce and market new resident Legends shows. In
connection with its proposed roll-out of Legends in new tourist venues, the
Company generally intends to utilize, what is referred to in the industry
as, a "four-wall" operating structure. With such a structure, the Company
assumes responsibility for all of the expenses associated with the show,
including the cost of the theater (whether leased or purchased), as well as
the costs associated with the show's "four walls", i.e. (i) front of house
(box office, food and beverage, maintenance, ushers), (ii) promotion
(marketing, advertising), (iii) stage (stage hands, technicians) and (iv)
production show (performers, orchestra, dancers). Under such a structure,
the Company is also the sole recipient of the show's potential revenues,
profits and/or losses. The Company's resident "four-wall" production in
Myrtle Beach has demonstrated the benefits of such operating structure; it
opened in March 1995 and, for the year ended December 31, 1996, generated
gross profits of over $1,900,000 and a 44% gross margin.
o Acquiring Brand-Name Theatrical Productions -- As part of its "roll-up"
strategy, the Company intends to acquire additional brand-name shows with
"roll-out" potential through joint ventures or other arrangements with other
production companies (such as An Evening at the Improv(R) Spectacular, which
the Company recently co-produced with Improv West, Inc. at the Trump Taj
Mahal in Atlantic City, New Jersey) and has identified several variety,
magic, ice and interactive dinner and other theater productions which it
believes have, like Legends, the quality, versatility and broad appeal
necessary to succeed under the "four-wall" operating structure and in
multiple markets.
o Acquiring Independent Production Companies -- As part of its "roll-up"
strategy, the Company will also seek to acquire small, independent
production companies with show concepts which it believes have the potential
to develop into brand-name shows or with existing commercial customer bases
to which it can market Legends and other shows. By leveraging its in-house
production expertise and infrastructure, the Company believes it can improve
the quality of acquired show concepts and the efficiency of acquired
production companies, and, by capitalizing upon its already established
Legends name and reputation, the Company believes it can improve and/or
hasten the marketability of new show concepts.
o Penetrating Commercial Markets through Expansion of Direct Sales Network --
Shows sold to corporations, fair and expositions, theme and amusement parks
and cruise lines are typically limited-run engagements, ranging from one night
to several months, and are usually guaranteed or "low-risk" shows where the
client pays the Company a guaranteed fee. Shows sold to casinos, both resident
and limited- run productions, are operated using either the "two-wall" method,
where the casino and the Company each assume certain aspects of the
production's costs and a designated percentage of its revenues, or a
guaranteed show arrangement. To further penetrate all of these commercial
markets, the Company plans to expand its national sales network, both in terms
of staffing and geographically, in order to target new clients and effectively
service, and sell additional guaranteed and "two-wall" shows to, existing
commercial clients. The Company recently hired a Vice President of Sales and
intends to open several regional sales offices by the end of 1998.
o Expanding and Centralizing Merchandising Program -- The Company believes that
it can increase its merchandise sales, which, to date, have accounted for
less than 6% per annum of the Company's rev
4
<PAGE>
enues, by introducing new products and designing more effective point of sale
displays. In addition, during 1997, the Company intends to hire a
Merchandising Director and implement centralized purchasing and marketing to
achieve economies of scale, ensure consistent product quality, and obtain
sales data in a timely manner.
The Company's on stage talent consists primarily of impersonators, variety
acts, singers, dancers, musicians and musical directors. The Company has
significant experience in talent recruitment, development and retention and has
featured 184 impersonators and over 239 other performers in its productions. In
order to maintain logistical and budgetary control over all aspects of its
productions, the Company maintains in-house choreography, wardrobe, lighting,
sound, staging, scenery, multimedia and special effects capabilities and
utilizes the Hollywood Inventory Tracking System ("H.I.T.S.") to manage its
theatrical assets.
The Company was incorporated on October 30, 1985 under the laws of the
State of Nevada as Legends in Concert, Inc. Subsequently, on August 7, 1996,
the Company changed its name to On Stage Entertainment, Inc. The Company's
principal executive offices are located at 4625 West Nevso Drive, Las Vegas,
Nevada 89103, and its telephone number is (702) 253-1333. Unless the context
otherwise indicates, use herein of the term "the Company" gives reference also
to the Company's three wholly-owned subsidiaries: Legends in Concert, Inc., a
Nevada corporation; On Stage Marketing, Inc., a Nevada corporation; and
Interactive Events, Inc., a Georgia corporation.
Recent Developments
Recent and Pending Debt Forgiveness
As of December 31, 1996, John W. Stuart, the Chairman, Chief Executive
Officer and principal stockholder of the Company, owed the Company a total of
$1,637,413 in principal amount under an 8% promissory note due in January 1998,
plus accrued interest thereon of $143,011. On December 31, 1996, the Company
forgave all $1,780,424 of such indebtedness (the "Stuart Debt Forgiveness"),
which has been accounted for as part of principal stockholder compensation in
the Company's Statements of Operations in the amounts of $920,913 and $859,511
for the years ended December 31, 1995 and 1996, respectively. In addition,
immediately prior to the consummation of this offering, the Company intends to
forgive an additional $220,000 (including principal and interest) borrowed by
Mr. Stuart since December 31, 1996. Pursuant to a Placement Agent Agreement
entered into between the Company and the Underwriter in connection with the
Bridge Financing (as defined below), the Company has agreed with the
Underwriter that, following the date of this Prospectus, the Company will
neither loan nor advance any further sums to or on behalf of Mr. Stuart. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Stuart Debt Forgiveness" and
"Certain Transactions."
Warrant Exchange
On March 17, 1997, the Company exchanged all of its then outstanding
warrants for 440,755 shares (the "Warrant Exchange Shares") of Common Stock
(the "Warrant Exchange"). The Warrant Exchange had no effect upon the Company's
earnings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Warrant Exchange."
Bridge Financing
On March 26, 1997, the Company completed the sale of 20 investment units
(the "Bridge Units") to 21 private investors, at a price of $50,000 per Bridge
Unit, for total gross proceeds of $1,000,000 (the "Bridge Financing"). Each
Bridge Unit consisted of (i) a 9% promissory note of the Company in the
principal amount of $50,000, maturing upon the consummation, and payable out of
the proceeds, of this offering (each, a "Bridge Note"), (ii) 10,000 shares of
Common Stock (the "Bridge Shares") and (iii) 12,500 warrants, each to purchase
one share of Common Stock at an exercise price of $4.00 per share (the "Bridge
5
<PAGE>
Warrants"). Originally, none of the securities issued in connection with the
Bridge Financing were transferable for a period of 12 months following the date
of this Prospectus. In August 1997, in connection with the Company's application
for listing of the Common Stock on Nasdaq, investors in the Bridge Financing
agreed to increase the exercise price of the Bridge Warrants from $4.00 to $5.50
per share and extend the restriction against transfer from 12 months to 24
months. In addition, the Company has agreed to include the Bridge Shares and the
shares underlying the Bridge Warrants (the "Bridge Warrant Shares") in a
registration statement filed with the Commission within 24 months following the
date of this Prospectus. After the payment of $125,000 in placement fees to the
Underwriter, who acted as placement agent for the Company with respect to the
sale of the Bridge Units, and other offering expenses of approximately $75,000,
the Company received net proceeds of approximately $800,000 in connection with
the Bridge Financing. In August 1997, an aggregate of 4,500 Bridge Shares and
37,500 Bridge Warrants were returned to the Company by two investors in the
Bridge Financing for no compensation, as a result of a regulatory determination
that such securities would have been deemed to be compensation to the
Underwriter. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Bridge Financing," "Description of Securities -- Bridge Warrants" and " --
Registration Rights."
Pending Debt Conversion
Immediately prior to the consummation of this offering, all $1,714,064
principal amount currently outstanding under the Company's 8% Amended and
Restated Convertible Subordinated Debentures due in January 1999 (the
"Debentures") will be converted (the "Pending Debt Conversion") into 505,649
shares of Common Stock (the "Debenture Shares"). Such conversion will result in
a one time, non-recurring, interest expense charge to the Company in the amount
of $194,228 (based on an imputed value of $4.00 per Debenture Share). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Debentures and Pending Debt
Conversion."
The Offering
Securities offered ....... 1,400,000 shares of Common Stock and Warrants to
purchase 1,400,000 shares of Common Stock. See
"Description of Securities."
Common Stock to be outstanding
after this offering(1)(2).. 6,584,480 shares.
Warrants (3)
Number to be outstanding
after this offering....... 1,400,000 Warrants.
Exercise terms .......... Exercisable commencing August 13, 1998, or such
earlier date as to which the Underwriter
consents, each to purchase one share of Common
Stock at a price of $5.50, subject to adjustment
in certain circumstances. See "Description of
Securities -- Public Warrants."
Expiration date .......... August 13, 2002 (five years following the date
of this Prospectus).
Redemption ................ Redeemable by the Company, upon the consent of
the Underwriter, at any time commencing on
August 13, 1998, upon notice of not less than 30
days, at a price of $.10 per Warrant, provided
that the closing bid quotation of the Common
Stock on all 20 trading days ending on the third
trading day prior to the Call Date has been at
least 150% (currently $8.25, subject to
adjustment) of the then effective exercise price
of the Warrants and the Company obtains the
written consent of the
6
<PAGE>
Underwriter to such redemption prior to the Call
Date. The Warrants will be exercisable until the
close of business on the date fixed for
redemption. See "Description of Securities --
Public Warrants."
Use of Proceeds ......... The Company intends to use the net proceeds of
this offering for new show openings; the
repayment of indebtedness; the hiring of
additional administrative and sales personnel;
and the balance for working capital and general
corporate purposes. See "Use of Proceeds."
Risk Factors ............ The securities offered hereby are speculative and
involve a high degree of risk and immediate
substantial dilution and should not be purchased
by investors who cannot afford the loss of their
entire investment. See "Risk Factors" and
"Dilution."
Nasdaq symbols ............ Common Stock -- "ONST"
Warrants -- "ONSTW"
- ------------
(1) Includes the 505,649 Debenture Shares which will be issued immediately
prior to the consummation of this offering in connection with the Pending
Debt Conversion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(2) Does not include: (i) 1,400,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 254,500
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 212,500
Bridge Warrant Shares; (iv) 11,020 shares of Common Stock reserved in
connection with the Company's November 1996 acquisition of Interactive
Events, Inc. (the "Interactive Events Acquisition") for issuance in
November 1997 (the "Interactive Events Shares"); (v) 657,403 shares of
Common Stock reserved for issuance upon exercise of options granted, and
127,597 shares of Common Stock reserved for issuance upon the exercise of
options available for future grant, under the Company's 1996 Stock Option
Plan (the "Option Plan"); (vi) 15,000 shares of Common Stock reserved for
issuance upon exercise of an outstanding non-plan option; and (vii) an
indeterminable number of shares of Common Stock reserved for issuance in
the event the Company fails under certain circumstances to register, or to
maintain an effective registration statement with respect to, the
Debenture Shares and certain securities issued in connection with the
Bridge Financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources,"
"Management -- 1996 Stock Option Plan," "Description of Securities" and
"Underwriting."
(3) Does not include any of the warrants referred to in clauses (ii) and (iii)
of footnote (2) above.
---------------------
Notice to California Investors. Each purchaser of Common Stock and
Warrants in California must be an "accredited investor" as that term is defined
in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), or satisfy one of the following suitability
standards: (i) minimum annual gross income of $65,000 and a net worth
(exclusive of home, home furnishings and automobiles) of $250,000; or (ii)
minimum net worth (exclusive of home, home furnishings and automobiles) of
$500,000.
Notice to Washington Investors. Each purchaser of Common Stock and
Warrants in Washington must be an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
7
<PAGE>
Summary Financial Information
(Dollars in thousands, except per share data)
The following table sets forth, for the periods and at the dates
indicated, certain summary financial information for the Company. Such data
have been derived from, and should be read in conjunction with, the financial
statements of the Company, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
--------------------------- -------------------
1995 1996 1997
------------ ------------ -------------------
<S> <C> <C> <C>
Net revenue ....................................... $ 12,775 $14,278 $2,719
Gross profit ....................................... 3,141 5,832 816
Principal stockholder compensation .................. 1,286 1,110 63
Operating income (loss) ........................... (1,079) 1,070 (401)
Net income (loss) ................................. (1,333) 901 (517)
Net income (loss) per share. ........................ (.32) .22 (.12)
Weighted average number of shares outstanding ...... 4,112,643 4,115,865 4,161,284
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
------------------- -------------------------------------------
As
Actual Pro Forma(1) Adjusted(1)(2)
-------- -------------- ---------------
<S> <C> <C> <C> <C>
Working capital (deficit) ............ $ (103) $ (351) $ (356) $4,078
Total assets ........................ 3,954 4,332 4,332 7,547
Total liabilities .................. 4,177 4,544 2,835 1,524
Stockholders' equity (deficit) ...... (223) (212) 1,497 6,023
</TABLE>
- ------------
(1) Gives retroactive effect to (i) the Pending Debt Conversion and (ii) the
return to the Company and cancellation of 4,500 Bridge Shares, each of
which will occur immediately prior to the consummation of this offering.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Management
Employment Contracts."
(2) Adjusted to give retroactive effect to the Company's sale of the Shares and
Warrants offered hereby and the anticipated application of the estimated
net proceeds therefrom, including for the repayment of the Bridge Notes
and the Company's loan (the "DYDX Loan") from DYDX Legends Group L.P.
("DYDX"). See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
8
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Each prospective investor should carefully consider the following risk
factors inherent in and affecting the business of the Company and this offering
before making an investment decision.
Prior Losses. Although the Company had net income of $900,998 for the year
ended December 31, 1996, the Company incurred net losses of $1,331,084 and
$517,372 for the year ended December 31, 1995 and the three months ended March
31, 1997, respectively. Further, the Company has loaned Mr. Stuart $220,000
(including principal and interest) since December 31, 1996 and intends to
forgive such indebtedness prior to the consummation of this offering, and,
during 1997, the Company will also have a one-time, non-recurring interest
expense charge of approximately $194,228 resulting from the Pending Debt
Conversion, both of which events will decrease any potential profits or
increase any losses which the Company might have during the year ending
December 31, 1997. Moreover, increased operating expenses in connection with
the Company's proposed expansion plans, delays in the introduction of new
productions and factors adversely affecting the Company's current productions,
could have a material adverse effect on the Company's future operating results.
There can be no assurance that the Company will continue to generate
significant net income in the future or that the Company's future operations
will be profitable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Certain Transactions" and Financial
Statements.
Dependence on Legends. To date, the Company's revenue has been limited
largely to the production of Legends. Revenue attributable to Legends
productions (including both resident and limited-run engagements) and the sale
of related Legends merchandise represented approximately 86%, 98% and 94% of
the Company's net revenue for the years ended December 31, 1995 and 1996, and
for the three months ended March 31, 1997, respectively. The future success of
the Company will depend, to a significant extent, on its ability to
successfully produce and market Legends shows in other venues. To the extent
the Company is unsuccessful in expanding the production of Legends, or to the
extent the Legends production concept ceases to be successful or profitable for
the Company, there will be a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Expansion
Strategy" and "-- Show Offerings."
Reliance on Principal Production Venues; Contractual Arrangements.
Revenues attributable to the Company's three largest revenue producing show
sites for the years ended December 31, 1995 and 1996, and for the three months
ended March 31, 1997, represented approximately 68%, 73% and 68% of the
Company's net revenue, respectively, for such periods. The Company anticipates
that it will continue to rely upon its three current largest revenue producing
show sites, i.e., its resident Legends productions in Las Vegas, Atlantic City
and Myrtle Beach, for the substantial majority of its revenues through at least
the middle of fiscal 1998. The loss of all or a substantial portion of the
business resulting from these relationships would have a material adverse
effect on the Company. Although the Company has entered into contractual
arrangements with the owners of each of its three largest revenue producing
show sites, the Imperial Palace in Las Vegas, Bally's Park Place in Atlantic
City and the Surfside Theater in Myrtle Beach, the first two contracts are
terminable with advance written notice to the Company ranging from only eight
weeks to six months. In addition, the Imperial Palace contract is immediately
terminable in the event of the death of Mr. Stuart. There can be no assurance
that these contracts will not be terminated and, in the event that one or all
of the contracts are terminated or not renewed, such an event could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if any one of these contracts is
terminated, it probably would take at least six months for the Company to
locate and secure a similar site in the same venue, conceptualize a new show
concept for such site and complete show implementation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Resident Production Contracts."
Risks Relating to Proposed Expansion Plans; Possible Inability to Manage
Growth. The Company's continued growth depends, to a significant degree, on its
ability to produce and market new theatrical productions on a profitable basis.
The Company's expansion plans include increasing both the number of productions
in operation at any given time and the rate at which such productions open.
Such expansion strategy contemplates the opening of approximately nine
additional "four-wall" resident productions over the next 24 months, which
strategy, if successful, will place significant pressures on the Company's
personnel, as such growth will require
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development and operation of a significantly larger business over a broader
geographical area. The success of the Company's expansion strategy will depend
upon a number of factors, including, among others, the Company's ability to
hire and retain additional skilled management, marketing, technical and
performing arts and theatrical production personnel, its ability to secure
suitable venues for new productions on a timely basis and on commercially
reasonable terms, and its ability to successfully manage its growth (which will
require it to develop and improve upon its operational, management and
financial systems and controls). The Company's prospects and future growth will
also be largely dependent upon the ability of its Legends productions to
achieve significant market share in targeted tourist and gaming markets and the
ability of the Company to develop and/or acquire and commercialize additional
productions. There can be no assurance that the Company will be able to achieve
its expansion goals or that, if it is able to expand its operations, it will be
able to effectively manage its growth, anticipate and satisfy all of the
changing demands and requirements that such growth will impose upon it or
achieve greater operating income or profitability. Moreover, in light of (i)
the significant up-front capital expenditures and pre-opening costs (estimated
to be approximately $400,000 to $800,000 in the case of a leased theater and up
to $1,000,000 in the case of a purchased theater) associated with the
establishment of a new "four-wall" resident production, (ii) the length of time
required to prepare for the opening of a new resident production (typically 3
to 6 months) and (iii) the significant time required before a new resident
production can achieve the market acceptance and name recognition required for
local ticket wholesalers and tour specialists to promote it, the
discontinuation of any such new production (whether due to inadequate advance
marketing, inadequate performances, poor site selection or otherwise) would
have a material adverse effect on the Company. For instance, during 1995, the
Company had to discontinue its resident production of Country Stars on Ice in
Pigeon Forge, Tennessee and its resident production of Glitz -- A Tribute to
the History of Las Vegas ("Glitz") in Las Vegas due to a lack of capital for
adequate pre-opening market research, site development and advertising,
resulting in less than optimal ticket sales in the start-up phases of both
shows and an aggregate estimated loss to the Company for fiscal 1995, from such
shows, of at least $411,000. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business --
Expansion Strategy" and "-- Show Financial Structures."
Working Capital and Stockholders' Deficits; Possible Need for Additional
Financing. As of December 31, 1996 and March 31, 1997, the Company had working
capital deficits of $103,000 and $350,521, respectively, resulting, primarily,
from advances paid to Mr. Stuart during the year ended December 31, 1996 in the
amount of $716,500 and during the three-month period ended March 31, 1997 in
the amount of $103,235. In addition, as of December 31, 1996 and March 31,
1997, the Company had stockholders' deficits of $222,640 and $211,583,
respectively, resulting from prior losses. There can be no assurance that the
Company's future operations will be profitable. Although the Company believes,
based on its currently proposed plans and assumptions relating to its
operations (and on the fact that it has agreed with the Underwriter that, as of
the date of this Prospectus, it will no longer make any advances to Mr.
Stuart), that the proceeds from this offering and the Bridge Financing,
together with the Company's cash and cash equivalent balances and anticipated
revenues from operations, will be sufficient to fund its current expansion
strategy, as well as its operating requirements for the next 24 months, there
can be no assurance that such funds will not be expended prior thereto due to
unanticipated financial shortfalls in the Company's results of operations,
changes in economic conditions or other unforeseen circumstances. In the event
the Company's plans change or its assumptions change or prove to be inaccurate,
the Company could be required to seek additional financing following this
offering in order to continue implementation of its proposed expansion plans.
The Company has no current arrangements with respect to, or potential sources
of, additional financing, and any inability to obtain such financing, if and
when needed, could cause the Company to curtail, delay or eliminate certain
anticipated productions, or to fund such productions through arrangements with
third parties that may require the Company to relinquish rights to substantial
portions of its revenues, and could possibly cause the Company to cease its
expansion plans. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Certain Transactions."
Substantial Use of Proceeds to Repay Indebtedness; Proceeds Used to
Benefit Related Parties. The Company intends to use approximately $1,775,000
(31%) of the estimated net proceeds of this offering to repay the DYDX Loan and
the Bridge Notes, including interest accrued thereon, and, as a consequence,
such proceeds will be unavailable to fund future growth. The indebtedness to be
repaid with proceeds from this offering includes,
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among other things, Bridge Notes in the principal amount of $50,000, $25,000
and $12,500 payable to Kenneth Berg, a director of the Company, David Hope, the
President, Chief Operating Officer and a director of the Company, and Kiranjit
S. Sidhu, the Senior Vice President and Chief Financial Officer of the Company,
respectively. See "Use of Proceeds" and "Certain Transactions."
Risks Associated with Proposed Acquisition Strategy. As part of its
expansion plans, the Company intends to pursue strategic acquisitions of, or
joint ventures with, independent production companies, and to market Legends to
the established customer bases of any such acquired companies, in order to
increase its revenues and market share. In addition, the Company intends to
acquire established, brand-name shows which it believes have the potential to be
successful in new markets. The Company currently intends to enter into such
arrangements on a shared revenue and/or profit basis (such as its joint venture
arrangement with Improv West, Inc.) and to make such acquisitions in a manner
similar to that used in its Interactive Events Acquisition, i.e., through
limited equity distributions rather than through cash payments or investments.
Nonetheless, there may, in the future, be attractive acquisition candidates for
which cash funding is the Company's only choice, in which case, any such
acquisitions may be contingent upon the Company acquiring additional financing
in excess of the proceeds from this offering. There can be no assurance that the
Company will be able to acquire such financing or, even with additional
financing, that it will be able to acquire acceptable production companies or
shows, nor can there be any assurance that the Company will be able to enter
into beneficial joint ventures, on commercially reasonable terms or in a timely
manner. Furthermore, the Company can provide no assurance that any acquired
customer bases will be receptive to Legends or Legends-type productions or that
the Company will be able to successfully develop any acquired shows. Moreover,
under Nevada law, various forms of business combinations can be effected without
stockholder approval. Accordingly, investors in this offering will, in all
likelihood, neither receive nor otherwise have the opportunity to evaluate any
financial or other information which may be made available to the Company in
connection with any potential acquisition or joint venture and will be dependent
upon the Company's management to select, structure and consummate any such
acquisitions and/or arrangements in a manner consistent with the Company's
business objectives. There can be no assurance that the Company will properly
ascertain or assess all significant and pertinent risk factors prior to its
consummation of such a transaction. Moreover, to the extent the Company does
effect an acquisition or joint venture, there can be no assurance that the
Company will be able to successfully integrate into its operations any business
or productions which it may acquire. Any inability to do so, particularly in
instances in which the Company has made significant capital investments, could
have a material adverse effect on the Company. In addition, there can be no
assurance that any acquired business will increase the revenues and/or market
share of the Company or otherwise improve the financial condition of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Acquisition of
Interactive Events, Inc.," "Business -- Expansion Strategy" and "-- Show
Acquisition and Development."
Control by Principal Stockholder. Upon the consummation of this offering,
John W. Stuart, the Company's Chairman, Chief Executive Officer and principal
stockholder, will beneficially own approximately 60.5% of the outstanding
Common Stock. Accordingly, Mr. Stuart will be able to control the Company and
direct its affairs, including the election of all of the Company's directors,
and cause an increase in the Company's authorized capital or the dissolution,
merger or sale of the Company or substantially all of its assets. See
"Principal Stockholders."
Competition. The leisure and entertainment market, which includes the
market for live theatrical productions, is highly competitive, and many of the
Company's markets contain a large number of competing live theatrical
productions. In resort and urban tourist locations, the Company competes for
ticket sales with the producers of other live productions, many of whom have
greater financial and other resources than the Company and/or feature
productions and headline stars with greater name recognition than those of the
Company. In addition, the Company competes with other production companies for
the most desirable commercial and tourist venues and for talent and production
personnel. The Company's inability to secure such venues or personnel could
have a material adverse effect on the Company's expansion plans and results of
operations. In addition, one or more of the commercial venues in which the
Company currently has, or plans to have, a live production show could decide to
self-produce its live entertainment needs. There can be no assurance that the
Company will be able to secure alternative venues for displaced productions or
that such alternative venues could be secured under similar or favorable terms.
See "Business -- Competition."
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Availability of Talent. The Company's future success will depend largely
upon its ability to attract and retain personnel sufficiently trained in
performing arts and theatrical production, including singers, dancers,
musicians, choreographers and technical personnel. The Company maintains
rigorous standards with respect to the abilities and level of experience of
such personnel in order to ensure consistency, quality and professionalism in
its productions, which may make it more difficult for the Company to obtain
qualified personnel. Moreover, any such difficulty is compounded by the fact
that Legends, the Company's flagship production, features impersonators of past
and present superstar vocalists. Because such headline performers must look,
sound and act like specific celebrities, the pool of performers from which the
Company can chose is significantly reduced. In addition, while the Company's
musicians, singers, dancers and production personnel are generally employees of
the Company, its headline acts are independent contractors who enter into new
contracts with the Company for each new show or venue in which they perform.
The Company does not maintain any long-term contracts with its performers. The
Company will need to hire additional performers and production technicians as
it continues to open new productions, as well as to supplement personnel in its
existing productions. The Company's inability to attract and retain such
personnel, for either new or existing productions, could have a material
adverse effect on the Company's expansion plans, business, financial condition
and results of operations. See "Business -- Talent."
Fluctuations in Quarterly Operating Results; High Seasonality. The Company
has experienced, and expects to continue to experience, fluctuations in
quarterly results of operations. The Company's live theatrical production
business is highly seasonal and the Company has historically generated (i)
negative cash flow from operations, and a net loss, for its first quarter and
(ii) less revenue in its first and fourth quarters than in its second and third
quarters. The Company expects such seasonal trends to continue. Additionally,
the Company typically spends significant resources on new resident theatrical
productions up to six months in advance of show openings, and believes that, as
the Company emphasizes pre-opening market research and development as part of
its expansion plan, both the amount of pre-opening expenditures and the lag
between the time in which the Company incurs such expenditures and the receipt
of post-opening revenue will increase. Accordingly, the Company's operating
results may also vary significantly from quarter to quarter or year to year due
to the opening and timing of new shows and the fluctuations associated with the
pre-opening and start-up phases of new productions in new and varying venues.
Consequently, revenues as well as profits and losses may vary significantly
from quarter to quarter and the results in any one period will not necessarily
be indicative of results in subsequent periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Seasonality
and Quarterly Results."
Effect of Recession on Live Entertainment Industry; Changing Trends. The
live entertainment industry is cyclical, with consumer spending tending to
decline during recessionary periods when disposable income is low. Although the
Company believes that its moderate ticket prices may enhance the appeal of its
productions to consumers in a recessionary environment, there can be no
assurance that a poor general economic climate will not have an adverse impact
on the Company's ability to compete for limited consumer resources. The live
entertainment industry is also subject to changing consumer demands and trends
and while the markets for live entertainment have grown significantly over the
past several years, there can be no assurance that such growth will continue or
that these trends will not be reversed. For instance, the rate of growth in the
casino gaming industry has recently begun to decrease due to consolidation
within the industry. The Company's success will depend on the Company's ability
to anticipate and respond to changing consumer demands and trends and other
factors affecting the live entertainment industry, including new artists and
musicians, as well as general trends affecting the music industry and its
performers. Failure to respond to such factors in a timely manner could have a
material adverse effect on the Company. See "Business -- Industry Background."
Dependence on the Casino Gaming Industry. Although the Company has
recently shifted its primary emphasis away from gaming markets and towards the
resort and urban tourist markets, the Company's success has been, and will
continue to be, highly dependent on the casino gaming industry. For the years
ended December 31, 1995 and 1996, and for the three months ended March 31,
1997, approximately 57%, 40% and 64%, respectively, of the Company's net
revenue was attributable to shows produced at casino gaming venues.
Consequently, a change in the laws or regulations governing the casino gaming
industry, or a significant decline in casino gaming in the United States could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Industry Background."
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Intellectual Property. The Company's success depends to a large extent on
its ability to reproduce the performance, likeness and voice of various
celebrities without infringing on the publicity rights of such celebrities or
their estates. Although the Company believes that its productions do not
violate such intellectual property rights under applicable state and Federal
laws, in the event such a claim were made against the Company, such litigation,
regardless of the outcome, could be expensive and time consuming for the
Company to defend. Additionally, if the Company were determined to be
infringing any intellectual property rights in the production of its
performances, the Company could be required to pay damages (possibly including
treble and/or statutory damages), costs and attorney fees, alter its
productions, obtain licenses or cease certain activities, all of which,
individually or collectively, could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
if the Company were required to obtain licenses from the celebrities it
impersonates, there can be no assurance that the Company would be able to
acquire such licenses on commercially favorable terms, if at all. In addition,
an element of the Company's business strategy is to expand its merchandising
program by introducing a wider variety of clothing items and new products such
as compact discs, and audio and video tapes. The Company has filed trademark
applications in the United States and anticipates filing trademark applications
in certain foreign countries, as necessary, in order to protect its rights in
the products that it sells. There can be no assurance that the Company will be
able to obtain any such trademarks on terms and conditions acceptable to the
Company. The Company's inability to obtain such rights could have a material
adverse effect on the Company's ability to successfully implement its
merchandising strategy. See "Business -- Expansion Strategy," "-- Show
Merchandising" and "-- Intellectual Property."
Government Regulation. Providing entertainment to the casino gaming
industry may subject the Company to various licensing regulations. For
instance, the Casino Control Commission of the State of New Jersey requires
that the Company obtain a Casino Service Industry License to perform its shows
at its Atlantic City venues. Although the Company has obtained this license,
there may be other licenses or permits which may be required in order for the
Company to perform its shows in casinos in other areas. In addition, pursuant
to the Company's expansion program, the Company plans to lease or purchase
some, if not all, of the theaters for its new Legends or other brand-name
resident productions, thereby absorbing all costs and risks associated with
producing the show in order to retain 100% of the show's profits (referred to
as a "four-wall" production). Producing shows on this basis may require the
Company to obtain and maintain certain business, professional, retail and local
licenses and permits (as the Company was required to obtain for the opening of
its Myrtle Beach show, a "four-wall" production). Difficulties or failure in
obtaining required licenses or regulatory approvals could delay or prevent the
opening of a new show or, alter, delay or hinder the Company's expansion plans.
In addition, the suspension of, or inability to renew, a license needed to
operate any of the Company's currently running productions would adversely
affect the operations of the Company. See "Business -- Government Regulation."
Dependence on Key Personnel. The Company's future success will depend
largely on the efforts and abilities of its existing senior management,
particularly Mr. Stuart, the Company's Chairman, Chief Executive Officer and
principal stockholder, and David Hope, the Company's President and Chief
Operating Officer. The loss of the services of such officers or other members
of the Company's management team could have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
Company currently maintains a key-man life insurance policy on the life of Mr.
Stuart in the amount of $5,000,000 and on the life of Mr. Hope in the amount of
$2,500,000, such proceeds may not be sufficient to compensate the Company for
the loss of their services. In particular, Mr. Stuart's death would result in
the loss of his creative contribution to the Company and would give the owner
of the Imperial Palace the right to terminate its contract with the Company
relating to the Company's resident Legends production in Las Vegas (one of the
Company's largest revenue producing venues). In addition, while Messrs. Stuart
and Hope have entered into non-competition agreements restricting their ability
to work for a competitor of the Company during the term of their employment
agreements (which expire on May 31, 2000) and thereafter for periods of up to
five and two years, respectively, there can be no assurance that such
non-competition agreements will be enforceable. Finally, there can be no
assurance that the Company will be able to attract and retain the additional
qualified senior management personnel necessary to manage its planned growth.
See "Business -- Resident Production Contracts" and "Management."
Risk of Employment Tax Liability. Pursuant to industry standards, the
Company has, since its inception, treated, and expects to continue to treat,
the headline acts of its productions as independent contractors rather
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than as employees. In making the determination that it is qualified to
characterize its headline acts as independent contractors, the Company, in
addition to following industry precedent, made an independent review of, and
analyzed, the applicable guidelines issued by the Internal Revenue Service.
There can be no assurance, however, that the Company is qualified to treat the
headline acts as independent contractors. In the event that the Company has
improperly classified the headline acts as independent contractors, the Company
would be liable for the payment of employment taxes for those periods in which
the headline acts were incorrectly characterized as independent contractors. If
imposed, such employment tax liability could have a material adverse effect on
the Company's financial condition and results of operations. See "Business --
Talent."
Litigation. The Company is involved in certain pending and threatened
lawsuits in which the adverse parties are seeking damages from the Company.
There can be no assurance that any of the instituted or threatened lawsuits
will be settled or decided in favor of the Company. Moreover, regardless of the
outcome of such lawsuits and claims, in the event the Company were to be
engaged in protracted litigation the costs of such litigation could be
substantial. Even in situations where the Company is fully indemnified by third
parties, the time and effort expended by the Company's personnel in connection
with such matters could be significant, leaving them with less time and energy
for the pursuit of the Company's strategic goals. The Company may utilize a
portion of the proceeds of this offering allocated to working capital in
connection with these litigation matters or settlements thereof. Although the
Company does not anticipate that a material portion of the proceeds of this
offering will be required to be used in connection with such litigation
matters, in the event that a material portion is required, the Company will
have less financial resources available to it for other purposes which could
adversely affect the Company. See "Use of Proceeds" and "Business -- Legal
Proceedings."
Immediate and Substantial Dilution to New Investors -- Over 80%. This
offering involves an immediate and substantial dilution of approximately $4.13
per share (83%) between the pro forma net tangible book value per share after
this offering and the initial public offering price per Share of $5.00. See
"Dilution."
Benefits of Offering to Existing Stockholders. Upon the consummation of
this offering, the existing stockholders of the Company will receive
substantial benefits, including the creation of a public trading market for
their securities (although all of such shares are subject to a lock-up
agreement with the Underwriter and will not be registered for sale in
connection with this offering) and the corresponding facilitation of sales by
such stockholders of their shares of Common Stock in the secondary market, as
well as an immediate increase in net tangible book value of $.80 per share to
such stockholders based upon the adjusted net tangible book value per share
after this offering and the initial public offering price per Share offered
hereby. If, at the time the existing stockholders are able to sell their shares
of Common Stock in the public market, the market price per share remains at the
$5.00 initial public offering price (of which there can be no assurance) such
stockholders would realize an average gain of $4.50 per share on the sale of
their existing shares. See "Use of Proceeds," "Dilution," "Shares Eligible for
Future Sale" and "Underwriting."
Limitations on Liability of Directors and Officers. The Company's Articles
of Incorporation include provisions to eliminate, to the full extent permitted
by Nevada General Corporation Law as in effect from time to time, the personal
liability of directors of the Company for monetary damages arising from a
breach of their fiduciary duties as directors. The Company's Articles of
Incorporation also include provisions to the effect that the Company shall, to
the maximum extent permitted from time to time under the law of the State of
Nevada, indemnify and, upon request, advance expenses to any director or
officer to the extent that such indemnification and advancement of expense is
permitted under such law, as it may from time to time be in effect. See
"Description of Securities -- Nevada Law and Articles of Incorporation and
By-Law Provisions Affecting Stockholders."
Possible Restrictions on Market-Making Activities in the Company's
Securities. The Company believes that the Underwriter intends to make a market
in the Company's securities and may be responsible for a substantial portion of
the market making-activities in such securities. Regulation M under the
Exchange Act may prohibit the Underwriter from engaging in any market-making
activities with regard to the Company's securities for (i) the period from five
business days (or such other applicable period as Regulation M may provide)
prior to any solicitation by the Underwriter of the exercise of outstanding
Warrants until the termination (by waiver or otherwise) of any right that the
Underwriter may have to receive a fee for the exercise of the Warrants
following such solicitation, and (ii) any period during which the Underwriter,
or any affiliated parties, participate
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in a distribution of any securities of the Company for the account of the
Underwriter or any such affiliate. As a result, the Underwriter may be unable
to provide a market for the Company's securities during certain periods,
including while the Warrants are exercisable. Any temporary cessation of such
market-making activities could have an adverse effect on the liquidity for the
Company's securities. See "Underwriting."
No Dividends. The Company has never paid any dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain all earnings for use in connection with the
expansion of its business and for general corporate purposes. The declaration
and payment of future dividends, if any, will be at the sole discretion of the
Company's Board of Directors and will depend upon the Company's profitability,
financial condition, cash requirements, future prospects, and other factors
deemed relevant by the Board of Directors. See "Dividend Policy."
Possible Adverse Effects of Authorization of Preferred Stock. The
Company's Articles of Incorporation authorize the Company's Board of Directors
to issue up to 1,000,000 shares of "blank check" preferred stock (the
"Preferred Stock") with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors will be empowered, without stockholder approval, to issue
Preferred Stock with dividend, liquidation, conversion, voting, or other
rights, which could adversely affect the voting power of the holders of Common
Stock and, under certain circumstances, could make it difficult for a third
party to gain control of the Company, prevent or substantially delay a change
in control, discourage bids for the Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock. Although the Company has
no current plans to issue any shares of Preferred Stock, there can be no
assurance that the Board will not decide to do so in the future. See
"Description of Securities -- Capital Stock -- Preferred Stock."
No Assurance of Public Market; Determination of Offering Price; Possible
Volatility of Market Price of Common Stock and Warrants. Prior to this
offering, there has been no public trading market for the Common Stock or
Warrants. Consequently, the initial public offering price of the Common Stock
and Warrants and exercise price of the Warrants has been determined by
negotiations between the Company and the Underwriter and do not necessarily
reflect the Company's book value or other established criteria of value. There
can be no assurance that a regular trading market for the Common Stock or
Warrants will develop after this offering or that, if developed, it will be
sustained. The market prices of the Company's securities following this
offering may be highly volatile as has been the case with the securities of
other emerging companies. Factors such as the Company's operating results,
announcements by the Company or its competitors of new production contracts,
and various factors affecting the entertainment industry generally, may have a
significant impact on the market price of the Company's securities. In
addition, in recent years, the stock market has experienced a high level of
price and volume volatility and market prices for the stock of many companies,
particularly of small and emerging growth companies, the common stock of which
trade in the over-the-counter market, have experienced wide price fluctuations
which have not necessarily been related to the operating performance of such
companies. See "Underwriting."
Current Prospectus and State Registration Required to Exercise Warrants.
Holders of the Warrants will be able to exercise the Warrants only if (i) a
current prospectus under the Securities Act relating to the securities
underlying the Warrants, is then in effect and (ii) such securities are
qualified for sale or exempt from qualification under the applicable securities
laws of the states in which the various holders of Warrants reside. Although the
Company has undertaken and intends to use its best efforts to maintain a current
prospectus covering the securities underlying the Warrants following the
consummation of this offering, to the extent required by federal securities
laws, there can be no assurance that the Company will be able to do so. The
value of the Warrants may be greatly reduced if a prospectus covering the
securities issuable upon the exercise of the Warrants is not kept current or if
the securities are not qualified, or exempt from qualification, in the states in
which the holders of Warrants reside. Persons holding Warrants who reside in
jurisdictions in which such securities are not qualified and in which there is
no exemption will be unable to exercise their Warrants and would either have to
sell their Warrants in the open market or allow them to expire unexercised. See
"Description of Securities -- Public Warrants."
Potential Adverse Effect of Redemption of Warrants. The Warrants are
subject to redemption by the Company, at any time commencing one year following
the date of this Prospectus, upon notice of not less than 30
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days, at a price of $.10 per Warrant, provided that the closing bid quotation
of the Common Stock on all 20 trading days ending on the third trading day
prior to the Call Date has been at least 150% (currently $8.25, subject to
adjustment) of the then effective exercise price of the Warrants and the
Company obtains the written consent of the Underwriter to such redemption prior
to the Call Date. Redemption of the Warrants could force the holders to
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for the holders to do so, to sell the Warrants at the then
current market price when they might otherwise wish to hold the Warrants, or to
accept the redemption price, which is likely to be substantially less than the
market value of the Warrants at the time of redemption. See "Description of
Securities -- Public Warrants."
Unaffiliated Bankruptcy. A real estate partnership (unaffiliated with the
Company) of which Mr. Stuart, the Chairman, Chief Executive Officer and
principal stockholder of the Company, was a partner, Maze Stone Canyon Estates
Partnership, filed for bankruptcy under Chapter 11 in December 1991 in the
United States Bankruptcy Court, Central District of California (the "Bankruptcy
Court"). The partnership is currently in reorganization pursuant to the Plan of
Reorganization adopted by the Bankruptcy Court in August 1992. See
"Management."
Shares Eligible for Future Sale; Registration Rights. Upon consummation of
this offering, the Company will have 6,584,480 shares of Common Stock
outstanding, of which the 1,400,000 Shares offered hereby will be freely
tradable without restriction or further registration under the Securities Act.
The remaining 5,184,480 shares of Common Stock outstanding are deemed to be
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, and may only be sold (i) pursuant to an effective
registration under the Securities Act, (ii) in compliance with the exemption
provisions of Rule 144 or (iii) pursuant to another exemption under the
Securities Act. Such restricted shares of Common Stock will become eligible for
sale, under Rule 144, at various times commencing 90 days following the date of
this Prospectus, subject to certain volume limitations prescribed by Rule 144
and to the agreements set forth below. The investors in the Bridge Financing
have agreed that their Bridge Shares (as well as their Bridge Warrants and
Bridge Warrant Shares) may not be sold for a period of 24 months following the
date of this Prospectus, under any circumstances, and the holders of the
4,988,980 other restricted shares have agreed not to sell any of their
securities of the Company for periods of between 10 and 12 months following the
date of this Prospectus without the Underwriter's prior written consent (subject
in certain cases to earlier release upon the Company's achievement of certain
performance targets). No prediction can be made as to the effect, if any, that
sales of shares of Common Stock or even the availability of such shares for sale
will have on the market prices prevailing from time to time. In addition, the
Company has granted certain demand and piggyback registration rights relating to
1,161,188 of the restricted shares, as well as to the 212,500 Bridge Warrant
Shares and to the securities underlying the Underwriter's Warrants. The
possibility that substantial amounts of Common Stock may be sold in the public
market may adversely affect prevailing market prices for the Common Stock and
Warrants and could impair the Company's ability to raise capital through the
sale of its equity securities. See "Description of Securities -- Registration
Rights," "Shares Eligible for Future Sale" and "Underwriting."
Possible Delisting of Securities from the Nasdaq SmallCap Market; Risks
Relating to Penny Stocks. The Company's Common Stock and Warrants have been
approved for listing on the Nasdaq SmallCap Market. In order to continue to be
listed on the Nasdaq SmallCap Market, however, the Company must maintain
$2,000,000 in total assets, a $200,000 market value of the public float and
$1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market-makers and a minimum bid price of $1.00 per share; provided,
however, that if the Company falls below such minimum bid price, it will remain
eligible for continued inclusion on the Nasdaq SmallCap Market if the market
value of the public float is at least $1,000,000 and the Company has $2,000,000
in capital and surplus. Nasdaq has recently proposed new maintenance criteria
which, if implemented, would eliminate the foregoing exception to the minimum
bid price requirement and require, among other things, $2,000,000 in net
tangible assets, $1,000,000 market value of the public float and adherence to
certain corporate governance provisions. The failure to meet these maintenance
criteria in the future may result in the delisting of the Company's securities
from the Nasdaq SmallCap Market, and trading, if any, in the Company's
securities would thereafter be conducted in the non-Nasdaq over-the-counter
market. As a result of such delisting, an investor could find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, the
Company's securities.
16
<PAGE>
In addition, if the Common Stock were to become delisted from trading on
the Nasdaq SmallCap Market and the trading price of the Common Stock were to
fall below $5.00 per share, trading in the Common Stock would also be subject
to the requirements of certain rules promulgated under the Exchange Act, which
require additional disclosure by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established
customers and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers
by such requirements may discourage broker-dealers from effecting transactions
in the Common Stock, which could severely limit the market liquidity of the
Common Stock and the ability of purchasers in this offering to sell the Common
Stock in the secondary market.
Contractual Obligations to the Underwriter. The Company will have certain
ongoing contractual obligations to the Underwriter following the consummation
of this offering, such as the Company's agreement to pay to the Underwriter a
fee of 5% of the exercise price for each Warrant exercised (provided the
Warrant exercise is solicited by the Underwriter and certain other conditions
are met) commencing one year after the date of this Prospectus; to use its best
efforts to elect a designee of the Underwriter as a member of the Company's
Board of Directors, if requested to do so by the Underwriter, for a period of
three (3) years from the date of this Prospectus; and, subject to certain
limitations and exclusions, to register, at the Company's expense, the
Underwriter's Warrants and the securities underlying such warrants under the
Securities Act on one occasion during their exercise term and to include such
securities in any appropriate registration statement which is filed by the
Company during the seven years following the date of this Prospectus. See
"Underwriting."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,400,000 Shares and 1,400,000 Warrants offered by the Company hereby are
estimated to be approximately $5,720,000 (approximately $6,651,770 if the
Underwriter's over-allotment option is exercised in full) after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company expects to use the net proceeds (assuming no
exercise of the Underwriter's over-allotment option) approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Net Proceeds
- ----------------------- --------------- --------------
<S> <C> <C>
New show openings (1) ............................................. $3,000,000 52.45%
Repayment of indebtedness (2) .................................... 1,775,000 31.03
Hiring of additional administrative and sales personnel (3) ...... 600,000 10.49
Working capital and general corporate purposes(4) ............... 345,000 6.03
----------- -------
Total ...................................................... $5,720,000 100.00%
=========== =======
</TABLE>
- ------------
(1) The Company's current expansion strategy contemplates the opening of
approximately nine new resident "four-wall" productions by May 1999, which
the Company intends to accomplish with proceeds from the Bridge Financing
and this offering and revenues generated from its current and, as they
open, new productions (for instance, by the end of 1995, the Company's
Surfside Theatre production, a resident "four-wall" production opened in
March 1995, had already generated approximately $300,000 in gross profits
after deducting all pre-opening costs). Costs associated with the opening
(typically a three- to six-month process after the theater site is
secured) of new resident "four-wall" productions in resort and urban
tourist markets, include lease deposits and down payments; costs
associated with leasehold improvements and signage; the lease and/or
purchase of capital equipment, such as lighting, sound and concession
equipment and computer ticketing systems; pre-opening advertising launch
campaigns; merchandising and inventory; purchase and physical loading of
sets, costumes and props; pre-show rehearsals and staffing; and estimated
running cost floats for expected two- to four-week initial operating
deficits. The Company expects that such opening costs will be between
$400,000 and $800,000 for productions in leased locations (the Company's
primary focus) and up to $1,000,000 for productions in purchased
locations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Expansion Plans" and "Business."
(2) Represents the repayment of the Bridge Notes in the aggregate principal
amount of $1,000,000, including Bridge Notes in the principal amounts of
$50,000, $25,000 and $12,500 payable to Kenneth Berg, a director of the
Company, David Hope, the President, Chief Operating Officer and a director
of the Company, and Kiranjit S. Sidhu, the Senior Vice President and Chief
Financial Officer of the Company, respectively, and the repayment of the
DYDX Loan in the principal amount of $750,000, plus interest accrued
thereon (in each case, at the rate of 9% per annum) through and until the
anticipated date of repayment in the estimated aggregate amount of
$25,000. The proceeds from the February 1996 DYDX Loan were used for the
payment of outstanding trade payables, capital improvements to the
Surfside Theater, working capital and general corporate purposes. The
proceeds from the Company's recent Bridge Financing were used for the
payment of outstanding trade payables, pre-opening expenditures on the
Daytona Beach show and the seasonal Branson show, certain pre-offering
expenses related to this offering and for working capital and general
corporate purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources"
and "Certain Transactions."
(3) The Company intends to hire an Executive Vice President of Production, a
Management Information Systems Director and a Merchandising Director over
the next year, as well as several regional corporate event salespersons by
the end of 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "Business --
Expansion Strategy."
(4) Includes costs associated with the Company's plan to expand and improve its
information technology system and to further develop the use of the
Hollywood Inventory Tracking System ("H.I.T.S."), an asset management
system, throughout the Company. See "Business -- Show Merchandising" and
"-- Operations and Show Implementation."
18
<PAGE>
If the Underwriter exercises the over-allotment option in full, the
Company will realize additional net proceeds of $931,770. If the 1,400,000
Warrants offered hereby are exercised, the Company will realize proceeds
relating thereto of $7,700,000 before any solicitation fees which may be paid
in connection therewith. Such additional proceeds, if received, are expected to
be used primarily for additional new show openings and for working capital and
general corporate purposes. See "Underwriting."
The allocation of the net proceeds to be received by the Company from this
offering as set forth above represents the Company's best estimates based upon
its currently proposed plans and assumptions relating to its operations and
expansion strategy and certain assumptions regarding general economic
conditions. The Company anticipates, based on management's internal forecasts
and assumptions relating to its operations (including the anticipated timetable
of new show openings and the costs associated therewith), that the net proceeds
of this offering and the Bridge Financing, together with its current cash and
cash equivalent balances and anticipated revenues from operations, will be
sufficient to funds its current expansion strategy, as well as its other cash
and operating requirements for 24 months following the consummation of this
offering. In the event that the Company's plans change, its assumptions change
or prove inaccurate, or if the proceeds of this offering and cash flow
otherwise prove to be insufficient to fund the Company's plans (due to
unanticipated financial shortfalls in the Company's results of operations,
changes in economic conditions or other unforeseen circumstances), the Company
could be required to seek additional financing following this offering in order
to continue implementation of its proposed expansion plans. There can be no
assurance, however, that additional financing will be available to the Company
if and when needed, on commercially reasonable terms or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in short-term investment grade debt obligations, bank
certificates of deposit, United States Government money market instruments or
other short-term interest bearing investments.
DILUTION
The difference between the initial public offering price per Share and net
tangible book value per share of Common Stock after this offering constitutes
the dilution to investors in this offering. Net tangible book value per share
is determined on any given date by dividing the net tangible book value of the
Company (total tangible assets less total liabilities) on such date by the
number of then outstanding shares of Common Stock.
At March 31, 1997, the net tangible book value (deficit) of the Company
was $(1,463,016), or $(.31) per share of Common Stock. After giving retroactive
effect to (i) the Pending Debt Conversion and (ii) the return to the Company
and cancellation of 4,500 Bridge Shares, the pro forma net tangible book value
of the Company as of March 31, 1997 would have been $343,348 or $.07 per share.
After also giving effect to the sale of the 1,400,000 Shares and 1,400,000
Warrants offered hereby and the receipt and application (including for the
repayment of the Bridge Notes and the DYDX Loan) of the estimated net proceeds
therefrom (less underwriting discounts and commissions and estimated offering
expenses), the as adjusted net tangible book value of the Company as of March
31, 1997 would have been $5,737,482 or $.87 per share, representing an
immediate increase in net tangible book value of $.80 per share to existing
stockholders and an immediate dilution of $4.13 (83%) per share to new
investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price .......................................... $5.00
Net tangible book value (deficit) before pro forma adjustment ...... $(.31)
Increase attributable to pro forma adjustment ........................ .38
------
Pro forma net tangible book value before this offering ............ .07
Increase attributable to investors in this offering .................. .80
------
As adjusted net tangible book value after this offering ............... .87
------
Dilution to new investors in this offering ........................... $4.13
======
</TABLE>
19
<PAGE>
The following table sets forth a comparison between the Company's existing
stockholders (giving effect to the Pending Debt Conversion) and new investors
in this offering, with respect to the number of shares of Common Stock acquired
from the Company, the percentage ownership of such shares, the total
consideration paid, the percentage of total consideration paid and the average
price per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------------- ------------------------ Average Price
Number Percent Amount Percent Per Share
----------- --------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 5,184,480 78.7% $2,592,765 27.0% $ .50
New investors ............... 1,400,000 21.3 7,000,000 73.0 $5.00
---------- ------ ----------- ------
Total .................. 6,584,480 100.0% $9,592,765 100.0%
========== ====== =========== ======
</TABLE>
The above table assumes no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$8,050,000 for 1,610,000 shares of Common Stock offered by the Company,
representing approximately 75.6% of the total consideration, for 23.7% of the
total number of shares of Common Stock outstanding. In addition, the above
table also assumes no exercise of outstanding stock options and warrants. As of
the date of this Prospectus, there are outstanding Bridge Warrants to purchase
212,500 Bridge Warrant Shares at $5.50 per share and options to purchase
672,403 shares of Common Stock at exercise prices ranging from $3.99 to $5.00
per share. There are also 11,020 Interactive Events Shares reserved for
issuance in November 1997 for no further consideration. To the extent that such
options and warrants are exercised, and such shares issued, there will be
further dilution to new investors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Acquisition of Interactive Events, Inc.," "Management -- 1996
Stock Option Plan," "Description of Securities -- Bridge Warrants" and
"Underwriting."
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common Stock
and does not expect to declare any cash dividends in the future. Payments of
dividends, if any, will be at the discretion of the Board of Directors after
taking into account various factors, including the Company's financial
condition, results of operations and current and anticipated cash needs and
other factors the Board of Directors may deem relevant.
20
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of March 31, 1997: (i) on an actual basis; (ii) on a pro forma
basis, giving effect to the Pending Debt Conversion and the return to the
Company and cancellation of 4,500 Bridge Shares; and (iii) as further adjusted
to give effect to the sale of the 1,400,000 Shares and 1,400,000 Warrants
offered hereby and to the anticipated application of the estimated net proceeds
therefrom, including for the repayment of the Bridge Notes and the DYDX Loan:
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------------------
Actual Pro Forma As Adjusted
------------ ----------------------- ---------------------------
<S> <C> <C> <C>
Short-term debt:
Bridge Notes .......................................... $ 556,000 $ 561,000(2) $ -0-(3(a))
Bank debt ............................................. 106,682 106,682 106,682
Current portion of capital lease obligations ......... 78,591 78,591 78,591
---------- -------------- ----------------
Total short-term debt .............................. $ 741,273 $ 746,273 $ 185,273
========== ============== ================
Long-term debt:
DYDX Loan ............................................. $ 750,000 $ 750,000 $ -0-(3(b))
Debentures .......................................... 1,714,064 -0-(2) -0-
Capital lease obligations, less current portion ...... 181,353 181,353 181,353
---------- -------------- ----------------
Total long-term debt .............................. 2,645,417 931,353 181,353
---------- -------------- ----------------
Stockholders' equity (deficit):
Preferred Stock, par value $1.00; 1,000,000 shares
authorized; no shares issued and outstanding ......... -- -- --
Common Stock, par value $.01; 25,000,000 shares
authorized; 4,683,331 shares issued and out-
standing (actual); 5,184,480 shares issued and
outstanding (pro forma); 6,584,480 shares
issued and outstanding (as adjusted)(1) ............ 46,833 51,845(2) 65,845(3(c))
Additional paid-in capital ........................... 642,640 2,540,920(2) 7,589,119(3(d))
Accumulated deficit ................................. (901,056) (1,095,284)(2) (1,631,584)(3(e))
---------- -------------- ----------------
Total stockholders' equity (deficit) ............... (211,583) 1,497,481 6,023,380
---------- -------------- ----------------
Total capitalization .............................. $2,433,834 $ 2,428,834 $ 6,204,733
========== ============== ================
</TABLE>
- ------------
(1) Does not include (i) 1,400,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) an aggregate of 254,500 shares of
Common Stock reserved for issuance upon exercise of the Underwriter's
Warrants and the warrants included therein; (iii) 212,500 Bridge Warrant
Shares; (iv) 11,020 Interactive Events Shares; (v) 657,403 shares of
Common Stock reserved for issuance upon exercise of options granted, and
127,597 shares of Common Stock reserved for issuance upon the exercise of
options available for future grant, under the Option Plan; (vi) 15,000
shares of Common Stock reserved for issuance upon exercise of an
outstanding non-plan option; and (vii) an indeterminable number of shares
of Common Stock reserved for issuance in the event the Company fails under
certain circumstances to register, or to maintain an effective
registration statement with respect to, the Debenture Shares and certain
securities issued in connection with the Bridge Financing. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operation -- Liquidity and Capital Resources," "Management -- 1996
Stock Option Plan," "Description of Securities" and "Underwriting."
(2) Gives retroactive effect to the return to the Company and cancellation of
4,500 Bridge Shares, the Pending Debt Conversion (i.e., the conversion of
$1,714,064 principal amount of Debentures into 505,649 Debenture Shares),
and an additional interest charge of $194,228 related to the conversion.
Also, reflects the aggregate par value of the Debenture Shares of $5,056.
(3) As Adjusted Adjustments
(a) To reflect the payoff of the Bridge Notes with proceeds of the offering.
(b) To reflect the payoff of the DYDX Loan with the proceeds of the offering.
(c) To reflect the Company's sale of the 1,400,000 Shares offered hereby.
(d) To reflect the Company's sale of the 1,400,000 Shares offered hereby,
assuming net proceeds of $5,720,000, less the par value of such shares in
the amount of $14,000, and the write-off of $657,801 of previously
capitalized offering costs.
(e) To reflect a charge to operations of $536,300 related to the loan
discount and debt issuance costs of the Bridge Financing.
21
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
The following selected financial data for each of the two years in the
period ended December 31, 1995 and at December 31, 1996 are derived from, and
should be read in conjunction with, the Company's audited financial statements,
including the notes thereto, included elsewhere in this Prospectus. The
selected financial data for the three months ended March 31, 1996 and 1997, as
well as the pro forma and as adjusted balance sheet data, are derived from the
unaudited financial statements of the Company and, in the opinion of
management, include all adjustments that are necessary to present fairly the
results of operations and financial position of the Company for those periods
in accordance with generally accepted accounting practices. The selected
financial data for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the full year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------ ---------------------------
1995 1996 1996 1997
----------- ----------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenue .......................................... $ 12,775 $ 14,278 $ 2,347 $ 2,719
Gross profit ....................................... 3,141 5,832 733 816
Principal stockholder compensation .................. 1,286 1,110 63 63
Operating income (loss) .............................. (1,079) 1,070 13 (401)
Net income (loss) .................................... (1,333) 901 (68) (517)
Net income (loss) per share ........................ (.32) .22 (.02) (.12)
Weighted average number of shares outstanding ...... 4,112,643 4,115,865 4,112,643 4,161,284
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
March 31, 1997
December 31, 1996 (unaudited)
------------------- -------------------------------------------
As
Actual Pro Forma(1) Adjusted(1)(2)
-------- -------------- ---------------
<S> <C> <C> <C> <C>
Working capital (deficit) ............ $ (103) $ (351) $ (356) $4,078
Total assets ........................ 3,954 4,332 4,332 7,547
Total liabilities .................. 4,177 4,544 2,835 1,524
Stockholders' equity (deficit) ...... (223) (212) 1,497 6,023
</TABLE>
- ------------
(1) Gives retroactive effect to (i) the Pending Debt Conversion and (ii) the
return to the Company and cancellation of 4,500 Bridge Shares, each of
which will occur immediately prior to the consummation of this offering.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and
"Management-Employment Agreements."
(2) Adjusted to give retroactive effect to the Company's sale of the 1,400,000
Shares and the 1,400,000 Warrants offered hereby and the anticipated
application of the estimated net proceeds therefrom, including for the
repayment of the Bridge Notes and the DYDX Loan. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company derives the majority of its net revenue from the sale of its
theatrical productions to audiences at venues in urban and resort tourist
locations and to commercial clients, which include casinos, corporations, theme
and amusement parks and cruise lines. In addition, the Company generates
revenue from the sale of merchandise, food and beverages in certain of its
venues, and, from time to time, from the sale of technical equipment and
services to commercial clients. The following table sets forth the various
components of the Company's revenue as a percentage of net revenue for the
periods indicated:
Three Months Ended
Years Ended December 31, March 31,
------------------------ --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
Theatrical productions:
Legends .................. 83.1% 93.4% 92.9% 90.9%
Other ..................... 12.4 0.8 1.6 5.0
------ ------ ------ ------
Total .................. 95.5 94.3 94.5 95.9
------ ------ ------ ------
Merchandise (all Legends) ... 3.0 4.8 1.9 3.2
Other ........................ 1.5 0.9 3.6 0.8
------ ------ ------ ------
Total .................. 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Legends opened at the Imperial Palace in Las Vegas in 1983. The Company
began actively producing additional tribute and specialty shows in 1994 and
currently produces resident Legends shows in Las Vegas (since May 1983),
Atlantic City (since October 1994) and Myrtle Beach (since March 1995), and
aboard a Premier Cruise Line ship sailing out of Cape Canaveral (since June
1990).
The Company classifies its productions (both its resident and limited-run
engagements) into two main categories: "at-risk" shows and "low-risk" shows.
"At-risk" shows classify any of the Company's resident or longer term
limited-run productions where the amount of the revenue to be obtained by the
Company in connection with the show is uncertain (as is typical in the case of
shows produced by the Company at theaters leased and or purchased directly by
the Company in urban and resort tourist locations and of shows produced by the
Company in, and for, large casinos). "Low-risk" shows are contracted
productions in which the client guarantees a fee (typical of shows produced by
the Company in, and for, smaller casinos and for other commercial clients such
as corporations, cruise lines and theme parks). Revenues attributable to
"at-risk" shows for the years ended December 31, 1995 and 1996 and the three
months ended March 31, 1996 and 1997 represented approximately 64%, 72%, 63%
and 56% of the Company's net revenues, respectively, for such periods. See
"Business -- Show Financial Structures."
During late 1994 and early fiscal 1995, the Company opened three new
resident "at-risk" shows: Legends at the Surfside Theater in Myrtle Beach;
Country Stars on Ice at the Coliseum Theater in Pigeon Forge, Tennessee; and
Glitz at the Sands Hotel in Las Vegas. The Company's Legends production in
Myrtle Beach, which opened in March 1995, generated approximately $2,685,000
and $528,000 in revenue and gross profit, respectively, in fiscal 1995 and
$4,386,000 and $1,916,000, respectively, in fiscal 1996. The Company believes
that this represents very attractive results for an "at-risk" show's first two
years of operation. In 1995, Country Stars on Ice and Glitz, however, generated
aggregate revenue and gross loss of approximately $881,000 and $411,000,
respectively, and were discontinued in December 1995 and August 1995,
respectively.
The Company believes that the operating performance of Country Stars on
Ice and Glitz suffered from a lack of capital for adequate pre-opening market
research, site development and advertising, resulting in less than optimal
ticket sales in the start-up phase of both shows. The lower than anticipated
revenue levels, combined with high indirect production costs associated with
the shows' risky "four-wall" cost structures, resulted in losses for both
shows. The Company continues to believe that emerging tourist markets, such as
Pigeon Forge, offer attractive opportunities for future growth. However, the
Company has now implemented a policy of opening
23
<PAGE>
only proven, branded shows, like Legends, and identifying, where possible,
local marketing partners in similar "at-risk" situations to increase its
likelihood of success. Furthermore, if the Company determines that the risk
profile of a new attractive market is too high, it will seek a "low-risk" deal
structure such as a minimum seat guarantee or fixed fee structure.
During 1996 the Company only opened one new "at-risk" Legends show at the
Grand Palace in Branson, Missouri which opened in April and ran through the
middle of October and generated approximately $1,610,000 and $476,000 in
revenue and gross profit. The Company focused its efforts on consolidating and
streamlining its existing productions which is reflected in the significant
improvement in the Company's gross margin. The Company also initiated expansion
of operations in anticipation of future sales growth. Since December, 1995 the
Company has hired four senior executives and their related support staff: a
Vice President of Marketing in December, 1995; a President and Chief Operating
Officer in April, 1996; a Corporate Controller in July, 1996; and a Vice
President of Sales in October, 1996. The Company also added a new branch office
in Atlanta through its acquisition of Interactive Events as well as in house
wardrobe, lighting, scenery and multimedia departments.
During the first quarter of 1997 the Company opened three new "low risk"
shows: the Improv(R) Spectacular at Trump's Taj Mahal Hotel and Casino in
Atlantic City for a sixteen week run which opened in March, for a weekly fee of
approximately $33,000; a Legends show at the Fireside Theater, Fort Atkinson,
Wisconsin, which opened in January for approximately eleven weeks for a weekly
fee of approximately $24,000; a Legends show at the Empress Casino in Joliet,
Illinois which opened in March for approximately sixteen weeks for a weekly fee
of $15,000. These three shows along with the addition of the Atlanta branch
office significantly increased special events and limited engagement business.
However, selling, general & administrative costs also increased as a direct
result of the Company's expansion of operations and a one time charge of
approximately $164,000 resulting from the issuance of the 40,532 shares of
Common Stock to the Company's Chief Financial Officer in March 1997 pursuant to
the terms of his employment agreement (the "CFO Shares"). See "Management --
Employment Contracts."
The Company currently maintains five administrative offices: its corporate
headquarters in Las Vegas and branch offices in Atlantic City, Atlanta, Myrtle
Beach and Daytona Beach. As part of its business strategy, the Company intends
to open several regional sales offices by the end of 1998. Potential sites for
these sales offices include New Orleans, Chicago, Dallas, New York, Minneapolis
and Los Angeles. In addition, over the next year, the Company plans to hire an
Executive Vice President of Production, a Management Information Systems
Director and a Merchandising Director.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of the Company's net revenues represented by certain income statement data:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------ --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue .............................. 100.0% 100.0% 100.0% 100.0%
Direct production costs .................. 57.2 42.6 49.2 53.8
Indirect production costs ............... 18.2 16.6 19.6 16.2
--------- ------ --------- ---------
Gross profit .............................. 24.6 40.8 31.2 30.0
Selling, general and administrative ...... 18.8 20.8 22.6 37.1
Depreciation and amortization ............ 4.1 4.7 5.3 5.4
Principal stockholder compensation ...... 10.1 7.8 2.7 2.3
--------- ------ --------- ---------
Operating profit (loss) .................. (8.4) 7.5 0.6 (14.8)
Interest expense, net ..................... 2.0 1.1 3.5 4.1
--------- ------ --------- ---------
Pre-tax income (loss) ..................... (10.4) 6.4 (2.9) (18.9)
Income taxes .............................. 0.0 0.1 0.0 0.1
--------- ------ --------- ---------
Net income (loss) ........................ (10.4%) 6.3% (2.9%) (19.0%)
========= ====== ========= =========
</TABLE>
24
<PAGE>
Net income for the year ended December 31, 1996 was $900,998, as compared
to a net loss of $1,333,034 for the year ended December 31, 1995. The Company
incurred a net loss of $517,372 for the three months ended March 31, 1997, as
compared to a net loss of $68,316 for the three months ended March 31, 1996.
The Company anticipates that net income for the three months ended June 30,
1997 will be approximately $200,000, as compared to $708,692 for the three
months ended June 30, 1996.
Quarter Ended March 31, 1996 versus Quarter Ended March 31, 1997
Net Revenues. Net revenue consists of sales of the Company's theatrical
productions, concession sales, photo sales, management fees and income from
equipment rental, less discounts, allowances and refunds. Net revenue for the
quarter ended March 31, 1997 increased by $372,000, or 16% from $2,347,000 to
$2,719,000, as compared to the quarter ended March 31, 1996. Contributing to
this increase were increases of approximately: (i) $123,000 attributable to the
resident Legends show in Myrtle Beach; (ii) $460,000 attributable to limited
engagements and corporate events which includes limited engagements of the
Legends show at Empress Casino in Joliet, Illinois and Trump's Taj Mahal Hotel
and Casino in Atlantic City which ran in 1997 but not in 1996; and (iii)
$25,000 in management fees from the Legends show in Hawaii. These increases
were offset by: (a) $121,000 attributable to the Legends show at the Imperial
Palace in Las Vegas; (b) $35,000 attributable to the Legends show at Bally's
Park Place in Atlantic City; (c) $7,000 attributable to the Legends show on
Premier Cruise Lines; (d) $10,000 attributable to the discontinuation of the
Legends show at the Grand Palace in Branson; and (e) $63,000 attributable to
other revenue.
Direct Production Costs. Direct production costs include salaries for
impersonators, stars, singers, dancers, musicians, choreographers, technical
operators, wardrobe personnel, production managers and concessions personnel,
license fees, electronic supplies, lighting, sound, wardrobe, sets, props, and
the cost of goods for merchandise and food and beverage. Direct production
costs for the quarter ended March 31, 1997 increased by $308,000, or
approximately 27%, as compared to the quarter ended March 31, 1996. Direct
production costs increased to 54% of net revenue for the quarter ended March
31, 1997, as compared to 49% for the quarter ended March 31, 1996. This
increase was primarily attributable to increased special events and limited
engagement business which has higher direct production costs relative to the
Company's other businesses.
Indirect Production Costs. Indirect production costs include salaries for
operations, box office, finance and marketing personnel, advertising and
promotion, insurance, rent, utilities, property taxes, housing, legal,
accounting and travel. Indirect production costs for the quarter ended March
31, 1997 decreased by $19,000, or 4%, as compared to the quarter ended March
31, 1996. Indirect production costs decreased to 16% of net revenue for the
quarter ended March 31, 1997, as compared to 20% for the quarter ended March
31, 1996. This decrease was primarily attributable to increased special events
and limited engagement business which has lower indirect production costs
relative to the Company's other businesses.
Selling, General and Administrative. Selling, general and administrative
expenses include officers, finance, operations, development, sales commissions,
marketing and technical salaries, office supplies, rent, utilities and legal
expenses. Selling, general and administrative expense for the quarter ended
March 31, 1997 increased by $474,000, or 89%, as compared to the quarter ended
March 31, 1996. Selling, general and administrative expense as a percent of net
revenues was 37% for the quarter ended March 31, 1997, as compared to 23% for
the quarter ended March 31, 1996. The significant increase was due to the
Company's preparation for future expansion by increasing the number of
employees, adding several senior executives and a new branch office in Atlanta,
and developing in house wardrobe, lighting, scenery and multimedia departments
as well as a one time charge of approximately $164,000 resulting from the
issuance of the 40,532 CFO Shares.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended March 31, 1997 increased by $24,000, or 19%, as compared to the
quarter ended March 31, 1996. The increase was due primarily to new capital
additions in existing shows and purchases of computers, office equipment and
furniture for new employees.
Interest Expense, Net. Interest expense for the quarter ended March 31,
1997 increased by $33,000, or 40%, as compared to the quarter ended March 31,
1996. This significant increase was primarily attributable to the Bridge
Financing which resulted in a charge of $37,000 during March, 1997.
25
<PAGE>
Income Taxes. The Company is a Nevada corporation with a substantial
portion of both revenue and income derived in Nevada. There are no state or
local income taxes in Nevada. The Company accrued no federal income tax for the
quarters ended March 31, 1997 and 1996. The Company paid state income tax for
the quarter ended March 31, 1997 of approximately $2,000.
Year Ended December 31, 1995 versus Year Ended December 31, 1996
Net Revenue. Net revenue consists of sales of the Company's theatrical
productions, concession sales, photo sales and income from equipment rental,
less commissions and rental fees. Net revenue for the year ended December 31,
1996 increased by $1,503,000, or 12% from $12,775,000 to $14,278,000, as
compared to the year ended December 31, 1995. Contributing to this increase
were increases of approximately: (i) $1,676,000, attributable to the resident
Legends show in Myrtle Beach; (ii) $106,000, attributable to the Legends shows
in Atlantic City; (iii) $1,615,000, attributable to the Legends show in
Branson, which ran for only one month (July) in the year ended December 31,
1995 as opposed to six months in the year ended December 31, 1996 (from April
1996 to October 1996); and (iv) $205,000 attributable to limited-run
engagements of Magic, Magic, Magic! at the ShowBoat Hotel and Casino in
Atlantic City and at Players Island Resort and Casino in Mesquite, Nevada.
These increases were offset by: (a) $75,000 attributable to the Legends show at
the Imperial Palace; (b) $38,000 attributable to the Legends shows on Premier
Cruise Lines; (c) $1,923,000 attributable to (1) the discontinuation during the
year ended December 31, 1996 of the resident productions of Country Stars on
Ice and Glitz and the previously recurring limited-run engagements of Legends
at the Riverside Casino in Laughlin, Nevada and the Silver Smith Casino in
Wendover, Nevada; (2) the early cancellations during such period of Atlantic
City Experience at Bally's Park Place and Rock Around the Clock at the MGM
Theme Park in Las Vegas; and (3) $63,000 attributable to the decrease of other
revenues.
Direct Production Costs. Direct production costs include salaries for
impersonators, stars, singers, dancers, musicians, choreographers, technical
operators, wardrobe personnel, production managers and concessions personnel,
license fees, electronic supplies, lighting, sound, wardrobe, sets, props, and
the cost of goods for merchandise and food and beverage. Direct production
costs for the year ended December 31, 1996 decreased by $1,242,000, or
approximately 17%, as compared to the year ended December 31, 1995. Direct
production costs decreased to 43% of net revenue for the year ended December
31, 1996, as compared to 57% for the year ended December 31, 1995. The
improvement was due primarily to cost controls initiated in late 1995 through
the first quarter of 1996 that significantly reduced discretionary direct
production cost expenditures by production managers and technicians for items
such as wardrobe, lighting and scenery.
Indirect Production Costs. Indirect production costs include salaries for
operations, box office, finance and marketing personnel, advertising and
promotion, insurance, rent, utilities, property taxes, housing, legal,
accounting and travel. Indirect production costs for the year ended December
31, 1996 increased by $54,000, or 2%, as compared to the year ended December
31, 1995. Indirect production costs decreased to 17% of net revenue for the
year ended December 31, 1996, as compared to 18% for the year ended December
31, 1995. The decrease was attributable primarily to the discontinuation of
resident productions of Glitz and Country Stars on Ice in August 1995 and
December 1995, respectively.
Selling, General and Administrative. Selling, general and administrative
expenses include officers, finance, operations, development, marketing and
technical salaries, office supplies, rent, utilities and legal expenses.
General and administrative expense for the year ended December 31, 1996
increased by $568,000, or 24%, as compared to the year ended December 31, 1995.
Selling, general and administrative expense as a percent of net revenue was 21%
for the year ended December 31, 1996, as compared to 19% for the year ended
December 31, 1995. The increase in total dollars was due primarily to an
increase in the number of employees, the addition of several senior executives,
and the development of wardrobe, lighting and scenery departments, in order to
prepare for future expansion.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 increased by $151,000, or 29%, as compared to the year
ended December 31, 1995. The increase was due primarily to new capital
additions in existing shows and the installation of a new computer system and
associated software programs, including H.I.T.S.
26
<PAGE>
Principal Stockholder Compensation. Principal stockholder compensation
includes all monies paid to John Stuart, the Company's Chairman and Chief
Executive Officer. Principal stockholder compensation for the year ended
December 31, 1996 decreased by $177,000 or 14% as compared to the year ended
December 31, 1995.
Interest Expense, Net. Interest expense for the year ended December 31,
1996 decreased by $100,000, or 39%, as compared to the year ended December 31,
1995. The decrease was due to an increase in the level of borrowing, primarily
as a result of the DYDX Loan, which was funded on February 29, 1996, offset by
$143,000 of interest income attributable to advances made to Mr. Stuart.
Income Taxes. The Company is a Nevada corporation with a substantial
portion of both revenue and income derived in Nevada. There are no state or
local income taxes in Nevada. The Company accrued no federal income tax for the
year ended December 31, 1996 and 1995. The Company accrued $15,800 at December
31, 1996 related to other state and local income taxes.
Seasonality and Quarterly Results
The Company's business has been, and is expected to remain, highly
seasonal, generating the majority of revenues from April through October. Part
of the Company's business strategy is to increase sales in tourist markets that
experience their peak seasons from November through March, such as Florida and
Arizona, domestically, and Australia, South Africa, China, Singapore, New
Zealand, and Hong Kong, abroad, which the Company believes will help mitigate
this seasonality.
The following table sets forth the Company's net revenue for each of the
last nine quarters ended March 31, 1997:
Net Revenues
($ in thousands)
March 31, June 30, September 30, December 31,
----------- ---------- --------------- -------------
Fiscal 1995 ...... $2,319 $2,747 $4,388 $3,320
Fiscal 1996 ...... $2,347 $4,264 $4,591 $3,076
Fiscal 1997 ...... $2,719
Liquidity and Capital Resources
General
The Company has historically met its working capital and capital
expenditure requirements through a combination of cash flow from operations, a
series of debt offerings, and through traditional bank financing.
For the year ended December 31, 1995, the Company had a net cash deficit
from operations of $939,000. This operating deficit was primarily attributable
to an increase in direct and indirect production costs resulting from new show
openings in October 1994 (Country Stars on Ice in Pigeon Forge) and March 1995
(Glitz in Las Vegas) and general and administrative costs offset by an increase
in revenues. For the year ended December 31, 1996, the Company had net cash
provided by operations of approximately $1,154,000. The cash provided from
operations was primarily attributable to an increase in revenue and a decrease
in direct and indirect production costs offset by an increase in general and
administrative costs. For the quarter ended March 31, 1997, the Company had a
net cash deficit from operations of $629,000. This operating deficit was
primarily attributable to business seasonality and increased selling, general
and administrative expense related to the Company's preparation for future
expansion. As of March 31, 1997, the Company had approximately $314,000 in cash
and cash equivalents.
Net cash used in investing activities for the years ended December 31,
1995 and 1996 of $932,000, and $942,000, respectively, and for the quarters
ended March 31, 1996 and 1997 of $301,000 and $197,000, respectively, was
primarily due to capital expenditures and advances (which were subsequently
written off at December 31, 1996) on notes receivable to Mr. Stuart, the
Company's principal stockholder, Chairman and Chief Executive Officer. See
"Certain Transactions."
27
<PAGE>
Net cash provided by financing activities for the years ended December 31,
1995 and 1996 of $1,892,000, and $58,000, respectively, and for the quarters
ended March 31, 1996 and 1997 of $753,000 and $849,000, respectively, was
primarily attributable to a series of debt and bank financings.
At December 31, 1995 and 1996, the Company had a working capital deficit
of approximately $447,000 and $103,000, which resulted, primarily, from
advances paid to Mr. Stuart. Such advances (including principal and interest)
amounted to approximately $920,913 and $859,511 for the years ended December
31, 1995 and 1996, respectively. The improvement in the Company's working
capital position at December 31, 1996 is primarily attributable to the
Company's receipt of the DYDX Loan and positive operating results. At March 31,
1997, the Company had a working capital deficit of approximately $351,000,
which resulted primarily from business seasonality, increased selling, general
and administrative costs (primarily in 1997), and advances paid to Mr. Stuart.
Such advances (including principal and interest) amounted to approximately
$123,000 and $103,000 for the three months ended March 31, 1996 and 1997,
respectively.
As of March 31, 1997, the Company had outstanding a bank term loan in the
principal amount of $106,682, Debentures in the principal amount of $1,714,064,
the DYDX Loan in the principal amount of $750,000 and the Bridge Notes in the
principal amount of $1,000,000. The Company anticipates that long-term debt
will increase from $1,895,417 as of March 31, 1997 to approximately $2,360,000
as of June 30, 1997.
Bank Financings
On March 10, 1995, First Security Bank of Nevada ("First Security") issued
a term loan to the Company (the "Term Loan") in the principal amount of
$400,000. The Term Loan bears interest at 11.5% per annum and is payable in 29
monthly installments of $15,405, plus a final payment in the estimated amount
of $18,160 due upon the loan's maturity in September 1997. The Term Loan was
secured by three (now two) of the Company's contracts, including its contracts
with MGM Movieworld, Inc. (subsequently terminated in October 1995), its
contract with Premier Cruise Lines, Ltd. and its contract with Bally's Park
Place, Inc. The Term Loan is also secured by Mr. Stuart's personal disability
insurance policy in the amount of $600,000, as well as his personal guaranty.
As of March 31, 1997, there was $106,682 outstanding under the Term Loan.
On March 10, 1995, First Security also issued a revolving line of credit
to the Company for up to $200,000. Borrowings under such facility bore interest
at 2% over the First Security Bank of Idaho's Index (11% per year as of the
facility's inception) and were due on demand. The line of credit was originally
scheduled to expire on March 25, 1996, but was subsequently extended until, and
expired on, June 25, 1996. All of the Company's borrowings under such facility
were paid in full in February 1996 and no further borrowings were accrued
thereafter. The line of credit was cross-collateralized with the security
provided under the Term Loan.
In May 1997, First Security issued a revolving line of credit to the
Company for up to $250,000. Borrowings under such facility bear variable
interest at 1.5% over the First Security Bank of Idaho's Index (10% per year as
of the facility's inception) and are due on demand. The line of credit is
scheduled to expire on May 19, 1998. The line of credit is cross-collateralized
with the security provided under the Term Loan and borrowings under the line of
credit are guaranteed by John W. Stuart. As of the date of this Prospectus, the
Company has drawn $122,000 on the line of credit.
The Debentures and the Pending Debt Conversion
From June through November 1995, the Company conducted a private placement
of units of its securities (the "Debenture Units"), each $50,000 Debenture Unit
consisting of (i) a $50,000 principal amount 8% convertible subordinated
debenture of the Company due on August 31, 1997, with interest payable monthly
(the "Original Debentures") and (ii) the right, under certain circumstances, to
receive an A and a B Warrant of the Company, for aggregate proceeds of
$1,989,064 (the "1995 Private Placement"). If issued, the A and B Warrants were
to have a term of five years and would have entitled the holders thereof to
purchase one share of Common Stock at a strike price of $4.94 and $6.33,
respectively. In order for the Original Debentures to be converted into shares
of Common Stock and for the investors to acquire their A and B Warrants, Joseph
D. Kowal, a former director of the Company, and his affiliated company, JDK &
Associates (together "JDK"), who assisted the Company with the 1995 Private
Placement, had to accomplish certain objectives (the "JDK Financing
Objectives") set
28
<PAGE>
forth in their consulting agreement with the Company dated February 17, 1995
and amended on March 14, 1995 (the "JDK Agreement"). The JDK Financing
Objectives required that JDK: (1) provide the Company with $1,500,000 of
financing by no later than May 17, 1995; (2) provide the Company with an
additional $500,000 of financing by no later than June 17, 1995; (3) assist and
advise the Company in the public offering process; (4) assist and counsel the
Company in obtaining a market capitalization of at least $25,000,000; and (5)
assist the Company in developing a business plan. If such objectives were
accomplished, each $100,000 principal amount of the Original Debentures would
automatically be converted into a .75% equity interest in the Company, based on
an assumed valuation of the Company of $13,333,333.
Subsequently, the Company and JDK had a dispute as to whether JDK had
successfully accomplished the JDK Financing Objectives. The Company maintained
that, among other things, JDK had failed to provide the Company with the
$2,000,000 of financing that JDK was to obtain. JDK took the position that
while it had not satisfied all of the JDK Financing Objectives, it had
substantially satisfied several of the conditions. To resolve the dispute, the
Company and JDK entered into a Settlement and Termination Agreement (the "JDK
Settlement Agreement") on September 6, 1995, pursuant to which the rights to
any A and B Warrants were terminated. Neither the Company nor JDK has any
current obligations under the Settlement and Termination Agreement. In July
1996, in order to (i) extend the maturity date of the Original Debentures and
(ii) eliminate certain covenants in the Original Debentures that were
disadvantageous to the Company, the Company offered to either (a) exchange the
outstanding Debenture Units for Debentures due January 4, 1999, or (b) to
repurchase the Debenture Units upon the terms and subject to the conditions set
forth in an Offer to Exchange or Repurchase the Debenture Units, dated July 24,
1996 (the "Exchange or Repurchase Offer"). The Debentures issued in connection
with the Exchange or Repurchase Offer bear interest at the rate of 8% per
annum, payable monthly, and, when issued, were convertible at the option of
their holders into shares of Common Stock at the rate of 266.67 shares per each
$1,000 principal amount of Debenture at any time prior to maturity. There are
no warrants attached to the Debentures. In connection with the Exchange or
Repurchase Offer, the holders of $1,714,064 principal amount of the Original
Debentures tendered their Debenture Units in exchange for Debentures in the
same principal amount and holders of $275,000 principal amount of the Original
Debentures opted to have them repurchased. Consequently, the Company currently
has outstanding $1,714,064 principal amount of Debentures. In February 1997,
the Company and the Debenture holders entered into an agreement pursuant to
which all of the Debentures will automatically be converted into an aggregate
of 505,649 shares of Common Stock (the "Debenture Shares") immediately prior to
the consummation of this offering, in connection with the Pending Debt
Conversion, based on a conversion ratio of 295 shares per each $1,000 principal
amount of Debenture. The Pending Debt Conversion will result in a one time,
non-recurring, interest expense charge to the Company in the estimated amount
of $194,228 (based on an imputed value of $4.00 per Debenture Share).
In September 1995, pursuant to the JDK Settlement Agreement, the Company
issued as compensation for all services performed by JDK for, or on behalf of,
the Company, warrants to purchase an aggregate of 355,378 shares of Common
Stock at an exercise price of $3.76 per share to JDK and its designees,
including Kenneth Berg (an investor in the 1995 Private Placement and a
director of the Company). In addition, the Company issued to Harry S. Stahl
warrants to purchase an aggregate of 11,019 shares of Common Stock at an
exercise price of $3.76 per share in payment for certain legal services
provided to the Company by Mr. Stahl with respect to the preparation of the
1995 Private Placement offering documents, and the Company issued to Lance Hall
warrants to purchase an aggregate of 27,549 shares of Common Stock at an
exercise price of $3.76 per share for certain financial consulting services
provided to the Company by Mr. Hall with respect to the 1995 Private Placement,
all in September 1995. These warrants were exchanged for an aggregate of
190,312 of the Warrant Exchange Shares in connection with the Warrant Exchange.
See "-- Warrant Exchange" and "Certain Transactions."
DYDX Loan Transactions
On February 29, 1996, the Company entered into a loan agreement with DYDX
(the "Original DYDX Agreement") pursuant to which the Company borrowed
$1,000,000 from DYDX. Proceeds of the DYDX Loan were used by the Company to
fulfill existing obligations to trade vendors, pay legal and accounting fees,
make capital expenditures on existing shows, finance operating expenses on new
shows, pay and/or advance up to $150,000 to Mr. Stuart and satisfy existing
indebtedness. Under the Original DYDX Agreement, the DYDX
29
<PAGE>
Loan accrued interest at a rate of 8% per annum, was to mature on January 1,
1998 and was secured by a security agreement pursuant to which DYDX had a lien
on substantially all of the present and future assets of the Company. In
addition, under the terms of the Original DYDX Agreement, if the Company did
not file an initial public offering registration statement by June 30, 1996 it
would be in default under the DYDX Loan. In connection with the Original DYDX
Agreement, the Company issued to DYDX a warrant to purchase 550,974 shares of
Common Stock exercisable for a period of 60 months commencing upon the
consummation of an initial public offering and at a price per share equal to
the initial public offering price of the Common Stock. In connection with their
assistance to the Company in its securing of the DYDX Loan, Mr. Stuart, the
Chairman, Chief Executive Officer and principal stockholder of the Company,
granted options in February 1996 to JDK, Kenneth Berg (a director of the
Company), Senna Venture Capital Holdings, Inc., an affiliate of DYDX ("Senna"),
Southwest Marketing I, LLC (a Debenture holder) and Lance Hall, to acquire an
aggregate of 140,498 of his shares of Common Stock at an exercise price of
$4.54 per share. The term of these options is two years commencing on the first
anniversary of the first to occur of the following: (i) the Company becomes a
public company pursuant to Federal securities laws, through merger or
otherwise; (ii) more than 50% of the Common Stock is acquired by a public
company; or (iii) an initial public offering registration statement is declared
effective by the SEC. See "Principal and Selling Stockholders" and "Certain
Transactions."
On June 27, 1996, the Company and DYDX entered into an Extension
Agreement, whereby the Company had to either file an initial public offering
registration statement or release a private placement memorandum to potential
investors by July 15, 1996 or it would be in default under the DYDX Loan. The
Extension Agreement also changed the exercise price of the DYDX warrant to the
imputed price per share of Common Stock as of the closing date, if any, of the
next debt or equity financing of the Company as determined by the placement
agent for such financing. Subsequently, on November 19, 1996, the Company and
DYDX entered into a Second Extension Agreement, whereby the date by which the
Company had to file a registration statement was extended until February 14,
1997. In connection with this Second Extension, the Company repaid $250,000
principal amount of the DYDX Loan, leaving an outstanding loan balance of
$750,000. On February 9, 1997, the Company and DYDX entered into a Third
Extension Agreement, whereby the Company's filing date was extended until March
31, 1997. In connection with the Third Extension, the Company split the
original DYDX warrant into two warrants, one in the name of DYDX for the
purchase of 440,779 shares of Common Stock and the other in the name of Senna,
an affiliate of DYDX, for the purchase of 110,195 shares of Common Stock, and
reduced the exercise price of both warrants to $3.99 per share. These warrants
were exchanged for an aggregate of 250,443 of the Warrant Exchange Shares in
connection with the Warrant Exchange. In addition, Mr. Stuart, in consideration
for the Third Extension Agreement and DYDX's agreement in connection with such
extension to allow the Stuart Debt Forgiveness, granted to Senna an option to
purchase 142,292 of his shares of Common Stock at an exercise price of $5.00
per share, exercisable for a period of three years commencing as of February 9,
1998. See "-- Warrant Exchange," "Principal and Selling Stockholders" and
"Certain Transactions."
In order to effect the Bridge Financing, the Company and DYDX entered into
an Amended and Restated Loan Agreement as of March 19, 1997 in connection with
which the security agreement executed in connection with the Original DYDX
Agreement and DYDX's security interest in the Company's assets were terminated,
the maturity date of the DYDX Loan was extended to coincide with that of the
Bridge Notes and its interest rate was raised to 9% per annum. The Company
intends to repay the DYDX Loan in full upon the consummation, and using
proceeds from, this offering.
Acquisition of Interactive Events, Inc.
On November 1, 1996, the Company purchased all of the outstanding capital
stock of Interactive Events, Inc., a small Atlanta - based corporate events
producer, from Richard S. Kanfer, as well as the rights to two interactive
dinner shows created and written by Mr. Kanfer, Frankie and Angie Get Married
and Wake Up Shamus O'Reilly, in exchange for (i) the delivery to Mr. Kanfer on
such date of (a) 19,284 shares of Common Stock and (b) a non-plan stock option
to purchase 15,000 shares of Common Stock at a price per share equal to the
initial public offering price of the Common Stock and (ii) the Company's
agreement to deliver 11,020 additional shares of Common Stock (the "Interactive
Events Shares") to Mr. Kanfer on November 30, 1997, for a total purchase price
of $121,216 based on the fair value of the Common Stock at the date of
purchase. Mr. Kanfer began working for the Company in September 1996 while the
Interactive Events Acquisition was pending. See "Business -- Show Acquisition
and Development" and Note 5 of Notes to Financial Statements.
30
<PAGE>
Stuart Debt Forgiveness
As of December 31, 1996, Mr. Stuart owed the Company an aggregate of
$1,780,424 (including principal and interest at the rate of 8% per annum) for
his outstanding advances, all of which was forgiven by the Company in
connection with the Stuart Debt Forgiveness as of December 31, 1996. The Stuart
Debt Forgiveness has been accounted for as part of principal stockholder
compensation in the Company's Statements of Operations in the amounts of
$920,923 and $859,511 for the years ended December 31, 1995 and 1996,
respectively. In addition, the Company has advanced an additional $220,000
(including principal and interest) to Mr. Stuart since December 31, 1996 and
intends to forgive all of such indebtedness prior to the consummation of this
offering. In connection with the Bridge Financing, the Company agreed that,
other than such $220,000, the Company will neither loan nor advance any further
sums to or on behalf of Mr. Stuart in the future. See "Certain Transactions."
Warrant Exchange
In February 1997, the Company and all of the holders of its then
outstanding warrants entered into an agreement pursuant to which, on March 17,
1997, prior to the Reverse Split and the initial closing of the Bridge
Financing, all of the Company's then outstanding warrants were exchanged for
440,755 (on a post-reverse split basis) shares of Common Stock, in connection
with the Warrant Exchange. The number of shares issued to each warrantholder in
the Warrant Exchange was equal to the number of warrants held by such holder
divided by the exercise price of the holder's warrants. The Warrant Exchange
had no effect upon the Company's earnings.
Bridge Financing
In connection with the Bridge Financing, the Company borrowed an aggregate
of $1,000,000 from 21 private investors in March 1997, in return for which the
Company issued to such investors Bridge Notes in the aggregate principal amount
of $1,000,000, an aggregate of 200,000 Bridge Shares and an aggregate of 250,000
Bridge Warrants, each to purchase one Bridge Warrant Share at an exercise price
of $4.00 per share. In August 1997, an aggregate of 4,500 Bridge Shares and
37,500 Bridge Warrants were returned to the Company by two investors in the
Bridge Financing for no consideration, as a result of a regulatory determination
that such securities would have been deemed to be compensation to the
Underwriter. In addition, in August 1997, the holders of the remaining Bridge
Warrants agreed to increase the exercise price of the Bridge Warrants from $4.00
to $5.50 per share. After payment of $125,000 in placement fees to the
Underwriter, which acted as placement agent for the Company in connection with
the Bridge Financing, and other offering expenses of approximately $75,000, the
Company received net proceeds of approximately $800,000 in connection with the
Bridge Financing, which were used for the payment of outstanding trade payables,
pre-opening expenditures on the Daytona Beach show and the seasonal Branson
show, certain pre-offering expenses related to this offering and for working
capital and general corporate purposes. The Company intends, upon consummation
of this offering, to use approximately $1,015,000 of the proceeds from this
offering to repay the Bridge Notes, including interest accrued thereon through
and until such repayment date.
Employment Contracts
The Company has employment contracts with certain executive officers and
employees, the terms of which expire at various dates through May 2000. Such
agreements provide for minimum salary levels and incentive bonuses based on
prescribed formulas over their terms. The minimum annual commitments related to
these contracts range from $780,442 for the year ending December 31, 1997 to
$384,167 for the year ending December 31, 1999. In addition, the employment
agreement between the Company and Kiranjit Sidhu, the Chief Financial Officer,
will extend automatically until May 31, 2000 upon the consummation of this
offering, increasing commitments under employment agreements by $496,000. See
"Management."
---------------------
The Company is dependent on the proceeds of this offering or other
financing to open new resident productions and expand its operations. The
Company anticipates, based on its currently proposed plans and assumptions
relating to its operations (including assumptions regarding the anticipated
timetable of its new show openings and the costs associated therewith) that the
proceeds of this offering and the Bridge Financing, together with the Company's
current cash and cash equivalent balances and anticipated revenues from
operations, will be sufficient to fund its current expansion strategy and
contemplated capital requirements (including those associated with the opening
of up to nine new resident "four-wall" productions) for 24 months following the
consummation of this offering. In the event that the Company's plans change, or
its assumptions change or prove to be incorrect, or if the foregoing proceeds,
cash balances and anticipated revenues otherwise prove to be insufficient,
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the Company would be required to revise its expansion strategy (which revision
could include the curtailment, delay or elimination of certain of its
anticipated productions or the funding of such productions through arrangements
with third parties which require it to relinquish rights to substantial
portions of its revenues) and/or seek additional financing prior to the end of
such period.
Furthermore, while the Company intends to use a substantial portion of the
proceeds of this offering to implement the next phase of its business strategy
in an effort to expand its current level of operations and grow the Company's
business, the Company's future performance will be subject to a number of
business factors, including those beyond the Company's control, such as
economic downturns and changing consumer demands and trends, as well as to the
level of the Company's competition and the ability of the Company to
successfully market its productions and effectively monitor and control its
costs. While the Company believes that increases in revenue sufficient to
offset its expenses and result in its profitability could be derived from its
currently proposed plans, there can be no assurance that the Company will be
able to successfully implement its expansion strategy, that either its revenues
will increase or its rate of revenue growth will continue or that it will be
able to achieve profitable operations.
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BUSINESS
General
The Company develops and produces live theatrical productions for domestic
and international audiences. The Company markets its productions, directly and
through ticket wholesalers, to audiences at theaters in resort and urban
tourist locations. The Company also markets its productions to commercial
clients, which include casinos, corporations, fairs and expositions, theme and
amusement parks, and cruise lines. The Company's flagship Legends production is
a live tribute show featuring recreations of past and present music and motion
picture superstars through the use of impersonators and is the longest running
independently produced production in Las Vegas. The Company currently has
full-scale, resident Legends productions at the Imperial Palace in Las Vegas,
Bally's Park Place in Atlantic City, the Surfside Theater in Myrtle Beach and
the Coliseum Theater in Daytona Beach and on a Premier Cruise Lines ship which
sails out of Cape Canaveral. In addition, the Company will have a resident
Legends production at the Estrel Residence & Congress Hotel in Berlin, Germany,
beginning September 12, 1997. The Company also produces limited-run Legends
shows and corporate events and has performed in locations such as the Illinois
State Fair, MGM Theme Park and Dollywood Theme Park; in locations as far away
as Australia, Russia, China, Africa, Japan and the Philippines; and for major
corporate clients such as McDonald's, Hewlett Packard, IBM, Pitney Bowes, Levi
Strauss and Texaco.
In addition to Legends, the Company has developed and produced 15 other
theatrical productions since its founding in 1985, including other tribute-type
shows, and a variety of musical reviews, magic, ice and specialty shows. All of
the Company's shows are designed to appeal to a broad spectrum of attendees by
offering affordable, quality entertainment incorporating experienced talent and
state-of-the-art special effects and staging. By offering multiple productions
in addition to Legends, the Company seeks to run more than one show in highly
visited live entertainment markets, thereby generating both increased operating
margins, due to economies of scale resulting from shared fixed costs, and
greater market share. In addition, since the Company currently has access to
over 70 different Legends tribute acts, it can tailor each tribute show to suit
the unique demographics of any audience and the size of any venue, and has been
able to attract significant repeat business by varying regularly the
composition of the acts in its shows.
For the years ended December 31, 1995 and 1996, approximately 26% and 44%,
respectively, of the Company's net revenue was generated from resort and urban
tourist markets; approximately 57% and 40%, respectively, of the Company's net
revenue was generated in gaming markets, predominantly Las Vegas and Atlantic
City; and approximately 15% and 15%, respectively, of the Company's net revenue
was generated primarily from various theme and amusement parks, fairs and
expositions, meetings and conventions, and cruise lines. Such percentages
reflect the Company's growing focus on the establishment of "four-wall"
productions in resort and urban tourist markets, over which the Company has
greater control and, in connection with which, it has more choices available to
it. In addition, the profit potentials, while riskier, are substantially
greater with such "four-wall" tourist productions than those associated with
shows produced by the Company for its casino gaming clients.
Industry Background
Resort and Urban Tourist Markets
In 1995, approximately 92 million Americans planned to take a family
vacation trip 100 miles or more away from home. While the most popular
destinations for these vacationers included the top gaming sites, Las Vegas and
Atlantic City, and the top theme park sites, Orlando and Los Angeles, several
emerging resort locations such as Myrtle Beach, Daytona Beach and Virginia
Beach were also included.
Myrtle Beach, which has 97 golf courses and 11 live entertainment venues,
was one of the five most popular destinations during the summer of 1995,
according to a survey reported by the American Automobile Association. In
addition, while Myrtle Beach has only 25,000 hotel rooms, versus Las Vegas'
104,000 rooms, tourism-related construction reached $221 million for the first
six months of 1995, and, what has historically been a warm weather,
golf-oriented resort, is emerging quickly as a year-round resort. The Company's
resident Legends production at the Surfside Theater in Myrtle Beach opened in
March 1995, with successful results to date.
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Daytona Beach, Florida is similarly a popular tourist destination with
approximately 8 million visitors annually. In June 1997, the Company commenced
operation of the Coliseum Theater in Daytona Beach where it produces a
full-scale resident Legends production under a "four-wall" operating structure.
In some emerging tourist markets, like Branson, Missouri, live
entertainment is actually the primary tourist activity. In 1994, Branson
attracted 5.8 million visitors to 34 live theater venues and was The National
Tour Association's number one domestic tour destination, followed by
Washington, DC and New York City. Live entertainment in Branson, predominantly
a retiree "day-tripper" market, is atypical of other theater districts, with
shows beginning mid-morning and continuing throughout the day and into the
evening. The Company began producing Legends at the OFT Theater in Branson in
1995 (two shows per day in July 1995 and a breakfast show each day in October
and November 1995), subsequently performed one Legends show per day at the
Grand Palace in Branson from April through October 1996, and relocated Legends
to the OFT Theater where it is presenting two shows per day in June, July and
August 1997.
Pigeon Forge, Tennessee, home to the Dollywood Theme Park and nine live
entertainment theaters, is similarly gaining popularity as an emerging
"day-tripper" live entertainment venue. The Company produced Country Stars on
Ice at the Coliseum Theater in Pigeon Forge for the first ten months of 1995
and believes that emerging tourist markets like Pigeon Forge offer attractive
opportunities for future growth. Furthermore, many urban destinations have
theater districts and concert halls which already serve as primary tourist
attractions and the Company is seeking to expand its operations into certain of
these urban markets. For instance, the Company is currently seeking a theater
location in Toronto, Ontario, Canada, the third largest English language
theater center in the world, following New York and London, and the most highly
visited tourist destination in Canada.
In addition, the Company believes that there are numerous other emerging
urban and resort tourist markets, both in the United States and abroad, where
the need exists for quality, affordable live entertainment. The Company is
currently researching the suitability of the following urban and resort tourist
locations for the production and marketing of resident and/or limited-run
Legends shows:
North America -- San Diego and San Francisco, California; Destin, Miami and
Orlando, Florida; New Orleans, Louisiana; New York City and
Niagara Falls, New York; and Montreal, Toronto and
Vancouver, Canada.
International -- Australia, China, England, France, Germany, Japan, Korea,
Malaysia, Mexico and Singapore.
Gaming Markets
There are currently over 600 gaming venues in North America ranging in
size from single gaming rooms to large casino hotels. Las Vegas, in Clark
County, Nevada, is the largest gaming market in the United States with 63
casino hotels. Thirty of these casino hotels have showrooms featuring live
entertainment and actively promote their shows as a means to generate traffic
to increase their gaming revenues. In addition, every major hotel and many
tourist and visitor centers have in-house ticket reservation services, and tour
operators in this market frequently buy blocks of tickets to include in package
tours. Legends has been playing at the Imperial Palace in Las Vegas since 1983
and the Company has produced numerous limited engagements and other shows in
Las Vegas, including Glitz at the Sands Hotel and Casino from April through
August 1995. The Company is aware of at least seven new casino hotel projects
in development in Clark County, Nevada and believes that several of these will
also contain showrooms suitable for live entertainment.
The second largest gaming market in the United States is Atlantic City,
with 13 casino hotels. All of these casino hotels contain showrooms which
feature live entertainment and provide complimentary tickets to visitors in an
attempt to retain them during the evening hours. Furthermore, since casino
visitors in this market do not typically expect to pay to attend a live
theatrical production, casino executives are often willing to "guarantee" a
weekly revenue stream to a producer of live entertainment, which the casino
then offers free of charge or at a reduced rate to its customers. The Company
currently produces Legends at Bally's Park Place in Atlantic City, having
previously produced it at Bally's Grand Hotel, Harrah's Hotel and Casino, and
Caesars Atlantic City, and has produced numerous other shows in this market
including Magic, Magic, Magic! at the Showboat Hotel and Casino, Cabaret on Ice
at Trump's Castle, and Bon Voyage and The Atlantic City Experience at Bally's
Park
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Place. The Company also co-produced a comedy show entitled An Evening at the
Improv(R) Spectacular at the Xanadu Theater at the Trump Taj Mahal Casino
Resort in Atlantic City, which ran from March 1997 through July 1997, which was
replaced with Camouflage Aux Folles which will run through September 1997.
Furthermore, the Company is aware of at least four new casino hotel projects
under development in Atlantic City and believes that several of these will also
contain showrooms for live entertainment.
As of the Spring of 1996, 24 states allowed casino gambling, an increase
from only two states in 1988. As the number of casino markets has grown, both
the number of entertainment venues and the dollars spent on entertainment in
these markets has grown as well. This growth is particularly significant since
the actual time and dollars spent gambling in these markets has declined. For
example, according to a July 1996 article in Forbes, visitors to Las Vegas in
1995 spent 4.1 hours and $114 per day gambling, down from 5.0 hours and $120
per day in 1989, while spending on shows, sightseeing and other activities
tripled over this same period to $97 per day per visitor. The Company believes
that casinos will increase the entertainment options offered in order to
attract visitors and that the continued emergence of new gaming markets,
combined with the increasing need for affordable, non-gaming entertainment in
such markets, will result in multiple opportunities for new Legends and other
shows. While there is currently a consolidation trend within the casino gaming
industry, it has not, as of yet, resulted in a reduction in the number of
casinos currently operating.
Internationally, there are numerous emerging gaming jurisdictions in which
Las Vegas-style casino hotels with live entertainment showrooms are under
construction. For example, the Pacific Rim, one of the most recent areas to
legalize gaming, is experiencing new construction in the resort locations of
Malaysia, Philippines, New Zealand and Australia. In addition, while several
Mediterranean islands have had legal gaming jurisdictions for many years, it is
anticipated that gaming will soon be legalized in Cyprus.
The Company is currently researching the suitability of existing and
potential gaming markets for the production and marketing of new shows,
including, in particular:
North America -- Reno, Nevada; Atlantic City, New Jersey; Biloxi and
Tunica, Mississippi; Lake Charles and New Orleans,
Louisiana; Prior Lake, Minnesota; Rising Sun, Indiana; and
St. Louis and Kansas City, Missouri.
International -- Auckland, New Zealand; Burswood and Darwin, Australia;
and Sun City, South Africa.
While the Company will continue to market its productions to the casino
gaming industry, and depend upon it for a significant portion of its revenues,
the Company has begun to shift its primary focus away from the casino gaming
industry and towards the resort and urban tourist market, as evidenced by the
changing composition of the Company's net revenues over the last three years
(during such period its revenues from gaming markets decreased from 72% to 41%
of its total net revenues and its revenues from resort and urban tourist
markets increased from 10% to 43% of its total net revenues). This shift in the
Company's primary focus began as a hedge against the declining growth in the
casino gaming industry which has resulted from emerging consolidation trends.
If the consolidation trends continue in the casino gaming industry, the
Company's exposure to such decreasing growth may be reduced as a result of its
shift in primary focus.
Other Commercial Client Markets
The Company has also produced limited-run Legends shows (and, in the case
of Premier Cruise Lines, resident Legends shows) in the last five years for
other types of commercial clients, such as theme parks (Six Flags, MGM Theme
Park, Lotte World in Korea), on cruise ships (Viking, Premier Cruise Lines,
Star Cruises), and at major fairs (Dade County Youth Fair, Illinois State
Fair). In addition, in 1995 and 1996, the Company produced approximately 40 and
80 events, respectively, for such diverse clients as McDonald's, Hewlett
Packard, IBM, Levi Strauss and Texaco.
Expansion Strategy
The Company's objective is to become a leading worldwide producer of
affordable live theatrical productions, which have mass market appeal, by the
implementation of both a "roll-out" and "roll-up" strategy. The key elements of
this business expansion strategy include:
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o Roll-Out of Legends into New Tourist Markets -- The Company has been
successful with its production of Legends in Myrtle Beach and Branson and
believes that it can be equally successful in other, similar markets. As
part of its "roll-out" strategy, the Company has identified over 30 resort
and urban tourist locations worldwide where it believes the potential
exists for the Company to successfully produce and market new resident
Legends shows. In connection with its proposed roll-out of Legends in new
tourist venues, the Company generally intends to utilize a "four-wall"
operating structure. With such a structure, the Company assumes
responsibility for all of the expenses associated with the show, including
the cost of the theater (whether leased or purchased) and is also the sole
recipient of the show's potential revenues, profits and/or losses. The
Company's resident Legends production in Myrtle Beach, a "four-wall"
production, has demonstrated to the Company the benefits of such operating
structure; it opened in March 1995 and, for the year ended December 31,
1996, generated gross profits of $1,900,000 and a 44% gross margin. The
Company currently anticipates that it will open approximately nine new
resident "four-wall" Legends productions within the next 24 months. The
Company intends to hire an Executive Vice President of Production during
1997 to oversee the implementation of its proposed Legends "roll-out"
strategy. In addition, prior to entering any new tourist market, the
Company generally intends to seek a local marketing partner, as it did in
Myrtle Beach, and undertake a comprehensive analysis of market
demographics, competition and available media in order to improve each new
show's opportunity to succeed.
o Acquiring Brand-Name Theatrical Productions -- The Company believes it
has developed worldwide market awareness of its Legends production and
that the long-term success of Legends has contributed to the Company's
credibility as a producer of affordable live entertainment. The Company
believes that Legends, and similar brand-name shows, are more easily
marketed and efficiently implemented in new markets than new show concepts
due to their built-in recognition among ticket and tour wholesalers. Thus,
as part of its "roll-up" strategy, the Company intends to acquire
additional brand-name shows with "roll-out" potential through joint
ventures or other arrangements with other production companies, such as An
Evening at the Improv(R) Spectacular which the Company co-produced with
Improv West, Inc. The Company has identified several other variety, magic,
ice, and interactive dinner and other theater productions which it
believes have, like Legends, the quality, versatility and broad appeal
necessary to succeed under the "four-wall" operating structure and in
multiple markets.
o Acquiring Independent Production Companies -- The live theatrical
entertainment industry is highly fragmented and contains many small,
independent producers with attractive show concepts and/or client bases.
Consequently, as part of its "roll-up" strategy, the Company will also
seek to acquire production companies with show concepts which it believes
have the potential to develop into brand-name shows (such as Frankie and
Angie Get Married, which the Company recently acquired in connection with
the Interactive Events Acquisition) or with existing commercial customer
bases to which it can market Legends and other shows. By leveraging its
in-house production expertise and infrastructure, the Company believes it
can improve the quality of acquired show concepts and the efficiency of
acquired production companies, and, by capitalizing upon its already
established Legends name and reputation, the Company believes it can
improve and/or hasten the marketability of new show concepts.
o Penetrating Commercial Markets through Expansion of Direct Sales Network --
Shows sold to corporations, fairs and expositions, theme and amusement
parks and cruise lines are typically limited-run engagements, ranging from
one night to several months, and are usually guaranteed or "low-risk" shows
where the client pays the Company a guaranteed fee. Shows sold to casinos,
both resident and limited-run productions, are operated using either the
"two-wall" method, where the casino and the Company each assume certain
aspects of the production's costs and a designated percentage of its
revenues, or a guaranteed show arrangement. Historically, the Company has
not aggressively marketed its shows to any of these potential commercial
clients, instead relying upon its reputation and word-of-mouth to generate
new business from such markets. To further penetrate all of these
commercial markets, the Company plans to expand its national sales network
both in terms of staffing and geographically. The Company recently hired a
Vice President of Sales and intends to open several regional sales offices
by the end of 1998. Potential sites for such offices include New Orleans,
Chicago, New York, Dallas, Minneapolis, and Los Angeles. An expanded
regional sales network should allow the Company to target new casinos,
corporations and other commercial clients, and effectively monitor, and
sell additional shows to, existing clients.
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o Expanding and Centralizing Merchandising Program -- The Company believes
that it can increase its merchandise sales, which, to date, have accounted
for less than 6% per annum of the Company's revenues, by introducing new
products such as compact discs, audio and video tapes and a wider variety
of clothing items, and by designing more effective point of sale displays.
In addition, the Company intends to hire a Merchandising Director during
1997 and to implement centralized purchasing and marketing to achieve
economies of scale, ensure consistent quality of product, and obtain sales
data in a timely manner.
Show Offerings
The Company has developed and produced 16 different theatrical productions
since its founding in 1985, including Legends and other tribute shows, and a
variety of musical reviews, magic, ice and specialty shows.
Legends
The Company's flagship production "Legends In Concert -- A Tribute to the
Superstars of Yesterday and Today," is a live tribute show featuring
re-creations of past and present music and motion picture superstars. Conceived
by the Company's Chairman, Chief Executive Officer and principal stockholder,
John W. Stuart, Legends has run continuously at the Imperial Palace in Las
Vegas since its debut in 1983 and, since that date, has been performed in over
17 countries. The Company believes it is the premier worldwide producer of
superstar tribute shows and has featured 184 impersonation artists portraying
over 72 different legends in its 13-year history. In 1996 alone, Legends shows
were seen by approximately one million people. In addition to Las Vegas, the
Company currently has resident Legends productions in Atlantic City, Myrtle
Beach and Daytona Beach and on a Premier Cruise Lines ship. For the years ended
December 31, 1995 and 1996, revenues attributable to Legends productions
(including both resident and limited-run engagements) and the sale of related
Legends merchandise accounted for approximately 86% and 98%, respectively, of
the Company's net revenue.
The Company's full-scale Legends shows utilize state-of-the-art sound,
lighting, and special effects and incorporate numerous backup singers and
dancers and feature live orchestras. Smaller-scale Legends shows, such as those
performed for corporate events, typically use taped orchestra music. Vocals,
however, are performed live in all Legends shows; there is no lip-synching nor
are any vocal tapes utilized during any show. Superstars from the past, such as
Elvis Presley, Marilyn Monroe and the Beatles, who have maintained their high
level of popularity since the time when they performed, are selected for
tributes. In addition, the Company selects present superstars who it believes
will have similar long-lasting appeal, such as Madonna, Michael Jackson and
Dolly Parton. The Legends shows are also versatile in that a casino, hotel,
resort or convention has the luxury of selecting the stars it wants to have
portrayed, as well as the actual composition of the show, and star lineups can
periodically be rotated to accommodate seasonal changes and the unique
demographics of any audience. In addition, the size of any Legends show can be
tailored to accommodate the budget constraints and profitability goals of most
showrooms.
Other Productions
In addition to Legends, in 1994, the Company began developing a variety of
other tribute and non- tribute show offerings incorporating the same
versatility and professionalism as the original Legends production. Non-
Legends productions accounted for 12% and 1% of the Company's net revenue for
the years ended December 31, 1995 and 1996, respectively, and include, among
others, the following:
"The Heroes Of Rock And Roll -- A Tribute To The Musical Artists Of The
'50s & '60s." -- a salute to the great musical rock and roll artists of
the fifties and sixties such as Richie Valens, Buddy Holly, The Big
Bopper, Chuck Berry, Jerry Lee Lewis, Sonny and Cher, The Beach Boys,
Aretha Franklin, and John Lennon. Heroes performed in the fall of 1995
at the Primadonna Hotel and Casino in Stateline, Nevada.
"Glitz -- A Tribute To The History Of Las Vegas." -- a musical revue
chronicling the development of Las Vegas from Frank Sinatra and his
contemporaries to the rise of modern revue shows, which featured
celebrity hosts Marty Allen and Steve Rossi and Australian singer Greg
Bonham. Glitz completed a five-month engagement in the summer of 1995
at the Sands Hotel and Casino in Las Vegas.
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"Magic, Magic, Magic!" -- combines master magicians and illusionists
with special visual effects, comedy, music and dance. Each magician
principal, complemented by a troupe of singers and dancers, performs
several different components of magic: sleight-of-hand, comedy magic
and grand scale illusion. Magic, Magic, Magic! completed an eleven-week
engagement at the Showboat Hotel and Casino in Atlantic City in May
1996 and completed an eight-week engagement at Players Island Casino in
Mesquite, Nevada in September 1996.
"Country Stars On Ice" -- combines performances by World Class skaters
with comedic skits by skating clowns and ensemble skating. Country
Stars On Ice was performed at the Coliseum Theater in Pigeon Forge
during the first 10 months of 1995 and at Trump's Castle (where it was
renamed "Cabaret on Ice") in Atlantic City during the last two months
of 1995.
"Atlantic City Experience" -- a 30-minute, five-screen multimedia
history chronicling the founding, development and growth of Atlantic
City from the 1600's through the introduction of gaming. Atlantic City
Experience ran through the summer of 1995 at Bally's Park Place and is
an excellent showcase of the Company's multimedia video production
capability.
Show Financial Structures
The types of financial structures inherent in the live entertainment
industry can be differentiated by which revenue and expense responsibilities
are borne by the producer and which are borne by the client. Most financial
structures for productions in theaters in resort and urban tourist markets and
in large casinos are based on what is known in the industry as the "wall"
method of expense and revenue allocation between the producer and the client,
while those produced for smaller casinos and other commercial clients, such as
corporations, fairs, cruise lines and theme parks, are "guaranteed deals" where
the client pays the producer a fixed fee.
The four "walls" of any live theatrical production can be illustrated as
follows:
FRONT OF HOUSE
Ticket Sellers
Food & Beverage Servers
Cleaning & Maintenance
Maitre d', Captains, Ushers
PRODUCTION SHOW PROMOTION
Performers Marketing
Orchestra BOX Community &
Dancers Media Relations
Advertising
Group Sales
STAGE
Stage Hands
Technicians
The Company intends generally to operate its resident productions in
resort and urban tourist markets and in large casinos under a "four-wall"
arrangement (where the Company assumes the responsibility for the cost of the
theater, whether leased or purchased, and the expenses associated with all four
of the "walls" depicted and is the recipient of all of the show's potential
revenues, profits and/or losses) or a "two-wall" arrangement (where the client
owns or manages the theater and each of the Company and the client assumes
responsibility for two of the "walls" depicted and retains certain designated
percentages of the show's revenues). The Company's resident Legends show at the
Surfside Theater in Myrtle Beach is structured as a "four-wall" arrangement and
its resident Legends show at the Imperial Palace in Las Vegas is structured as
a "two-wall" arrangement.
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The Company refers to those shows which it operates under a "wall"
structure as "at-risk" shows. The Company expects to realize steady state
economics for new "at-risk" shows generally in their second full year of
operation, due to the amortization of pre-opening costs in the year of opening
and a typical one-year revenue ramp-up as tour operators and visitors become
familiar with the show.
While the Company believes that the potential benefits associated with the
"four-wall" operating structure are enormous, it is, by far, the riskiest type
of financial arrangement for the Company. Consequently, as part of the
Company's planned roll-out of "four-wall" resident productions in new tourist
venues, the Company intends to limit such roll-out to Legends productions or
other brand-name shows. Additionally, the Company will often attempt to team up
with a local marketing partner, like Calvin Gilmore Productions, a division of
International Family Entertainment, the Company's marketing partner in Myrtle
Beach, for additional sales and marketing support.
The balance of the Company's shows are guaranteed or "low-risk" shows
where the client is responsible for all non-production-related expenses and
retains all revenue generated from ticket sales, and the Company is responsible
for all production related expenses (performers, orchestra and dancers) and
receives a guaranteed weekly fee. This is a typical structure for shows sold to
commercial clients such as corporations, fairs and theme and amusement parks
(which are typically limited-run engagements ranging from one night to several
months), as well as shows sold to cruise lines and smaller casinos (both
resident and limited-run engagements, where audiences do not typically expect
to pay to attend a live theatrical production), and is the type of arrangement
governing the Company's resident Legends production at Bally's Park Place in
Atlantic City and its resident Legends productions on board two Premier Cruise
Lines ships.
Resident Production Contracts
The Surfside Theater, Myrtle Beach, South Carolina
The Company has presented a full-scale Legends show at the Surfside
Theater in Myrtle Beach, South Carolina since March 1995 under a "four-wall"
arrangement. The original term of the Company's lease with the theater's owner,
Great American Entertainment Company ("Great American"), expired on December
31, 1995, subject thereafter to three successive renewal options (one year, one
year and seven years) extending through February 2004. To date, the Company has
exercised the first two of such options and intends to exercise the third.
Under the lease, the Company pays rent in the amount of $330,000 per year. In
addition, the lease provides that (i) within a 50-mile radius of the Myrtle
Beach show and until February 1998, the Company may not lease another location
for the purpose of operating a Legends show, (ii) Great American has a right of
first refusal to rent space to the Company to operate a production other than
Legends and (iii) the Company has a right of first refusal to purchase the
Surfside Theater from Great American.
The Company's "four-wall, at-risk" production at the Surfside Theater
generated a 44% gross margin for the year ended December 31, 1996.
The Imperial Palace Hotel and Casino - Las Vegas, Nevada
The Company has produced and presented a full-scale Legends show at the
Imperial Palace since May 1983. The Company has a "two-wall" arrangement with
Imperial Palace, Inc. ("Imperial"), the owner of the casino, pursuant to which
Imperial is responsible for the front of house and promotion "walls" and the
Company is responsible for the production show and stage "walls." The Company's
agreement with Imperial continues indefinitely but may be terminated earlier by
Imperial (i) on eight weeks notice, (ii) if the number of paying customers
falls below 2,400 persons per week (based on six evening shows per week) for
three consecutive weeks, (iii) immediately, in the event of the death of Mr.
Stuart, or (iv) if there is an accident, fire, explosion or any other event
beyond the parties' control which interferes with the performance of the
production for seven consecutive days.
The Imperial Palace agreement provides that Legends be performed twice
each day, six days a week, and that the admission fee per show remain at
$29.50. After amounts are withheld for taxes, gratuities and beverage costs, a
substantial percentage of the proceeds of such admission fees are paid to the
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Company and the remaining proceeds are paid to Imperial. The parties receive the
same percentage of net profits on all Legends merchandise sold by the Company at
the Imperial Palace, except for merchandise sold by Imperial's gift shop. Net
profits from merchandise sold at Imperial's gift shop are divided equally by the
parties.
The Company's "two-wall, at-risk" production at the Imperial Palace
generated a 38% gross margin for the year ended December 31, 1996.
Bally's Park Place Hotel and Casino - Atlantic City, New Jersey
The Company has produced and presented a full-scale Legends production at
Bally's Park Place since October 1994, prior to which time, from July 1993 to
September 1994, the Company presented Legends at its sister hotel, Bally's
Grand Hotel and Casino, also in Atlantic City. The Company recently extended
the term of its agreement (which is renewable each six months at the option of
the casino) with the casino's owner, Bally's Park Place, Inc., until September
1997. The agreement provides that the Company will present its Legends show
twice each day and six days each week. The Bally's Park Place agreement is a
"guaranteed" arrangement under which the Company receives a guaranteed weekly
fee. The agreement also contains a provision which prohibits the Company from
presenting Legends within a radius of 150 miles of Bally's Park Place.
The Company's "low-risk", guaranteed arrangement at Bally's Park Place
generated a 31% gross margin for the year ended December 31, 1996.
Premier Cruise Lines (the Atlantic and the Oceanic)
The Company has produced and presented a smaller-scale Legends production
on board a Premier Cruise Lines ship since June 1990. The Company has a
"guaranteed" arrangement with Premier Cruise Lines, Inc. ("Premier") to provide
Premier with three principal Legends tribute acts to perform year-round on
board its vessel which sails out of Cape Canaveral, Florida. Under its
agreement with Premier, the Company receives a guaranteed weekly fee. The
Company's agreement with Premier terminates in January 1999.
The Company's "low-risk," guaranteed arrangement with Premier Cruise Lines
generated a 6% gross margin for the year ended December 31, 1996.
The Coliseum Theater - Daytona Beach, Florida
The Company commenced operation of a full-scale Legends production at the
Coliseum Theater in Daytona Beach, Florida in June 1997. The Company has a
lease arrangement with the Theater's owner, Burgoyne Properties, Limited, which
expires on April 30, 1998, subject thereafter to two successive renewal options
for one year and eight years extending through April 30, 2007. The lease
provides for rent of $10,000 per month commencing on November 1, 1997. In the
event one or both of the Company's renewal options are exercised by the
Company, the rent shall increase at the rate of 5% per year for each year of
the renewal term. In addition, the lease provides that the Company may use the
location for the operation of a theater, bar, club with a restaurant and cafe
and a gift shop.
The Estrel Residence & Congress Hotel - Berlin, Germany
The Company will begin producing and presenting a full-scale Legends
production at the Estrel Residence & Congress Hotel in Berlin, Germany on
September 12, 1997. The Company has an agreement with Kurz Management, the
hotel's entertainment management which terminates on December 31, 1997, but may
be extended for five successive two-year periods by Kurz management upon ninety
days notice and subject to an increase in compensation to the Company under the
agreement. The agreement provides that the Legends show be performed a maximum
of six days per week for eight performances per week. The Estrel Residence &
Congress Hotel agreement is a "guaranteed" arrangement under which the Company
receives a guaranteed weekly fee.
Show Acquisition and Development
Most shows in tourist locations like Myrtle Beach are structured as
"four-wall" arrangements, the riskiest type of financial arrangement for the
Company. Since the Company believes that Legends and similar brand-
name shows are more easily marketed, and can be implemented more efficiently,
than new show concepts in these riskier markets, due to their built-in
recognition among ticket and tour wholesalers, it generally intends to
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implement its "roll-out" strategy in new resort and urban tourist markets only
with Legends and similar brand- name shows. As part of its "roll-up" strategy,
the Company intends to acquire additional brand-name shows with "roll-out"
potential through joint ventures and other arrangements with other production
companies. For instance, in October 1996, the Company entered into an agreement
with Improv West, Inc. to co-produce a conceptual show entitled An Evening at
the Improve(R) Spectacular. Pursuant to the terms of the agreement, Improv
West, Inc. granted to the Company the right to use its federally registered
trademark and brand-name "Improv(R)" and agreed to assume 50% of the show's
pre-production costs in return for co-production billing rights and 50% of all
profits, if any, generated by the show. In March 1997, the Company began
performing An Evening at the Improv(R) Spectacular for Trump's Taj Majal in
Atlantic City, where it ran from March 1997 through July 1997. The Company has
also identified certain variety, magic, ice and interactive dinner and other
theater productions which it believes, like Legends, have the quality,
versatility and broad appeal necessary to succeed in multiple markets.
In addition to acquiring brand-name shows, the Company, as part of its
"roll-up" strategy, will also seek to acquire production companies with show
concepts which it believes have the potential to develop into brand-
name shows. By leveraging its in-house production expertise and infrastructure,
the Company believes it can improve the quality of acquired show concepts, and,
by capitalizing upon its already established Legends name and reputation, the
Company believes it can improve and/or hasten the marketability of new show
concepts.
In keeping with this "roll-up" strategy, on November 1, 1996, the Company
purchased all of the outstanding capital stock of Interactive Events, Inc., a
small Atlanta - based corporate events producer, as well as the rights to two
interactive dinner shows, Frankie and Angie Get Married and Wake Up Shamus
O'Reilly, in exchange for the Company's delivery, on the closing date of the
acquisition, of 19,284 shares of Common Stock, a non-plan option to purchase
15,000 shares of Common Stock, at a price per share equal to the initial public
offering price of the Common Stock, and its promise to deliver 11,020
additional shares of Common Stock, on November 1, 1997. Interactive Events,
Inc. specializes in producing audience participation theme parties for
corporate clients which it anticipates rolling out to the general public. For
example, Frankie and Angie Get Married is a mock New York/Italian wedding in
which the audience participates as guests of the wedding families, and Wake Up
Shamus O'Reilly is a mock Irish wake with a funeral service. In addition,
Interactive Events, Inc. has produced several other audience participation
theme parties including its Las Vegas Spectacular in which a casino is created
and participants are allowed to gamble as if they were in a Las Vegas casino.
Interactive Events, Inc. has held these types of theme parties for such
corporate clients as the City of Las Vegas, Hyatt Hotels Worldwide, Six Flags
Over Georgia, The National Football League, IBM, Xerox and Conoco.
In addition , the Company periodically conceives of new show ideas, and if
it cannot adapt an existing show to suit a client's needs, it may develop a new
show to meet a client's requirements. Depending on the client's budget, the
Company may hire a development team and/or consultation team to augment its
in-house capabilities. In most instances, the Company self-produces its shows,
and when possible, uses performers in the Company's database. Budgets are
prepared as part of the show development process, and the Company targets a 30%
average gross margin on each of its productions.
Sales and Marketing
The Company currently markets its productions to commercial clients, which
include casinos, corporations, fairs and expositions, theme and amusement
parks, and cruise lines, from its offices in Las Vegas, Atlantic City, Atlanta,
Myrtle Beach and Daytona Beach. However, historically, the Company has not
aggressively marketed its shows to potential commercial clients, relying
instead upon its reputation and word-of-mouth to generate business. Part of the
Company's business strategy is to become more proactive in the commercial
market and it plans to expand its national sales network in order to target, on
a regional basis, new commercial clients and effectively service, and sell
additional shows to, existing clients. Potential regional sales office sites
include New Orleans, Chicago, New York, Dallas, Minneapolis, and Los Angeles.
In the casino, theme and amusement park, and cruise markets, the Company
markets its shows directly to clients' entertainment directors and senior
executives or through agents that have long-standing relationships
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with the client. The Company has historically marketed its productions to fairs
and expositions through a network of agents, and has recently started to
augment its efforts in this segment by marketing through trade publications,
trade shows, direct mail and telemarketing. The Company has also started to
market directly to the meeting and convention market through direct mail, trade
shows and trade advertisements and intends to form alliances with small
independent event planners and collectively market to corporate clients. The
Company intends to augment its efforts in this segment by acquiring event
planners in urban centers, focusing primarily on events with larger
entertainment budgets (in excess of $10,000), and marketing to catering
managers in large metropolitan hotels.
The Company markets its productions to audiences at venues in resort and
urban tourist locations directly through its own box offices and through ticket
wholesalers and tour operators. Since many people do not plan to attend a
specific live performance prior to leaving for vacation, unless they have
purchased the show as part of a packaged tour or group outing, the Company also
relies on focused show promotion and word-of-mouth to attract additional
"walk-up" traffic to its box office. In addition, the Company aggressively
markets to tour operators and ticket wholesalers, through partnerships with
entities such as Calvin Gilmore Productions in Myrtle Beach, for additional
sales and marketing support.
The Company generally targets mass market audiences with average prices
for its productions ranging from $20.00 to $40.00 per adult ticket. Show
pricing is determined by competition in the local marketplace and is typically
neither the lowest nor the highest in a particular market. Once ticket pricing
has been determined, the composition of the show (number of principals,
singers, dancers, orchestra, technicians, etc.) and facility and equipment
requirements are adjusted so that each show will generate profits based upon
projected attendance. The Company distributes, from time to time, show coupons
offering discounts of up to 20% on individual ticket purchases, and offers
volume discounts of up to 46% to ticket and tour wholesalers buying large
blocks of tickets.
Advertising and Promotion
The Company provides publicity support and seeks major ongoing media
coverage for all of its shows through its network of media contacts. Exposure
on television and radio, and in national periodicals, major metropolitan
newspapers, and local tourist entertainment guides has served to promote the
Company's shows both regionally and nationally. Over the last year, publicity
exposure for the Company included impersonator appearances at the 1996 Miss
Universe Pageant, on Jay Leno's Tonight Show from Las Vegas, and on VH1's Route
96.
Prior to the opening of each new "four-wall" show produced by the Company
in the resort and urban tourist market, the Company, as an integral part of its
"roll-out" strategy, intends to undertake a detailed analysis of market
demographics, available media and the various transportation modes to the
theater site. In addition, the Company prepares press kits for dissemination to
the local and regional media, which include a show synopsis, biographies of all
principals and production personnel, an opening press release, photographs and
support materials. A "press night" is typically held during the first week
after the opening of a new show and many show principals actively participate
as goodwill ambassadors at community and charitable events. The Company
maintains an in-house video, photo and press clipping library and is capable of
producing promotional videos and commercials upon client request.
Advertising designed to target the individual tourist includes newspaper
and magazine print ads, television and radio commercials, airport videos and
signage, billboard and outdoor advertising, transit advertising, and brochures
placed in areas with a high concentration of tourists (such as visitor and
tourist welcome centers). In some resort markets, such as Myrtle Beach and
Branson, advertising commences up to one year in advance of a show's opening,
and includes direct mail campaigns, attendance at consumer and travel trade
shows, and placement of print ads in travel and trade publications. Within
casinos and hotels, table tent cards, coupons, flyers and brochures are placed
in each guest room, restaurant and lounge, and promotional show videos are
broadcast on in-house television systems.
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Show Merchandising
The Company sells Legends merchandise at all of its shows in tourist
locations and, if permitted, in client venues. Merchandise includes Legends
logo clothing, keychains, magnets, pins, canvas tote bags and coffee mugs, plus
specialty merchandise featuring the Company's more popular Legends acts such as
Elvis, the Blues Brothers and Marilyn Monroe. In addition, the Company sells
autographed photographs of impersonators posing with audience members, for
which it pays nominal royalties to featured performers. For the year ended
December 31, 1995 and 1996, and for the three months ended March 31, 1997 sales
of merchandise accounted for approximately 3%, 5% and 3% of the Company's net
revenue, respectively.
Part of the Company's business strategy is to increase its merchandise
sales by introducing new products such as compact discs, audio and video tapes
and a wider variety of clothing items, and by designing more effective point of
sale displays. In addition, the Company intends to implement centralized
purchasing and marketing to achieve economies of scale, ensure consistent
quality of product, and obtain sales data in a timely manner. See " --
Intellectual Property."
Talent
The Company has featured 184 impersonators and numerous variety acts
(magicians, dancers, aerial acts, jugglers, clowns, comedians), singers,
dancers, musicians and musical directors in its productions, and regularly
receives promotional materials from individuals who are eager for work. An
average of 30 inquiries are received per month, and for every working
performer, the Company has access to three potential performers. The Company
periodically holds auditions for new impersonators, singers, and dancers in Las
Vegas, Atlantic City, Myrtle Beach and Los Angeles, and often views acts in
outside show environments and clubs.
All performers receive creative and professional support from the
Company's various in-house personnel. The Company employs choreographers and
contracts with a professional vocal coach to work with new and existing
entertainers to develop their skills and improve their confidence on stage.
Utilizing the Company's in-house music library, musical arrangements are
developed for new and existing performers and digital audio tapes are developed
for principal acts. The Company's in-house wardrobe personnel, together with
several well established costume designers, create new performers' wardrobes
and update the wardrobes of existing talent. The Company contracts with an
independent photographer to provide promotional photographs of the principals
and employs a writer to prepare professional biographies and press releases.
The Company believes it is the premier producer of impersonator shows
worldwide and has the ability to offer a variety of consistent work to its acts
by rotating them among its different shows and events. The Company offers
compensation which is competitive with market standards and, for certain long
production runs, offers housing to principal acts. The Company's musicians,
singers, dancers and production personnel are generally employees of the
Company, while headline acts, including the impersonators utilized in the
Company's tribute shows, are treated as independent contractors in accordance
with industry practice. An in-house attorney handles the negotiation of
contracts with all entertainers, and each impersonator enters into a new
contract for each new show or venue. The contracts provide for the term of the
engagement, the compensation to be paid to the impersonator, the
responsibilities and obligations of the parties, confidentiality and
noncompetition provisions and other general terms.
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The following is a list of Legends tribute acts available to the Company as
of August 1, 1997:
LEGENDS TRIBUTE ACTS
Individual Number of Individual Number of
Legends Acts Impersonators Legends Acts Impersonators
- ------------ ------------- ------------ -------------
1. Alan Jackson 1 38. Kenny Rogers 2
2. Andrew Sisters 1 39. Laurel & Hardy 2
3. Barbara Streisand 3 40. Liberace 3
4. Barry Manilow 1 41. Little Richard 1
5. Beatles Group 3 42. Liza Minelli 1
6. Bette Midler 2 43. Loretta Lynn 1
7. Billy Ray Cyrus 2 44. Louis Armstrong 1
8. Bing Crosby 1 45. Madonna 6
9. Blues Brothers 7 46. Marilyn Monroe 5
10. Bobby Darin 2 47. Mario Lanza 1
11. Bonnie Raitt 1 48. Michael Bolton 1
12. Buddy Holly 2 49. Michael Jackson 6
13. Charlie Chaplin 1 50. Nat King Cole 1
14. Charlie Daniels 2 51. Neil Diamond 5
15. Cher 2 52. Olivia Newton-John 1
16. Conway Twitty 2 53. Patsy Cline 2
17. Diana Ross 3 54. Paul McCartney 3
18. Dean Martin 2 55. Prince 2
19. Dolly Parton 3 56. Reba McIntyre 5
20. Elton John 2 57. Richie Valens 1
21. Elvis Presley 18 58. Ricky Nelson 1
22. The Four Tops 1 59. Righteous Brothers 1
23. Frank Sinatra 3 60. Robin Williams 1
24. Franki Valle 1 61. Rod Stewart 4
25. Garth Brooks 6 62. Roy Orbison 4
26. Hank Williams Jr. 2 63. Sammy Davis Jr. 1
27. Jackie Wilson 1 64. Stevie Wonder 2
28. Janet Jackson 2 65. Tanya Tucker 2
29. Janis Joplin 2 66. The Temptations 1
30. Jay Leno 1 67. Tina Turner 5
31. Jerry Lee Lewis 2 68. Tom Jones 2
32. Joan Rivers 1 69. Tony Bennett 1
33. John Lennon 2 70. Wayne Newton 1
34. John Wayne 1 71. Whitney Houston 5
35. Johnny Cash 1 72. Willie Nelson 2
36. Johnny Mathis 1 73. Wynonna Judd 1
37. Judy Garland 1 -----
Total 173
-----
Operations and Show Implementation
The Company has developed a centralized operation capable of producing
multiple shows of varying complexity simultaneously. See "Production Flow
Chart" on the following page. The Company's team of professionals, including
sound, lighting, multimedia, costume and scenic personnel, have over 70 years
of collective experience in the live entertainment industry. The key personnel
necessary to implement a show include: (i) entertainers - principal acts,
singers, dancers and musicians; (ii) choreographer - assisted by a dance
captain; (iii) technical director - assisted by a lighting designer, a master
electrician, and audio and video engineers; (iv) stage manager - assisted by
stage hands; (v) wardrobe personnel; and (vi) production manager - directs the
show and ensures that schedules and budgets are satisfied.
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On Stage Entertainment, Inc. Production Flow Chart
----------------------- *treatments
| Concept | *schematics
| Developed | *run down
----------------------- *casting
|
----------------------- *monthly cash flow
| Production | *monthly profit/loss
| Budgeted | *IRR analysis
-----------------------
|
------------------- *script
| Concept | *music
| Finalized | *performers
| | *technicians
| | *choreography
-------------------
|
------------------- *staging
| Show | *set & props
| Designed | *lighting
| | *sound
| | *costumes
-------------------
| |
*testing ------------------ -------------------- *dance
*programming | Equipment | | Rehearsals | *performers
*configuration | Staged | | Conducted | *score
------------------ --------------------
| |
*packing ------------------ -------------------- *principals
*manifest | Equipment | | Costumes | *singers
*transport | Shipped | | Fitted | *dancers
| | | | *musicians
------------------ --------------------
| |
*inspection ------------------ -------------------- *leases
*unpacking | Show | | Housing & Travel | *tickets
| Load-In | | Coordinated | *allowances
------------------ --------------------
| |
*set-up ------------------ -------------------- *check-in
*hanging | Configuration | | Venue | *review
*checks | | | Walk Through | *scheduling
*programming ------------------ --------------------
| |
--------------------
| Dress Rehearsals |
| Conducted |
--------------------
|
--------------------
| SHOW OPENS! |
--------------------
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New productions are conceptualized in detail before any implementation
begins. Renderings of sets, scenery, and costumes are executed, and lighting
plots and staging layouts are generated using computer programs such as WYSIWYG
(lighting design), AutoCad13 (set and prop design), LiteWrite (lighting
programmer) and Corel Draw. Each new venue must be evaluated to determine the
availability of in-house equipment, the projected cost of shipping
supplementary equipment, and the estimated cost of transporting and housing
personnel. In 1996, the Company began to utilize H.I.T.S., used by the major
motion picture studios and theatrical equipment rental companies, to ensure
efficient pre-production technical planning and avoid unnecessary pre-opening
and capital costs. After final Company-wide implementation (expected in late
1997), the H.I.T.S. system will contain an up-to-date list of all Company
assets (equipment, sets, costumes), historical cost, availability, and current
location of each asset, how often each asset has been used and serviced, and
the asset's estimated life expectancy. Timely access to this information will
allow the Company to identify props or costumes that need to be built and
additional lighting or sound equipment that needs to be purchased or rented
prior to opening a new show. In addition, in order to manage the logistics of
multiple shows in multiple markets, the Company intends to install a
Company-wide computer network whereby all sales offices and production venues
would have access to a central database containing real-time show scheduling,
inventory and revenue information.
Competition
The leisure and entertainment market, which includes the market for live
theatrical productions, is highly competitive and many of the Company's markets
contain a large number of competing live theatrical productions. In resorts and
urban tourists locations, the Company competes for ticket sales with other live
productions and headline stars, many of whom have better name recognition and
greater financial and other resources than the Company. The pricing for the
Company's productions is based upon local market conditions, including the
level of competition, and is typically neither the lowest nor the highest in
any given market.
The live theatrical entertainment industry is highly fragmented and
contains many small, independent production companies and numerous large
production companies. The Company competes with these production companies for
the most desirable commercial and tourist venues, and for talent and production
personnel. Major production companies in the Company's markets include Feld
Entertainment Productions, Blair Farrington Productions and Dick Foster
Productions in Las Vegas, Calvin Gilmore Productions in Myrtle Beach and Greg
Thompson Productions in Seattle. In addition to competition from major
production companies who produce other forms of live theatrical shows, the
Company also competes directly against a large number of smaller independent
producers who sometimes produce impersonators or impersonator shows. However,
the Company believes that only one of these competitors, Spring Time
Productions, produces such shows on a continuous basis in more than one
location, and therefore presently offers any real competition to the Company.
Spring Time Productions currently produces its American Superstars impersonator
shows at the Stratosphere Hotel and Casino in Las Vegas, at the Flamingo Hilton
Hotel and Casino in Reno, Nevada and at the Grand Casinos in Gulfport,
Mississippi.
Intellectual Property
On October 7, 1986, the name "Legends in Concert" was registered as a
federal service mark by Mr. Stuart in the United States. In late 1986, Mr.
Stuart granted to the Company the non-exclusive right to produce and otherwise
use the Legends service mark for all of its productions within and outside of
the United States. Subsequent to his grant of such right, Mr. Stuart formed Las
Vegas/Hawaii Entertainment, Inc., a Nevada subchapter S corporation ("LVHE")
and granted LVHE or any successor entity the right to use the Legends service
mark in the state of Hawaii. In August, 1994, Mr. Stuart and LVHE granted
R.B.L.S, Ltd. ("R.B.L.S."), a Nevada limited liability company in which LVHE
owns a 40% membership interest, the exclusive right to produce Legends
(including the use of the Legends service mark) in the state of Hawaii,
contingent upon their continuous operation of the Legends show in Hawaii. On
December 11, 1996, Mr. Stuart assigned all of his rights to the Legends concept
and his federally registered rights in Legends, including the Legends service
mark, to the Company, subject to R.B.L.S.'s exclusive rights to the use thereof
in Hawaii as described above. See "Certain Transactions."
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The Legends service mark was also registered in the United Kingdom in
November 1996 and an application for its registration in Canada is currently
pending. The Company anticipates filing applications for protection of its
Legends service mark in Japan, France and several other foreign countries, as
well. The Legends United States service mark registration expires in the year
2006 and its United Kingdom service mark registration expires in the year 2005.
The United States Copyright Law specifies that copyrighted musical works
cannot be performed publicly without obtaining the permission of the copyright
owner. Permission can be obtained from either the copyright owner directly, or
from another person or entity entitled to license said right on the copyright
owner's behalf. Currently, the two primary entities that are entitled to
license copyrighted musical works are Broadcast Music, Inc. ("BMI") and the
American Society of Composers, Authors and Publishers ("ASCAP"). The Company
believes that it either owns or has appropriately licensed all of the
intellectual property rights required to perform its shows in the manner in
which they are currently produced, including, but not limited to, the right to
publicly present and otherwise perform all non-dramatic copyrighted musical
compositions pursuant to BMI and ASCAP licenses. The Company believes that
Legends does not infringe any intellectual property rights of any third
parties, including the celebrities portrayed in the show.
In connection with its merchandising strategy, the Company filed two
Legends trademark applications in the United States and anticipates filing
trademark applications in certain foreign countries, as necessary, to cover the
various goods to be sold by the Company. As the Company develops its
merchandising program, the Company also intends to conduct the due diligence
reasonably necessary to ensure that its merchandise does not infringe the
intellectual property rights, including the publicity rights, of any third
parties, including the celebrities portrayed in its shows. In the event that
such due diligence indicates that the unlicensed sale of any merchandise would
infringe the rights of any third party, the Company intends to obtain the
necessary licenses prior to selling the merchandise in question.
The Company typically requires its independent contractors, employees,
consultants and advisors to execute appropriate confidentiality agreements in
connection with their employment, consulting or advisory relationship with the
Company.
Government Regulation
The Company currently has full-scale Legends productions in two casinos:
Bally's Park Place in Atlantic City and the Imperial Palace in Las Vegas. The
Company is currently researching the suitability of existing and potential
casino gaming markets for the production and marketing of new shows. Providing
entertainment to the casino gaming industry may subject the Company to various
licensing regulations. The Company is regulated and required to obtain a casino
industry license from the New Jersey Casino Control Commission pursuant to the
New Jersey Casino Control Act. The Company's current casino service industry
license from the New Jersey Casino Control Commission was issued on January 17,
1997 and expires on September 30, 1999. In connection with the license
application, the New Jersey Division of Gaming Enforcement conducted an
investigation of the Company to determine its suitability for licensure.
Management believes that the Company is not required to obtain a license to
provide its services to casinos in Nevada or in any other jurisdictions in
which it operates, other than New Jersey. The Nevada Gaming Control Board and
similar authorities in other jurisdictions, however, have broad authority to
order providers of services to casinos to file applications, be investigated,
have their suitability determined, obtain licenses and cease providing their
services, if they find the service providers to be unfit. In addition, pursuant
to the Company's expansion program, the Company plans to lease or purchase
some, if not all, of the theaters for its new Legends or other brand-name
resident productions, thereby absorbing all costs and risks associated with
producing the show in order to retain 100% of the show's profits. Producing
shows under this "four-wall" arrangement, may require the Company to obtain and
maintain certain local licenses and permits (as the Company was required to
obtain for the opening of its Myrtle Beach show, a "four-wall" production).
Such licenses and permits could include, among others, amusement licenses,
music licenses, i.e., BMI or ASCAP, business licenses, liquor licenses, retail
licenses, food and beverage licenses and a health inspection rating (if dairy
products and/or hot food, other than popcorn, is to be sold). Difficulties or
failure in obtaining required licenses or regulatory approvals could delay or
prevent the opening of a new show or, alter, delay or hinder the Company's
expansion plans. In addition, the suspension of, or inability to renew, a
license needed to operate any of the Company's currently running productions
would adversely affect the operations of the Company.
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Employees
As of August 1, 1997, the Company employed approximately 208 full-time
employees, including 47 singer/dancers, 20 musicians, 54 operational personnel,
14 administrative personnel, 15 marketing personnel, 53 box office/concession
personnel and its 5 executive officers. In addition, the Company retains
impersonators on an independent contractor basis as needed for its productions.
None of the Company's current employees are covered by a collective bargaining
agreement. The Company believes that its relationship with its employees is
good.
Legal Proceedings
In May 1996, a former performer in the Company's Legends production aboard
a vessel owned and operated by Premier Cruise Lines filed a lawsuit in a
Florida Circuit Court against the Company alleging bodily injury, pain and
suffering, disability, disfigurement, mental anguish and pain, loss of
earnings, loss of ability to earn money, and reimbursement for medical expenses
and treatment and care for any amount in excess of $15,000 as a result of an
injury suffered in the course of his performance. The case was recently
dismissed for improper venue and has been refiled by the plaintiffs in another
jurisdiction. The Company has filed an answer to the plaintiff's complaint. The
matter is currently in the discovery stage of litigation.
In July 1996, an impersonator of Hank Williams, Sr. who performed for the
Company, filed suit against the Company in the Circuit Court of Taney County,
Missouri. The plaintiff asserts that during one of his performances with the
Company, a photograph was taken of him by the Company while in costume and
surrounded by dancers and that the picture has been reproduced and published in
a Company scrapbook along with other photographs of the Company's
impersonators. The plaintiff alleges that the Company misappropriated his name,
image and likeness for commercial purposes by publishing and selling the
booklets and is claiming damages in the amount of $2,000,000. The Company
believes that the plaintiff's claim is without merit since the Company utilized
the plaintiff's photograph in its booklets for ten years with the plaintiff's
knowledge and without objection. The Company intends to defend this action by
asserting that the appropriation was de minimis in that the picture is only
approximately 2" x 4" in size, contains two of the Company's showgirls,
identifies the plaintiff as an impersonator of Hank Williams, Sr. and is only
one of approximately 50 other photographs contained in the brochure. The
Company has filed its answer to the plaintiff's complaint. The matter is
currently in the discovery stage of litigation.
In March 1997, a complaint was filed by a shareholder of Grand Strand
Entertainment, Inc. ("Grand Strand"), a South Carolina corporation in which Mr.
Stuart is a majority shareholder, against the Company, John Stuart and Grand
Strand, alleging misappropriation of corporate opportunity and breach of
contract. Grand Strand, which was formed solely for the purpose of establishing
a Legends production in Myrtle Beach, South Carolina, was granted a license by
the Company to use the "Legends in Concert" trademark in connection with such
production. The license was contingent upon Grand Strand raising sufficient
capital to fund pre-production costs associated with establishing the Legends
production which was scheduled to take place at the Surfside Theater in Myrtle
Beach. However, since the contingency was not met in a timely manner and the
Company was responsible for the lease of the property, the Company rescinded
the license and funded and operated the production on its own. The plaintiff
seeks for (i) a receiver to manage the Legends show produced by Grand Strand;
(ii) an accounting of all assets and profits of Grand Strand; (iii) the Company
to be prevented from diverting profits to itself or from diminishing the value
of Grand Strand's property or other contractual rights; (iv) the Company to pay
to Grand Strand all sums found to be due from an accounting of the profits and
the losses of Grand Strand caused by the Company's actions; and (v) actual
damages for loss of earnings. The Company filed an answer to the plaintiff's
complaint, as well as a motion to stay and a motion to compel arbitration. On
June 2, 1997, the Court of Common Pleas for Horry County, South Carolina
granted such motions. Mr. Stuart, at the request of the Underwriter, has
entered into an Indemnification Agreement with the Company and Grand Strand
dated February 27, 1997, whereby Mr. Stuart shall indemnify the Company against
any liability for any judgments or settlement payments, expenses and or legal
fees in connection with any proceeding relating to the grant of the license to
Grand Strand. Mr. Stuart has also entered into a Security and Pledge Agreement
with the Company dated February 27, 1997 whereby he has pledged and granted a
security interest to the Company in 400,000 of his shares of Common Stock of
the Company to secure his obligations and performances under the
Indemnification Agreement.
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<PAGE>
Although the Company believes that it has meritorious defenses with
respect to all of the foregoing matters which it will vigorously pursue, there
can be no assurance that the ultimate outcome of such actions will be resolved
favorably to the Company or that such litigation will not have an adverse
effect on the Company's liquidity, financial condition and results of
operation. To the extent that the Company is required to use the proceeds of
this offering in connection with such litigation, the Company will have less
resources available to it for other purposes.
Facilities
The Company's corporate headquarters consists of approximately 16,000
square feet of office and warehouse space located at 4625 West Nevso Drive, Las
Vegas, Nevada. The lease will expire on February 28, 1999 and the total rent
for the premises is approximately $14,000 per month.
The Company's east coast office consists of approximately 600 square feet
of space located at Flightwinds in Atlantic City, New Jersey. The lease, which
is currently on a month to month basis, provides for monthly rent in the amount
of $460. In addition, the Company leases seven condominium units for use by its
performers in Atlantic City from Mr. Stuart and his wife. The aggregate rent
for such apartments is currently $7,833 per month. The current lease term
expires on June 30, 1998. See "Certain Transactions."
The Company has leased the OFT Theater located in Branson, Missouri for
the three-month period from June through August 1997 for aggregate rent of
$90,000, all of which has been prepaid.
The Company leases and operates the Surfside Theater and related office
space in Myrtle Beach, South Carolina. The Company has the option to extend
this lease until December 31, 2004 and the current monthly rent for the
premises is $27,500.
The Company leases and operates the Coliseum Theater and related office
space located in Daytona Beach, Florida. The lease, which will expire in April
1998, provides for monthly rent in the amount of $10,000. The Company has the
option to extend this lease until April 2007.
The Company leases apartments in Branson and Myrtle Beach for its
performers. Dancers and musicians reimburse the Company for its actual cost of
maintaining the leases, while the impersonators are provided accommodations at
no cost. In addition, the Company from time to time leases from third parties
apartments and condominiums for use by its performers and production crew, and
storage space for its equipment, props and costumes.
The Company's Atlanta, Georgia office consists of 6,000 square feet of
office and warehouse space. The lease expires on October 31, 1998 and the total
rent for the premises is approximately $1,000 per month.
49
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- ----- --------
<S> <C> <C>
John W. Stuart ............... 54 Chairman and Chief Executive Officer
David Hope (1) ............... 38 President, Chief Operating Officer and Director
Neil H. Foster ............... 64 Executive Vice President and Director
Kiranjit S. Sidhu ............ 32 Senior Vice President, Chief Financial Officer and Treasurer
Christopher R. Grobl ......... 29 General Counsel and Secretary
Kenneth Berg (2) ............... 71 Director
Jules Haimovitz (1)(2) ......... 46 Director
James L. Nederlander (2) ...... 37 Director
Mark Tratos (1) ............... 45 Director
</TABLE>
- ------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
John W. Stuart has served as the Chairman and Chief Executive Officer of
the Company since April 1996 and also was the President of the Company from
October 1985 through March 1996. He founded the Company in 1985. He has been
involved in the theatrical business since age seven and has produced or
appeared in over 200 theater productions and several feature films. Mr. Stuart
received a Bachelor of Arts degree in 1967 from California State University at
Fullerton. A real estate partnership (unaffiliated with the Company) of which
Mr. Stuart was a partner, Maze Stone Canyon Estates Partnership, filed for
bankruptcy under Chapter 11 in December 1991 in the United States Bankruptcy
Court, Central District of California (the "Bankruptcy Court"). The partnership
is currently in reorganization pursuant to the Plan of Reorganization adopted
by the Bankruptcy Court in August 1992.
David Hope has served as the President and Chief Operating Officer of the
Company since joining the Company in April 1996. For ten years prior to that
time, Mr. Hope served in various capacities, including most recently as
Executive Vice President and Chief Operating Officer, for ITC Entertainment
Group ("ITC"), a major independent producer and worldwide distributor of
feature films, television movies and mini-series and a subsidiary of Polygram
N.V., where, as Chief Operating Officer, he was responsible for day-to-day
operations, as well as strategic and corporate development and acquisitions.
Prior to that time, Mr. Hope was a production manager with Hinchcliffe
Productions, a United Kingdom-based producer and distributor of documentaries
and motor sport events. Mr. Hope received a degree in Management Science in
1981 from the Loughborough University in England.
Neil H. Foster has been the Executive Vice President of the Company since
October 1985 and a director of the Company since February 1995. Mr. Foster met
Mr. Stuart in 1964 when they performed together in "Gentlemen Prefer Blondes"
starring Jayne Mansfield. His television credits include "Combat," "Gunsmoke,"
"Honey West," and "Fridays." From 1977 to 1983, Mr. Foster worked as a producer
for the American Broadcasting Companies, Inc. ("ABC"), where he assisted in the
production of "ABC's Wide World of Sports," the Grammy Awards, "Soap" and
"Barney Miller."
Kiranjit S. Sidhu has been the Company's Senior Vice President, Chief
Financial Officer and Treasurer since joining the Company in August 1995. Prior
to joining the Company, Mr. Sidhu served as Chief Financial Officer and
Corporate Secretary for Aspen Technologies, a computer peripheral manufacturer,
from July 1994 to July 1995. From January 1993 to June 1994, Mr. Sidhu served
as President and a director for Aspen Peripherals, a computer peripheral
reseller. From February 1992 to June 1993, Mr. Sidhu served as a financial
consultant to ITC. From January 1992 to July 1993, Mr. Sidhu served as Vice
President of Finance and a director for Nuvo Holdings of America, a computer
peripheral manufacturer. From January 1991 to March 1992, Mr. Sidhu served as a
financial consultant for Integrated Voice Solutions, a health care computer
software developer. From
50
<PAGE>
April 1989 to November 1990, Mr. Sidhu was an associate with Merrill Lynch
Capital Markets (Mergers and Acquisitions Division) and, from August 1987 to
March 1989, was a senior associate and manager with Price Waterhouse's
Strategic Consulting Group. Mr. Sidhu holds a Masters degree in Business
Administration from the Wharton School of Business and a Bachelor of Arts in
Computer Science from Brown University.
Christopher R. Grobl has been the General Counsel and Secretary of the
Company since November 1994. Mr. Grobl received a Bachelor of Arts in 1990 from
the University of Illinois and a Juris Doctor in 1994 from the John Marshall
Law School in Chicago, Illinois.
Kenneth Berg has been a director of the Company since August 1995. He has
also been the Chairman and Chief Executive Officer of Koo Koo Roo, Inc., a
publicly traded restaurant company, since July 1992. He was Co-Chairman of the
Board and Co-Chief Executive Officer of Koo Koo Roo, Inc. from March 1992 until
July 1992, and from August 1990 until March 1992, he served as its Chairman of
the Board. Since January of 1990, Mr. Berg has also served as Chairman of the
Board and President of Berg Enterprises, Inc. ("Berg Enterprises"), a holding
company of which Mr. Berg is the sole stockholder. From 1969 to December 1989,
Mr. Berg served as Chairman of the Board and President of the original Berg
Enterprises, Inc., a company chiefly involved in the mortgage banking business
called Margaratten (renamed Margco Holdings, Inc. in 1990), which was listed on
the New York Stock Exchange until May 1985 and which subsequently became a
subsidiary of Primerica Corporation.
Jules Haimovitz has been a director of the Company since March 1997. Mr.
Haimovitz currently serves as the President and Chief Operating Officer of King
World Productions, a leading syndicator of television programs including shows
such as OPRAH!, JEOPARDY! and Wheel of Fortune. From January 1995 to March
1997, he served as the Chief Executive Officer of ITC after it was sold to
PolyGram N.V., one of the world's leading global music and entertainment
companies. Prior to such time, from April 1993 to January 1995, Mr. Haimovitz
served as ITC's President and Chief Executive Officer while it was owned by
Midland Montague Ventures. Mr. Haimovitz was also acting President of Video
Jukebox Network Inc., a publicly traded interactive music video service, from
October 1992 through August 1993, and a director of such company from August
1990 to November 1995. From March 1989 to January 1992, Mr. Haimovitz was
President, Chief Operating Officer and a director of Spelling Entertainment
Inc. ("Spelling"), a company he helped found by engineering the acquisitions of
Worldvision Enterprises Inc. and Laurel Entertainment Inc. by, and the merger
of such companies with, Spelling's predecessor, Aaron Spelling Productions,
Inc. ("Aaron Productions"). From December 1987 until Spelling's formation in
January 1992, he served in the same capacities for Aaron Productions.
James L. Nederlander has been a director of the Company since August 1996.
He has also been the Chairman of the Nederlander Producing Company of America,
a producer of live entertainment shows, since August 1996 and prior to such
time, commencing in 1980, he was Executive Vice President of such organization.
Mr. Nederlander was the associate producer of Peter Brooks' "The Tragedy of
Carmen," which won a special Tony Award in 1984, and was a co-producer of such
shows as Natalia's "Little Voice," the Royal Shakespeare Company's "A Midsummer
Night's Dream," and "Cafe Crown," and musical concerts such as Billy Joel, U2,
Harry Connick, Jr., Pink Floyd, Ray Davies and Yanni.
Mark Tratos has been a director of the Company since March 1997. Mr.
Tratos has been the managing partner of the law firm Quirk & Tratos of Las
Vegas, Nevada since 1983. He received his J.D. from Lewis and Clark Law School
in 1979, where he was a member of the Law Review and the Editor-in-Chief of the
Lewis and Clark Law Forum. He is admitted to the Nevada and California state
bars and to the United States District Courts for the Districts of Nevada and
each of Central and Southern California. Since 1982, Mr. Tratos has also served
as a member of the adjunct faculty of the University of Nevada Las Vegas
teaching a variety of subjects in the areas of fine and performing arts and
entertainment and business law. He has also written numerous articles,
including "Intellectual Property Considerations in Licensing Pre-Existing Works
for Use in Multimedia" (1995), "Rights in Publicity: Laws Vary from State to
State" (1996), and "Gaming on the Internet" (to be published in May 1997) and
co-authored the Nevada Chapter of the United States Trademark Association's
State Trademark Law Handbook, for the years 1987 to 1995.
The Board of Directors is divided into three classes, with Class I having
a term expiring in 1998, Class II having a term expiring in 1999, and Class III
having a term expiring in 2000. All directors hold office until the
51
<PAGE>
annual meeting of stockholders in the year in which their respective terms
expire or until their respective successors are duly elected and qualified.
After the expiration of a class's initial term, any director elected to such
class shall serve for a period of three years. Currently, Class I is comprised
of Messrs. Foster and Nederlander, Class II is comprised of Messrs. Berg and
Tratos, and Class III is comprised of Messrs. Haimovitz, Hope and Stuart.
Executive officers of the Company serve at the discretion of the Board and
until their successors are duly elected and qualified.
In connection with this offering, the Company has agreed that it will, for
a period of three years following the date of this Prospectus, upon the request
of the Underwriter, nominate and use its best efforts to elect a designee of
the Underwriter (which designee may change from time to time) as a director of
the Company or, at the Underwriter's option, appoint such designee as a
non-voting advisor to the Company's Board of Directors. The Underwriter has not
yet exercised its rights to designate such a person. See "Underwriting."
The Company has obtained key-man life insurance on the life of Mr. Stuart
in the amount of $5,000,000 and on the life of Mr. Hope in the amount of
$2,500,000.
Committees of the Board
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee determines salaries, bonuses and
other compensation matters for officers of the Company, determines employee
health and benefit plans, and administers the Company's stock option plans. The
Audit Committee recommends the appointment of the Company's independent public
accountants and reviews the scope and results of audits, internal accounting
controls, and tax and other accounting-related matters. Pursuant to the terms
of the Company's Bylaws, a majority of the members of the Audit Committee, and
all of the members of the Compensation Committee, must be non-employee
directors of the Company.
Director Compensation
Directors of the Company currently are not paid a fee for their services,
but are reimbursed for all reasonable expenses incurred in attending Board
meetings. In addition, each non-employee director will receive options under
the 1996 Stock Option Plan to purchase an aggregate of 10,000 shares of Common
Stock each year that the director serves as such a director (each such year, a
"Grant Year"), partially contingent upon the director's attendance at the
Company's four scheduled Board of Directors meetings during the Grant Year.
One-quarter of the annual option grant will vest as of each of the Grant Year's
first three scheduled Board of Director meetings and the remainder of such
option grant will vest as of the fourth scheduled meeting; provided, in the
latter case, that the director has attended all four of that Grant Year's
scheduled Board meetings.
Executive Compensation
Summary Compensation Table
The following table sets forth the cash compensation paid by the Company
for services rendered during the fiscal year ended December 31, 1996 to each
executive officer who received total compensation in excess of $100,000 (the
"Named Executive Officers"):
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
--------------------------------------------------- ----------------------------------
Securities
Other Annual Underlying All Other
Name and Principal Position Salary Bonus Compensation Options/SARs Compensation ($)
- --------------------------------- ---------- ---------------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
John W. Stuart, Chairman and
Chief Executive Officer ...... $250,000 -- $ 1,786,448(1) -- --
David Hope, President and Chief
Operating Officer(2) ......... $130,769 $ 42,155(3) $ 23,673(4) -- --
Kiranjit S. Sidhu, Senior Vice
President, Chief Financial
Officer and Treasurer ......... $123,461 -- $ 10,500(5) -- --
</TABLE>
52
<PAGE>
- ------------
(1) Represents a health insurance allowance of $6,024 and $1,780,424 in
compensation related to the Stuart Debt Forgiveness.
(2) Mr. Hope began his employment with the Company on April 15, 1996.
(3) Represents a bonus to be paid to Mr. Hope in 1997 for services rendered in
1996.
(4) Includes $9,212 representing car and health insurance allowances and
$14,461 representing non-recurring relocation-related expenses.
(5) Includes $3,500 representing car and health insurance allowances and $7,000
representing non-recurring relocation-related expenses.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding stock options
granted during the year ended December 31, 1996 to each of the Named Executive
Officers:
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Price Expiration
Name Granted (#)(1) Fiscal Year Per Share Date(1)
- ------------------------- ---------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C>
John W. Stuart ......... -- -- -- --
David Hope ............ 311,300(2) 57.5% $ 3.99(3) 8/6/05
Kiranjit S. Sidhu ...... 24,794(4) 4.6% $ 5.00 8/6/05
</TABLE>
- ------------
(1) These options were granted under the Option Plan, and have a term of ten
years, subject to earlier termination in certain events related to the
termination of employment or a change in control.
(2) Of such shares, 236,168 shares underlie non-qualified stock options which
vest as follows: 50% on the date of grant, 25% one year thereafter, and
25% two years thereafter. The 75,132 remaining shares underlie qualified
stock options which vest as follows: 33.3% on the date of grant, 33.3% one
year thereafter, and 33.3% two years thereafter.
(3) Represents the fair market value of the underlying Common Stock as
determined by the Board of Directors on the date of grant.
(4) All of such shares underlie qualified stock options which vest as follows:
33.3% on the first anniversary of the date of grant, 33.3% one year
thereafter and 33.3% two years thereafter. Does not include immediately
exercisable stock options to purchase 85,000 shares of Common Stock at
$4.00 per share which were granted to Mr. Sidhu in February 1997.
Fiscal Year-End Option Values
The following table sets forth certain information regarding options held
as of December 31, 1996 by each of the Company's Named Executive Officers. None
of the Named Executive Officers exercised options during the year ended
December 31, 1996:
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options
at Fiscal Year End (#) at Fiscal Year-End($)(1)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
John W. Stuart ......... -- -- -- --
David Hope ............ 143,128 168,172 -- --
Kiranjit S. Sidhu ...... -- 24,794 -- --
</TABLE>
- ------------
(1) There was no public trading market for the Common Stock as of December 31,
1996.
53
<PAGE>
Employment Contracts
John W. Stuart. On February 1, 1997, the Company entered into an
employment agreement with Mr. Stuart to employ him as its Chairman of the
Board and Chief Executive Officer until May 31, 2000. In accordance with this
employment agreement, Mr. Stuart receives an annual salary of $250,000 and may
receive annual salary increases of up to 10% of his base salary amount at the
discretion of the Compensation Committee of the Board of Directors. Mr. Stuart
will not be eligible to receive any bonuses during the initial term of his
employment agreement. Mr. Stuart is provided with a family health insurance
allowance of up to $600 per month and a $1,500 monthly automobile allowance.
The Company has the right to terminate Mr. Stuart's employment at any time,
without cause, provided that the Company pays Mr. Stuart a lump sum payment
equal to one year's base salary, car allowance and insurance allowance.
David Hope. On February 1, 1997, the Company entered into an amended
employment agreement with Mr. Hope to employ him as the President and Chief
Operating Officer of the Company until May 31, 2000. In accordance with this
employment agreement, Mr. Hope receives an annual salary of $220,000 until
April 14, 1998, after which time he may receive annual salary increases of up
to 10% of his base salary amount contingent upon meeting reasonable financial
performance goals as determined between Mr. Hope and the Compensation Committee
of the Board of Directors. For the years ended December 31, 1997, 1998 and
1999, Mr. Hope shall be entitled to receive a bonus equal to 2% of the
Company's audited pre-tax earnings, after deduction for non-
recurring charges such as original issue discount, compensation and interest
expense charges for each such year, provided that the Company achieves certain
designated financial goals for the respective year. See "-- Executive Bonus
Plan." Mr. Hope is currently provided with a family health insurance allowance
of up to $600 per month and a $500 monthly automobile allowance. In addition,
the Company has granted Mr. Hope 311,300 stock options under its Option Plan.
Mr. Hope has elected to classify 75,132 of said stock options as incentive
stock options of which one-third vest immediately, one-third vest on the first
anniversary of such grant, and the balance vest on the second anniversary of
such grant. The remaining 236,168 are to be classified as non-qualified
options, of which one-half vest immediately, one-quarter vest on the first
anniversary of such grant, and the balance vest on the second anniversary of
such grant. The exercise price of the options, whether they are qualified or
non-qualified, has been set at $3.99 per option which was the fair market value
thereof at the date Mr. Hope commenced his employment with the Company. All
other terms of Mr. Hope's option will be governed by the Option Plan and/or his
employment agreement, at the option of Mr. Hope. The Company shall have the
right to terminate Mr. Hope's employment agreement at any time, without cause,
provided that the Company pays Mr. Hope a lump sum payment on the date of such
termination equal to the greater of (i) his base salary, car allowance and
insurance allowance due from the date of termination up until April 1999, plus
any accrued bonus up until his date of termination and (ii) one year's base
salary, car allowance and insurance allowance, plus any accrued bonus up until
the date of termination. In addition, upon termination of Mr. Hope's
employment, without cause, Mr. Hope's non-vested options shall immediately
vest.
Kiranjit S. Sidhu. On February 1, 1997, the Company entered into an
amended employment agreement with Mr. Sidhu to employ him as its Senior Vice
President, Chief Financial Officer and Treasurer. Upon the consummation of this
offering, Mr. Sidhu's contract will extend until May 31, 2000; his annual
salary will be $150,000 until July 31, 1997, after which, he may receive annual
salary increases of up to 10% of his base salary amount at the discretion of
the Compensation Committee of the Board of Directors; he may receive a bonus
under the Executive Bonus Plan, at the discretion of the Board of Directors;
and, in addition to his salary, Mr. Sidhu will continue to receive a $300
monthly health insurance allowance and a $500 monthly automobile allowance. In
the event his employment is terminated, without cause, Mr. Sidhu will be
entitled to a lump sum payment equal to one year's base salary, car allowance
and insurance allowance and the vesting of all of his stock options. In
connection with his employment agreement, the Company has also granted to Mr.
Sidhu stock options to purchase a total of 109,794 shares of Common Stock under
the Option Plan. Of such options, options to purchase 85,000 shares were issued
in February 1997 and are immediately exercisable at $4.00 per share, and
options to purchase 24,794 shares were issued in August 1996 and will become
exercisable in accordance with the vesting parameters set forth in the Option
Plan, at the initial public offering price per share of the Common Stock. The
Company also issued to Mr. Sidhu the 40,532 CFO Shares pursuant to the terms of
his employment agreement in March 1997.
In connection with each of their respective employment agreements, each of
Messrs. Stuart, Hope and Sidhu also entered into a Confidentiality and
Non-Compete Agreement with the Company, which, in addition to
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<PAGE>
the obligations of confidentiality imposed upon each, provides that in the
event of the termination of an employment agreement for any reason, the Company
shall have the option to pay the respective employee at the date of termination
50% of such employee's base salary for five years (in the case of Mr. Stuart)
and two years (in the case of Messrs. Hope and Sidhu) in consideration for such
employee's covenant not to compete with the Company during such five-year and
two-year periods, respectively. In the case of Mr. Stuart, such non-compete
relates to any business associated with the live entertainment industry and, in
the case of each of Messrs. Hope and Sidhu, such non-compete relates to any
business associated with the theatrical segment of the live entertainment
industry.
1996 Stock Option Plan
The Option Plan was approved by the Board of Directors and the Company's
then sole stockholder on August 7, 1996. Pursuant to an amendment to the Option
Plan, the maximum number of shares of Common Stock available for issuance upon
exercise of options granted and available for grant under the Option Plan is
785,000 shares. The Option Plan is designed to further the interests of the
Company by strengthening the desire of employees to continue their employment
with the Company and by securing other benefits for the Company.
Under the Option Plan, a committee (the "Committee") has been appointed by
the Board of Directors to administer the Option Plan and is authorized, in its
discretion, to grant options thereunder to all eligible employees of the
Company, including certain officers and directors of the Company as well as to
others providing services to the Company. The Option Plan provides for the
granting of both (i) "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, which are intended to qualify for
special federal income tax treatment ("ISOs") to employees (including officers
and employee directors) and (ii) "non-qualified stock options" ("NQSOs") to
employees (including officers and employee directors) and consultants. Options
can be granted under the Option Plan on such terms and at such prices as
determined by the Committee, except that in the case of ISOs, the per share
exercise price of such options cannot be less than the fair market value of the
Common Stock on the date of grant. In the case of an ISO granted to a 10%
stockholder (a "10% Stockholder"), the per share exercise price cannot be less
than 110% of such fair market value. To the extent that the grant of an option
results in the aggregate fair market value of the shares with respect to which
incentive stock options are exercisable by a grantee for the first time in any
calendar year exceed $100,000, such option will be treated under the Option Plan
as an NQSO.
Options granted under the Option Plan will become exercisable after the
vesting period or periods specified in each option agreement. Except as
otherwise determined by the Committee, options become exercisable as to
one-third of the shares subject to the option on each of the first, second and
third anniversaries of the date of grant of the option. Options are not
exercisable, however, after the expiration of ten years from the date of grant
(or five years from such date in the case of an ISO granted to a 10%
Stockholder) and are not transferable other than by will or by the laws of
descent and distribution. Except as the Committee may determine with respect to
NQSOs, if the holder of an option granted under the Option Plan ceases to be an
employee, options granted to such holder shall terminate three months (12
months if the termination is a result of the death or disability of the
employee) from the date of termination of employment and shall be exercisable
as to only those options exercisable as of the date of termination.
As of the date of this Prospectus, options to purchase 657,403 shares have
been granted under the Option Plan, including options to purchase 311,300,
109,794, 18,000 and 13,224 shares granted to Messrs. Hope, Sidhu, Foster and
Grobl, respectively, and options to purchase an aggregate of 80,000 shares
granted, as of the date of this Prospectus, to the Company's four non-employee
directors, Messrs. Berg, Haimovitz, Nederlander and Tratos. See "Principal and
Selling Stockholders."
Executive Bonus Plan
In March 1997, the Company implemented a three-year Executive Bonus Plan,
which is administered by the Compensation Committee. Under the Executive Bonus
Plan, an annual bonus pool of up to 5% of the Company's audited pre-tax
earnings, after non-recurring charges such as original issue discount,
compensation and interest expense charges and excluding extraordinary items
("Pre-Tax Earnings"), may be established for distribution at the discretion of
the Company's Board of Directors, to the Company's executive officers (other
than
55
<PAGE>
Mr. Stuart, who is not eligible for bonuses under the plan) in 1998, 1999 and
2000, provided that the Company achieves at least minimum Pre-Tax Earnings for
the respective preceding fiscal year as follows:
Year Minimum Pre-Tax Earnings
---- ------------------------
1997 $1,850,000
1998 $5,000,000
1999 $8,700,000
The terms of the Executive Bonus Plan, including the minimum Pre-Tax
Earnings requirements set forth above, were determined by negotiations between
the Company and the Underwriter, and should not be construed to imply or
predict any future earnings of the Company.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus (giving
effect to the Pending Debt Conversion, which will occur immediately prior to
the consummation of this offering), and as adjusted to reflect the sale of the
1,400,000 Shares offered hereby, certain information known to the Company
regarding the beneficial ownership of the Common Stock by: (i) each person
known by the Company to own beneficially more than 5% of the outstanding Common
Stock; (ii) each director of the Company; (iii) each Named Executive Officer;
and (iv) all officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Percentage of
Outstanding Shares
Beneficially Owned(2)
Number of ----------------------
Name and Address of Shares Beneficially Before After
Beneficial Owner(1) Owned(2) Offering Offering
- ------------------------------------------------ --------------------- ---------- ---------
<S> <C> <C> <C>
John W. Stuart (3) ........................... 3,982,760 76.8% 60.5%
David Hope (4) ................................. 154,378 2.9% 2.3%
Neil H. Foster (5) ........................... -0- -- --
Kiranjit S. Sidhu (6) ........................ 131,157 2.5% 2.0%
Kenneth Berg (7) .............................. 158,756 3.1% 2.4%
James L. Nederlander (8) ..................... -0- -- --
Mark Tratos (9) .............................. -0- -- --
Jules Haimovitz (10) ........................... -0- -- --
All executive officers and directors as a group
(9 persons) (11) .............................. 4,427,051 81.5% 64.8%
</TABLE>
- ------------
(1) Unless otherwise indicated, the address for each named individual or group
is in care of the Company at the Company's address.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have 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. In accordance with the rules of the
Commission, a person is deemed to be the beneficial owner of Common Stock
that can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options or warrants. Each beneficial
owner's percentage ownership is determined by assuming that options and
warrants that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Prospectus have been exercised. Percentages herein assume a base of
5,184,480 shares of Common Stock outstanding prior to this offering
(including the 505,649 Debenture Shares) and a base of 6,584,480 shares of
Common Stock outstanding immediately after this offering.
(3) Includes 382,790 shares of Common Stock issuable by Mr. Stuart to third
parties upon the exercise of options granted by him to such persons,
including 35,813 shares of Common Stock issuable upon exercise of options
granted to Kenneth Berg, a director of the Company, none of which options
are currently exercisable.
(4) Includes 143,128 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options granted under the Option Plan and
6,250 Bridge Warrant Shares. Does not include 168,172 shares issuable upon
the exercise of stock options granted under the Option Plan that are not
currently exercisable.
(5) Does not include 18,000 shares of Common Stock issuable upon exercise of
stock options granted under the Option Plan that are not currently
exercisable.
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(6) Includes 85,000 shares of Common Stock issuable upon exercise of
immediately exercisable stock options granted under the Option Plan and
3,125 Bridge Warrant Shares. Does not include 24,794 shares of Common
Stock issuable upon exercise of stock options granted under the Option
Plan that are not currently exercisable.
(7) Includes 12,500 Bridge Warrant Shares. Does not include 35,813 shares of
Common Stock issuable upon the exercise of options granted to Mr. Berg by
Mr. Stuart and 20,000 shares of Common Stock issuable upon the exercise of
stock options granted under the Option Plan as director compensation
("Director Options"), none of which are currently exercisable. See
"Management -- Director Compensation" and "Certain Transactions."
(8) Does not include 10,000 shares of Common Stock issuable upon the exercise
of Director Options. See "Management -- Director Compensation."
(9) Does not include 20,000 shares of Common Stock issuable upon exercise of
Director Options. See "Management -- Director Compensation."
(10) Does not include 30,000 shares of Common Stock issuable upon exercise of
Director Options. See "Management -- Director Compensation."
(11) Includes 21,875 Bridge Warrant Shares and 228,128 shares of Common Stock
issuable upon exercise of immediately exercisable stock options granted
under the Option Plan. Does not include 390,025 shares issuable upon
exercise of stock options granted under the Option Plan, including 80,000
Director Options, that are not currently exercisable.
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<PAGE>
CERTAIN TRANSACTIONS
Kenneth Berg, a director of the Company, purchased four Debenture Units
for a total price of $200,000 in connection with the 1995 Private Placement and
subsequently exchanged them for Debentures in the principal amount of $200,000
in connection with the Exchange or Repurchase Offer. Such Debentures will be
converted into 59,000 Debenture Shares in connection with the Pending Debt
Conversion.
Pursuant to the September 1995 JDK Settlement Agreement, as compensation
for all of the services performed by JDK for, or on behalf of, the Company, the
Company issued to JDK and its designees, five-year warrants (the "JDK
Warrants") to purchase an aggregate of 337,609 shares of Common Stock at an
exercise price of $3.76 per share, which, as of the date of the JDK Settlement
Agreement, approximated the fair market value of the Common Stock. All of such
warrants were exchanged in the Warrant Exchange. Mr. Berg, who was one of the
largest investors in the 1995 Private Placement, received a portion of the JDK
Warrants and consequently received 77,256 of the Warrant Exchange Shares in the
Warrant Exchange.
In February 1996, John W. Stuart, the Chairman, Chief Executive Officer
and principal stockholder of the Company, granted options to acquire an
aggregate of 140,498 of his shares of Common Stock at an exercise price of
$4.54 per share to several persons and/or entities, including Mr. Berg, in
consideration for their assistance to the Company in its securing of the DYDX
Loan. Of such options, Mr. Berg received options to purchase 35,813 shares of
Common Stock. The term of such options is two years commencing on the first
anniversary of the first to occur of the following: (a) the Company becomes a
public company pursuant to Federal securities laws, through merger or
otherwise; (b) more than 50% of the Common Stock is acquired by a public
company; or (c) a registration statement registering the Common Stock is
declared effective by the Commission.
As of December 31, 1996, Mr. Stuart owed the Company a total of $1,637,413
principal amount under an 8% promissory note due in January 1998, plus accrued
interest thereon of $143,011. On, and as of such date, the Company forgave all
$1,780,424 of such indebtedness in connection with the Stuart Debt Forgiveness.
In addition, as of the date of this Prospectus, the Company has advanced an
additional $220,000 (including principal and interest) to Mr. Stuart since
December 31, 1996 and intends to forgive all of such amount immediately prior
to the consummation of this offering. The Company has agreed with the
Underwriter that it will not advance any further sums to or on behalf of Mr.
Stuart in the future.
In February 1997, Mr. Stuart granted to Senna, an affiliate of DYDX, an
option to purchase 142,292 of his shares of Common Stock at an exercise price
of $5.00 per share, in consideration for the Third Extension Agreement of the
DYDX Loan and DYDX's agreement in connection with such extension to allow the
Stuart Debt Forgiveness. Such option is exercisable for a period of three years
commencing as of February 9, 1998.
Mr. Stuart, in addition to being the Chairman and Chief Executive Officer
of the Company, is also the President and sole owner of LVHE, a Nevada
subchapter S corporation, which owns 40% of, and is a member of R.B.L.S., a
Nevada limited liability company. R.B.L.S., in turn, owns a 99% interest in
R.B.L.S. Partnership, which operates a Legends production at the Royal Hawaiian
Shopping Center in Honolulu, Hawaii. Mr. Stuart has a Management Agreement with
R.B.L.S., pursuant to which R.B.L.S. pays him a monthly management consulting
fee of $3,000 per week, provided Mr. Stuart or an approved representative makes
at least one trip to Hawaii to evaluate the production every two months. In
addition, according to the operating agreement of R.B.L.S., all members are to
share ratably in the profits or losses of R.B.L.S. As such, LVHE is entitled to
receive a 40% membership interest in the profits of R.B.L.S. However, as a
result of a dispute between LVHE and R.B.L.S. as to which of the two entities
is responsible for certain litigation related liabilities (the "Disputed
Liabilities"), R.B.L.S. is currently withholding membership profit
distributions from LVHE. The Disputed Liabilities relate to lawsuits which are
based on events that took place prior to the formation of R.B.L.S. and R.B.L.S.
Partnership when the Legends show in Hawaii was owned by LVHE. LVHE and
R.B.L.S. dispute whether these lawsuits were retained by LVHE or assumed by
R.B.L.S. when it acquired the Hawaiian Legends show from LVHE. LVHE has been
informed by R.B.L.S. that R.B.L.S. is funding the defense of these suits with
LVHE's membership profits. LVHE and R.B.L.S. also dispute which of them would
ultimately be responsible for any settlement payments or judgments if
unsuccessful.
In February 1997, the Company agreed, pursuant to a duly authorized board
resolution, that the services provided by Mr. Stuart to R.B.L.S. and/or LVHE
will not place him in a conflict of interest with his employment
59
<PAGE>
contract with the Company (which commenced as of February 1, 1997) on the
condition that all monies received by Mr. Stuart, either directly from R.B.L.S.
or through LVHE, are immediately paid to the Company as producer fees earned by
the Company for providing the services of Mr. Stuart. Simultaneously with such
board resolution, Mr. Stuart entered into the Stuart LVHE Agreement with the
Company pursuant to which he has agreed that, commencing as of February 25,
1997, he will pay any monies received by him from R.B.L.S., or through LVHE
from R.B.L.S., to the Company. The Company will book any such monies received
from Mr. Stuart, including both his R.B.L.S. membership profit and his
management consulting fees, as revenues in the form of producer's fees (in the
same manner that other such services are booked by the Company). As part of the
Stuart LVHE Agreement, Mr. Stuart has also agreed (i) to indemnify the Company
against any of the actions or liabilities of, or arising in connection with,
LVHE, R.B.L.S., R.B.L.S. Partnership or the other members of R.B.L.S.,
including their respective companies, which indemnity has been secured with
200,000 of his shares of Common Stock, and (ii) to contribute all of the
capital stock of LVHE (the "LVHE Stock"), as well as his rights under the
Management Agreement, to the Company whenever the Company deems such
contribution to be permissible under the terms of the R.B.L.S. operating
agreement (such a contribution may require the approval of the other members of
R.B.L.S.; however, LVHE is currently in disagreement with such members
vis-a-vis the Disputed Liabilities), which contribution pledge has been secured
with an additional 200,000 of Mr. Stuart's shares of Common Stock.
The Company leases from Mr. Stuart seven condominium units in Atlantic
City, New Jersey for use by the Company's performers. The current lease term
expires on June 30, 1997. The total lease payment to Mr. Stuart from the
Company is currently $7,833 per month, which amount the Company believes
approximates the fair market value for the use thereof. In addition, commencing
as of January 1, 1997, the Company is also paying, directly, the association
dues, insurance, taxes, maintenance and utilities on such apartments. The
Company paid aggregate rent to Mr. Stuart for such apartments of $47,000 and
$94,000 for the years ended December 31, 1995 and 1996, respectively.
Future transactions, if any, between the Company and any of its directors,
officers and/or 5% stockholders will be on terms no less favorable to the
Company than could be obtained from independent third parties and will be
approved by a majority of the independent, disinterested directors of the
Company.
DESCRIPTION OF SECURITIES
Capital Stock
General
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $1.00
per share. As of the date of this Prospectus, there are 4,678,831 shares of
Common Stock outstanding held by 29 stockholders and no shares of Preferred
Stock outstanding. Upon the consummation of this offering (assuming also the
consummation of the Pending Debt Conversion), there will be 6,584,480 shares of
Common Stock outstanding and no shares of Preferred Stock outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. If dividends are
declared, whether payable in cash, property or securities of the Company,
holders of the Common Stock are entitled to share equally in such dividends,
subject to the rights, if any, of the holders of any series of Preferred Stock.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after payment has been made to the holders of shares
of Preferred Stock, if any, for the full amount to which they are entitled,
each holder of Common Stock will be entitled to share equally in the assets
available for distribution.
Holders of shares of Common Stock have no preemptive rights to acquire any
additional shares of the Common Stock and have no cumulative voting rights. All
currently outstanding shares of Common Stock are duly authorized, validly
issued, fully paid and non-assessable.
60
<PAGE>
Preferred Stock
The Board of Directors is authorized, without further action by the
stockholders, to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix the designations, powers, preferences, privileges, and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Board of
Directors, without stockholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of
the holders of Common Stock.
Public Warrants
The Warrants offered hereby entitle the registered holder thereof (the
"Warrant Holders") to purchase one share of Common Stock at a price of $5.50,
subject to adjustment in certain circumstances at any time commencing August 13,
1998 (or such earlier date as to which the Underwriter consents) through and
including August 13, 2002. The Warrants will be separately transferable
immediately upon issuance.
The Warrants are redeemable by the Company, upon the consent of the
Underwriter, at any time commencing on August 13, 1998, upon notice of not less
than 30 days, at a price of $.10 per Warrant, provided that the closing bid
quotation of the Common Stock on all 20 trading days ending on the Call Date has
been at least 150% (currently $8.25, subject to adjustment) of the then
effective exercise price of the Warrants and the Company obtains the written
consent of the Underwriter to such redemption prior to the Call Date. The
Warrant holders shall have the right to exercise their Warrants until the close
of business on the date fixed for redemption.
The Warrants will be issued in registered form under a warrant agreement
by and among the Company, American Stock Transfer & Trust Company, as warrant
agent (the "Warrant Agent"), and the Underwriter (the "Warrant Agreement"). The
exercise price and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at prices below the
exercise price of the Warrants. Reference is made to the Warrant Agreement
(which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part) for a complete description of the terms and conditions
therein (the description herein contained being qualified in its entirety by
reference thereto).
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the Warrant Agent for
the number of Warrants being exercised. The Warrant holders do not have the
rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless, at the time of exercise, the
Company has filed a current registration statement with the Commission covering
the shares of Common Stock issuable upon exercise of such Warrant and such
shares have been registered or qualified or deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of such Warrant. The Company will use its best efforts
to have all such shares so registered or qualified on or before the exercise
date and to maintain a current prospectus relating thereto until the expiration
of the Warrants, subject to the terms of the Warrant Agreement. While it is the
Company's intention to do so, there can be no assurance that the Company will
be successful in registering such shares.
No fractional shares will be issued upon exercise of the Warrants.
However, if a Warrant holder exercises all Warrants then owned of record by
such Warrant holder, the Company will pay to such Warrant holder, in lieu of
the issuance of any fractional share which is otherwise issuable, an amount in
cash based on the market value of the Common Stock on the last trading day
prior to the exercise date.
61
<PAGE>
Bridge Warrants
There are currently outstanding 212,500 Bridge Warrants, each to purchase
one Bridge Warrant Share at an exercise price of $5.50 per share. The Bridge
Warrants are exercisable until March 19, 2002; however, neither the Bridge
Warrants nor the Bridge Warrant Shares are transferable by the holders thereof
until 24 months following the date of this Prospectus. The investors in the
Bridge Financing have been granted certain registration rights relating to the
Bridge Warrant Shares. See "-- Registration Rights."
Registration Rights
Upon the consummation of this offering, the holders of 1,161,188 shares of
Common Stock and the holders of the Bridge Warrants will be entitled to certain
rights with respect to the registration of such shares and the 212,500 Bridge
Warrant Shares, respectively, under the Securities Act.
The holders of the 440,755 Warrant Exchange Shares may request that the
Company file one registration statement under the Securities Act (a "Demand
Registration") with respect to such shares beginning on the earlier of (a) one
year following the date of this Prospectus, or (b) 20 trading days after
September 30, 1997, if the closing bid price of the Common Stock is at least
$8.75 for 20 consecutive trading days after September 30, 1997 (the "Early
Registration Condition"). In addition, beginning at the same time as the
foregoing Demand Registration right, whenever the Company proposes to register
any of its securities under the Securities Act for its own account or for the
account of other security holders, the Company shall be required to promptly
notify the holders of the Warrant Exchange Shares of the proposed registration
and include all Warrant Exchange Shares which such holders may request to be
included in such registration, subject to certain limitations (a "Piggyback
Registration"). The holders of an additional 19,284 shares of Common Stock have
the right to have such shares included in Piggyback Registrations commencing one
year after the consummation of this offering.
In connection with the Pending Debt Conversion, the Company has agreed to
file a registration statement under the Securities Act covering the 505,649
Debenture Shares by the first day of the tenth month following the date of this
Prospectus (the "Mandatory Registration"). In addition, if the Early
Registration Condition referred to above is met, the Company has agreed to file
a registration statement covering 25% of the Debenture Shares (an aggregate of
126,412 Debenture Shares) within one month following the completion of the
Early Registration Condition (the "Early Registration"). In the event the
Company does not file the Mandatory Registration or, if required pursuant to
the foregoing terms, an Early Registration, by the required dates, the Company
has agreed to issue to each holder of Debenture Shares five additional shares
of Common Stock for each 100 Debenture Shares held by such holder, on the first
day of each month that the respective registration statement continues not to
be filed.
In connection with the Bridge Financing, the Company has agreed to include
the 195,500 Bridge Shares and the 212,500 Bridge Warrant Shares (the
"Registrable Bridge Securities") in a registration statement which the Company
will prepare and file with, and use its best efforts to have declared effective
by, the Commission so as to permit the public trading of the Registrable Bridge
Securities pursuant thereto commencing no later than 24 months following the
consummation of this offering. If such registration statement is not declared
effective by the Commission within 24 months following the consummation of this
offering, then, commencing on the first day of the 25th month following the
consummation of this offering, the Company shall issue to each holder of
Registrable Bridge Securities, on the first day of each month that a
registration statement continues not to have been declared effective by the
Commission, such number of additional shares of Common Stock as is equal to 10%
of the number of Registrable Bridge Securities held by and/or issuable to each
holder thereof. In the event the Company fails to maintain the effectiveness of
a registration statement with respect to the Registrable Bridge Securities, the
Company is obligated to issue, on one occasion only, other added shares of
Common Stock.
In connection with this offering, the Company has agreed to grant to the
Underwriter certain demand and piggyback registration rights in connection with
the 254,500 shares of Common Stock issuable upon exercise of the Underwriter's
Warrants and the warrants included therein. See "Underwriting."
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock, and the Warrant
Agent for the Warrants, is American Stock Transfer & Trust Company, 40 Wall
Street, 46th Floor, New York, New York 10005.
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Nevada Law and Articles of Incorporation and Bylaws Provisions Affecting
Stockholders
The Company's Certificate of Incorporation, By-laws and the General
Corporation Law of the State of Nevada may have the effect, either alone or in
combination with each other, of making more difficult or discouraging a tender
offer, change in control or takeover attempt that is opposed by the Company's
Board of Directors.
Staggered Board
The Company's By-laws provide that the Board will be divided into three
classes of directors, with the classes to be as nearly equal in number as
possible. The By-laws provide that Class I shall be comprised of directors who
shall serve until the annual meeting of stockholders in 1998 and until their
successors shall have been elected and qualified. Class II shall be comprised
of directors who shall serve until the annual meeting of stockholders in 1999
and until their successors shall have been elected and qualified. Class III
shall be comprised of directors who shall serve until the annual meeting of
stockholders in 2000 and until their successors shall have been elected and
qualified. The classification of directors will have the effect of making it
more difficult for stockholders to change the composition of the Board of
Directors. The classification provisions could also have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to obtain control of the Company.
Control Share Acquisitions
Pursuant to Sections 78.378 to 78.3793 of the Nevada Revised Statutes (the
"NGCL"), an "acquiring person," who acquires a "controlling interest" in an
"issuing corporation," may not exercise voting rights on any "control shares"
unless such voting rights are conferred by a majority vote of the disinterested
stockholders of the issuing corporation at a special meeting of such
stockholders held upon the request and at the expense of the acquiring person.
In the event that the control shares are accorded full voting rights and the
acquiring person acquires control shares with a majority or more of all the
voting power, any stockholder, other than the acquiring person, who did not
vote in favor of authorizing voting rights for the control shares, is entitled
to demand payment for the fair value of his or her shares, and the corporation
must comply with the demand. For purposes of the above provisions, "acquiring
person" means (subject to certain exceptions) any person who, individually or
in association with others, acquires or offers to acquire, directly or
indirectly, a controlling interest in an issuing corporation. "Controlling
interest" means the ownership of outstanding voting shares of an issuing
corporation sufficient to enable the acquiring person, individually or in
association with others, directly or indirectly, to exercise (i) one-fifth or
more but less than one-third, (ii) one-third or more but less than a majority,
and/or (iii) a majority or more of the voting power of the issuing corporation
in the election of directors. Voting rights must be conferred by a majority of
the disinterested stockholders as each threshold is reached and/or exceeded.
"Control shares" means those outstanding voting shares of an issuing
corporation which an acquiring person acquires or offers to acquire in an
acquisition or within 90 days immediately preceding the date when the acquiring
person became an acquiring person. "Issuing corporation" means a corporation
that is organized in Nevada, has 200 or more stockholders (at least 100 of whom
are stockholders of record and residents of Nevada) and does business in Nevada
directly or though an affiliated corporation. The above provisions do not apply
if the articles of incorporation or by-laws of the corporation in effect on the
10th day following the acquisition of a controlling interest by an acquiring
person provide that said provisions do not apply. The Company's Bylaws exclude
the Company from the restrictions imposed by such provisions.
Certain Business Combinations
Sections 78.411 to 78.444 of the NGCL restrict the ability of a "resident
domestic corporation" to engage in any combination with an "interested
stockholder" for three years following the interested stockholder's date of
acquiring the shares that cause such stockholder to become an interested
stockholder, unless the combination or the purchase of shares by the interested
stockholder on the interested stockholder's date of acquiring the shares that
cause such stockholder to become an interested stockholder is approved by the
board of directors of the resident domestic corporation before that date. If
the combination was not previously approved, the interested stockholder may
effect a combination after the three-year period only if such stockholder
receives approval from a majority of the disinterested shares or the offer
meets certain fair price criteria. For purposes of the above
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provisions, "resident domestic corporation" means a Nevada corporation that has
200 or more shareholders. "Interested stockholder" means any person, other than
the resident domestic corporation or its subsidiaries, who is (i) the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the outstanding voting shares of the resident domestic corporation or (ii) an
affiliate or associate of the resident domestic corporation and, at any time
within three years immediately before the date in question, was the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the then
outstanding shares of the resident domestic corporation. The above provisions
do not apply to any combination of a resident domestic corporation; (i) whose
current articles of incorporation expressly state that the corporation is not
to be governed by these provisions; or (ii) that amends its articles of
incorporation through a vote of a majority of its stockholders, excluding any
interested stockholders, so as to expressly elect not to be governed by these
provisions. However, in the event a corporation amends its articles of
incorporation in accordance with subsection (ii), above, such an amendment
would not become effective until eighteen (18) months after its passage and
would apply only to stock acquisitions occurring after its effective date. As
noted above, the Company's Amended and Restated Articles of Incorporation do
not exclude the Company from the restrictions imposed by such provisions.
Indemnification of Officers and Directors
Subsection 1 of Section 78.751 of Chapter 78 of the NGCL empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that
the person did not act in good faith in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation and that, with
respect to any criminal action or proceeding, he had reasonable cause to
believe his action was unlawful.
Subsection 2 of Section 78.751 of the NGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that
he acted in any of the capacities set forth above, against expenses, including
amounts paid in settlement and attorneys' fees, actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in accordance with the standard set forth above, except that
no indemnification may be made in respect of any claim, issue or mater as to
which such person shall have been adjudged by a court of competent jurisdiction
after exhaustion of all appeals therefrom to be liable to the corporation or
for amounts paid in settlement to the corporation unless and only to the extent
that the court in which such action or suit was brought or other court of
competent jurisdiction determines that, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
Section 78.751 of the NGCL further provides that, to the extent a director
or officer of a corporation has been successful on the merits or otherwise in
the defense of any action, suit or proceeding referred to in subsection (1) and
(2), or in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification
provided for by Section 78.751 of the NGCL shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled and that the scope
of indemnification shall continue as to directors, officers, employees or
agents who have ceased to hold such positions, and to their heirs, executors
and administrators. Finally, Section 78.752 of the NGCL empowers the
corporation to purchase and maintain insurance on behalf of a director,
officer, employee or agent of the corporation against any liability asserted
against him or incurred by him in any such capacity or arising out of his
status as such whether or not the corporation would have the authority to
indemnify him against such liabilities and expenses.
64
<PAGE>
The Company's bylaws provide that directors, officers and certain other
persons may be indemnified to the fullest extent authorized by Nevada law. The
Nevada General Corporation Law provides that such indemnification would apply
if it were determined that the proposed indemnitee acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal proceeding, if he or
she had no reasonable cause to believe that the conduct was unlawful. In
actions brought by or in the right of the Company, such indemnification is
limited to reasonable expenses (including attorneys' fees) and amounts paid in
settlement, and applies if it is determined that the proposed indemnitee acted
in good faith and in a manner such person reasonably believed to be in, or not
opposed to, the best interests of the Company, except that no indemnification
may be made with respect to any matter as to which such person is adjudged
liable to the Company, unless, and only to the extent that, a court determines
upon application that, in view of all the circumstances of the case, the
proposed indemnitee is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper. To the extent that any Director, officer,
employee, or agent of the Company has been successful on the merits or
otherwise in defense of any of the foregoing actions, suits, or proceedings,
such person must be indemnified against reasonable expenses incurred by him in
connection with the defense of such action.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 6,584,480
shares of Common Stock outstanding, of which the 1,400,000 Shares offered
hereby will be freely tradable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate of
the Company" (in general, a person who has a controlling position with regard
to the Company), which will be subject to the resale limitations of Rule 144
promulgated under the Securities Act.
The remaining 5,184,480 shares of Common Stock outstanding are deemed to be
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, and may only be sold pursuant to an effective
registration under the Securities Act, in compliance with the exemption
provisions of Rule 144 or pursuant to another exemption under the Securities
Act. Such restricted shares of Common Stock will become eligible for sale, under
Rule 144, subject to certain volume limitations prescribed by Rule 144 and to
the agreements set forth below, at various times commencing 90 days following
the date of this Prospectus. The investors in the Bridge Financing have agreed
that their 195,500 Bridge Shares (as well as their Bridge Warrants and Bridge
Warrant Shares) may not be sold for a period of 24 months following the date of
this Prospectus, under any circumstances, and the holders of the 4,988,980 other
restricted shares have agreed not to sell any of their securities of the Company
for periods of between 10 and 12 months following the date of this Prospectus
without the Underwriter's prior written consent. Notwithstanding the preceeding,
of the aggregate 5,184,480 restricted shares currently outstanding, Mr. Stuart
may sell up to 50,000 shares of Common Stock owned by him, pursuant to Rule 144,
in the event the Company achieves pre-tax earnings (after original issue
discount, interest expense and compensation charges) for the year ended December
31, 1997 of $1,850,000.
In general, under Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or persons whose
shares are aggregated with an affiliate) who has owned restricted shares of
Common Stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the then outstanding shares of the issuer's Common Stock or the average
weekly trading volume during the four calendar weeks preceding such sale,
provided that certain public information about the issuer as required by Rule
144 is then available and the seller complies with certain other requirements.
A person who is not an affiliate, has not been an affiliate within three months
prior to sale, and has beneficially owned the restricted shares for at least
two years is entitled to sell such shares under Rule 144 without regard to any
of the limitations described above.
Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that market sales of Common
Stock or the availability of such shares for sale will have on
65
<PAGE>
the market price prevailing from time to time. Nevertheless, the possibility
that substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities.
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
1,400,000 Shares and 1,400,000 Warrants offered hereby. The Underwriter is
committed to purchase and pay for all of the Shares and Warrants offered hereby
if any of such securities are purchased. The Shares and Warrants are being
offered by the Underwriter subject to prior sale, when, as and if delivered to
and accepted by the Underwriter and subject to approval of certain legal
matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Shares and Warrants to the public at the public offering prices set forth on the
cover page of this Prospectus. The Underwriter may allow to certain dealers who
are members of the National Association of Securities Dealers, Inc. ("NASD")
concessions, not in excess of $.20 per Share and $.004 per Warrant, of which not
in excess of $.10 per Share and $.002 per Warrant may be reallowed to other
dealers who are members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days following the date of this Prospectus, to purchase up to 210,000
additional Shares and/or 210,000 additional Warrants at the respective public
offering prices set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. The Underwriter may exercise this
option in whole or, from time to time, in part, solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the
Shares and/or Warrants offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable expense
allowance equal to 3% of the gross proceeds of this offering, including the
gross proceeds from the sale of any Shares and Warrants sold pursuant to the
Underwriter's exercise of its over-allotment option, $50,000 of which has been
paid as of the date of this Prospectus. The Company has also agreed to pay all
expenses in connection with qualifying the Shares and Warrants offered hereby
for sale under the laws of such states as the Underwriter may designate,
including expenses of counsel retained for such purpose by the Underwriter.
The Company has agreed to issue to the Underwriter and its designees, for
an aggregate of $128.50, the Underwriter's Warrants to purchase up to 114,500
shares of Common Stock, at an exercise price of $8.25 per share (165% of the
public offering price per share), and/or up to 140,000 warrants (each to
purchase one share of Common Stock at $9.075 per share), at a purchase price of
$.165 per warrant (165% of the public offering price per Warrant). In addition,
an aggregate of 25,500 of the Bridge Shares have been included as compensation
to the Undewriter. The Underwriter's Warrants may not be transferred for one
year following the date of this Prospectus, except to the officers and partners
of the Underwriter and members of the selling group, and are exercisable at any
time and from time to time during the four-year period commencing one year
following the date of this Prospectus (the "Warrant Exercise Term"). During the
Warrant Exercise Term, the holders of the Underwriter's Warrants are given, at
nominal cost, the opportunity to profit from a rise in the market price of the
Company's Common Stock. To the extent that the Underwriter's Warrants are
exercised, dilution to the interests of the Company's stockholders will occur.
Further, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected since the holders of the Underwriter's
Warrants can be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable to
the Company than those provided in the Underwriter's Warrants. Any profit
realized by the Underwriter on the sale of the Underwriter's Warrants, the
underlying shares of Common Stock or the underlying warrants, or the shares of
Common Stock issuable upon exercise of such underlying warrants, may be deemed
additional underwriter compensation. Subject to certain limitations and
exclusions, the Company has agreed, at the request of the holders of a majority
of the Underwriter's Warrants, at the Company's expense, to register the
Underwriter's Warrants and the underlying securities under the Securities Act
on one occasion during the Warrant Exercise Term and to include such
Underwriter's Warrants and such underlying securities in any appropriate
registration statement which is filed by the Company during the seven years
following the date of this Prospectus.
66
<PAGE>
The Company has agreed, for a period of three years following the date of
this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. The Company's officers, directors and
substantially all of its stockholders have agreed to vote their shares of
Common Stock in favor of such designee. The Underwriter has not yet exercised,
and does not currently intend to exercise in the near future, its right to
designate such a person.
The Company has also agreed, in connection with the exercise of the
Warrants pursuant to solicitation (commencing one year following the date of
this Prospectus), to pay to the Underwriter a fee of 5% of the exercise price
for each Warrant exercised; provided, however, that the Underwriter will not be
entitled to receive such compensation in Warrant exercise transactions in which
(i) the market price of Common Stock at the time of the exercise is lower than
the exercise price of the Warrants; (ii) the Warrants are held in any
discretionary account; (iii) disclosure of compensation arrangements is not
made, in addition to the disclosure provided in this Prospectus, in documents
provided to holders of the Warrants at the time of exercise; (iv) the holder of
the Warrants has not confirmed in writing that the Underwriter solicited such
exercise; or (v) the solicitation of exercise of the Warrants was in violation
of Rule 101 promulgated under the Exchange Act.
Regulation M under the Exchange Act may prohibit the Underwriter
from engaging in any market-making activities with regard to the Company's
securities for the period from five business days (or such other applicable
period as Regulation M may provide) prior to any solicitation by the
Underwriter of the exercise of outstanding Warrants until the termination (by
waiver or otherwise) of any right that the Underwriter may have to receive a
fee for the exercise of the Warrants following such solicitation; and any
period during which the Underwriter, or any affiliated parties, participate in
a distribution of any securities of the Company for the account of the
Underwriter of any such affiliate. As a result, the Underwriter may be unable
to provide a market for the Company's securities during certain periods,
including while the Warrants are exercisable.
The holders of the 195,500 Bridge Shares (as well as the holders of the
212,500 Bridge Warrants) have agreed not to sell, under any circumstances, any
of such securities (or any Bridge Warrant Shares) for a period of 24 months
following the date of this Prospectus. All of the Company's current directors
and officers and other securityholders have agreed that, without the
Underwriter's prior written consent, for the 12-month period following the date
of this Prospectus (10-month period, in the case of the Debenture Shares), they
will not sell, pledge, hypothecate or otherwise dispose of any securities of the
Company in any public market transaction (including pursuant to Rule 144) or
exercise any rights held by them to cause the Company to register any shares of
Common Stock for sale pursuant to the Securities Act; provided, however, that
the Warrant Exchange Shares and 126,412 of the Debenture Shares may be earlier
released from the foregoing lock-up in the event the Early Registration
Condition is met. See "Description of Securities -- Registration Rights."
The Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed 1% of the securities offered hereby.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public market for the Shares or
Warrants. Consequently, the initial public offering prices for the Shares and
Warrants and the exercise price and terms of the Warrants have been determined
by negotiation between the Company and the Underwriter and are not necessarily
related to the Company's asset value, net worth or other established criteria
of value. Among the factors considered in determining such prices and terms re
the Company's financial condition and prospects, management, market prices of
similar securities of comparable publicly-traded companies, certain financial
and operating information of companies engaged in activities similar to those
of the Company and the general condition of the securities market.
In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
Common stock and Warrants. Specifically, the Underwriter may over-allot in
connection with the offering, creating a short position in the Common Stock
and/or Warrants for its own account. In addition, to cover over-allotments or
to stabilize the price of the Common stock and Warrants, the Underwriter may
bid for, and purchase, shares of Common Stock and Warrants in the open market.
The Underwriter may also reclaim selling concessions allowed to a dealer for
distributing the Common Stock and Warrants in the offering, if the Underwriter
repurchases previously distributed Common Stock and Warrants in transactions to
67
<PAGE>
cover short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock and
Warrants above independent market levels. The Underwriter is not required to
engage in these activities, and may end any of these activities at any time.
William G. Walters, the Chairman of Whale Securities Corp., the general
partner of the Underwriter, purchased one Debenture Unit for $50,000 in
connection with the 1995 Private Placement and subsequently exchanged it for a
Debenture in the principal amount of $50,000 in connection with the Exchange or
Repurchase Offer. Mr. Walter's Debenture will be converted into 14,750
Debenture Shares in connection with the Pending Debt Conversion.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Morgan, Lewis & Bockius
LLP, Philadelphia, Pennsylvania. Certain legal matters will be passed upon for
the Underwriter by Tenzer Greenblatt LLP, New York, New York.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified 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.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act with the Commission in Washington, D.C. with respect to the
securities offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the securities offered hereby,
reference is hereby made to the Registration Statement and the exhibits and
schedules filed as a part thereof. Statements contained in this Prospectus as
to the contents of any agreement or any other document referred to are not
necessarily complete, and in each instance, if such agreement or document is
filed as an exhibit, reference is made to the copy of such agreement or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the principal office of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, New York, New York 10048, and
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material may also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Company is required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The
Commission maintains a World Wide Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
68
<PAGE>
On Stage Entertainment, Inc.
Index to Financial Statements
Page
----
Independent Certified Public Accountant's Report ...... F-2
Financial statements
Balance sheets .................................... F-3
Statements of operations ........................... F-4
Statements of stockholder's equity (deficit) ...... F-5
Statements of cash flows ........................... F-6
Summary of accounting policies ..................... F-7 - F-9
Notes to financial statements ..................... F-10 - F-20
F-1
<PAGE>
Independent Certified Public Accountant's Report
Board of Directors and Stockholders of
On Stage Entertainment, Inc.
We have audited the accompanying balance sheet of On Stage Entertainment, Inc.
as of December 31, 1996, and the related statements of operations,
stockholder's deficit and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of On Stage Entertainment, Inc.
at December 31, 1996, and the results of its operations and its cash flows for
the two years then ended, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Los Angeles, California
February 4, 1997, except for Notes 1, 3,
5 and 9 which is as of March 26, 1997
F-2
<PAGE>
On Stage Entertainment, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
-------------- ---------------
(Unaudited)
<S> <C> <C>
Assets (Notes 3 and 9)
Current assets
Cash and cash equivalents .......................................... $ 290,751 $ 314,147
Accounts receivable ................................................ 490,465 319,866
Inventory ......................................................... 67,853 74,820
Deposits ......................................................... 231,601 353,571
Prepaid and other assets .......................................... 236,295 260,258
Pre-opening costs, net ............................................. 129,180 225,354
----------- -----------
Total current assets .......................................... 1,446,145 1,548,016
----------- -----------
Property, equipment and leasehold improvements (Notes 2 and 3) ...... 3,725,941 3,819,458
Less: Accumulated depreciation and amortization ..................... (1,937,718) (2,067,117)
----------- -----------
Property, equipment and leasehold improvements, net .................. 1,788,223 1,752,341
----------- -----------
Cost in excess of net assets acquired, net of accumulated amortization
of $1,053 and $2,632 (Note 5) ....................................... 62,123 60,544
Offering costs ...................................................... 657,801 868,235
Note receivable from stockholder (Note 7) ........................... -- 103,235
----------- -----------
$ 3,954,292 $ 4,332,371
=========== ===========
Liabilities and Stockholder's Deficit
Current liabilities
Accounts payable and accrued expenses .............................. $ 599,045 $ 592,422
Accrued payroll and other liabilities .............................. 621,986 564,842
Litigation settlement accrual .................................... 100,000 --
Current maturities of long-term debt (Note 3) ..................... 228,510 185,273
Bridge Notes (Note 9) ............................................. -- 556,000
----------- -----------
Total current liabilities ....................................... 1,549,541 1,898,537
----------- -----------
DYDX LP Loan (Note 3) ................................................ 750,000 750,000
Long-term debt, less current maturities (Note 3) ..................... 1,877,391 1,895,417
----------- -----------
Commitments and contingencies (Notes 4 and 9)
Stockholder's deficit (Notes 5 and 9)
Preferred stock, par value $1 per share, 1,000,000 shares autho-
rized; none issued and outstanding -- --
Common stock, par value $0.01 per share; authorized 25,000,000
shares; 4,002,044 and 4,683,331 shares issued and outstanding
(Note 9) ......................................................... 40,020 46,833
Additional paid-in-capital ....................................... 121,024 642,640
Accumulated deficit ................................................ (383,684) (901,056)
----------- -----------
Total stockholder's deficit .................................... (222,640) (211,583)
----------- -----------
$ 3,954,292 $ 4,332,371
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-3
<PAGE>
On Stage Entertainment, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
--------------------------------- ----------------------------
1995 1996 1996 1997
----------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenues .................................... $ 12,774,693 $14,278,082 $2,346,754 $2,718,777
Direct production costs ........................ 7,311,931 6,070,361 1,154,957 1,462,905
Indirect production costs ..................... 2,322,184 2,376,006 459,030 439,983
------------- ------------ ---------- ----------
Gross profit ................................. 3,140,578 5,831,715 732,767 815,889
------------- ------------ ---------- ----------
Operating expenses
Selling, general and administrative ......... 2,408,072 2,976,113 533,585 1,007,332
Depreciation and amortization (Note 2) ...... 524,969 676,306 123,701 147,241
Principal stockholder compensation
(Notes 7, 9) ................................. 1,286,113 1,109,511 62,500 62,500
------------- ------------ ---------- ----------
Total operating expenses .................. 4,219,154 4,761,930 719,786 1,217,073
------------- ------------ ---------- ----------
Operating income (loss) ........................ (1,078,576) 1,069,785 12,981 (401,184)
Interest, net ................................. 252,508 152,998 81,297 113,869
------------- ------------ ---------- ----------
Net income (loss) before income taxes ......... (1,331,084) 916,787 (68,316) (515,053)
Income taxes (Note 8) ........................ 1,950 15,789 0 2,319
------------- ------------ ---------- ----------
Net income (loss) .............................. $ (1,333,034) 900,998 $ (68,316) $(517,372)
============= ============ ========== ==========
Net income (loss) per share .................. $ (0.32) 0.22 $ (0.02) $ (0.12)
============= ============ ========== ==========
Weighted average number of common and
common equivalent shares ..................... 4,112,643 4,115,865 4,112,643 4,161,284
============= ============ ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-4
<PAGE>
On Stage Entertainment, Inc.
Statements of Stockholder's Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 .................. 3,982,760 $ 10,000 $ -- $ 78,180 $ 88,180
Net loss for the year ..................... -- -- -- (1,333,034) (1,333,034)
---------- --------- --------- ----------- -----------
Balance, December 31, 1995 ............... 3,982,760 10,000 -- (1,254,854) (1,244,854)
Effects of stock splits (Notes 5 and 9) . -- 29,828 -- (29,828) --
Acquisition of Interactive Events, Inc.
(Note 5) ................................. 19,284 192 121,024 -- 121,216
Net income for the year .................. -- -- -- 900,998 900,998
---------- --------- --------- ----------- -----------
Balance, December 31, 1996 ............... 4,002,044 $ 40,020 $121,024 $ (383,684) $ (222,640)
Issuance of Common Stock in connection with
the Bridge Financing (unaudited) (Note 9 200,000 2,000 364,300 -- 366,300
Issuance of Common Stock to CFO
(unaudited) (Note 9) ..................... 40,532 405 161,724 -- 162,129
Warrant exchange (unaudited)
(Note 9) ................................. 440,755 4,408 (4,408) -- --
Net loss for the period (unaudited) ...... -- -- -- (517,372) (517,372)
---------- --------- --------- ----------- -----------
Balance, March 31, 1997 (unaudited) ...... 4,683,331 $ 46,833 $642,640 $ (901,056) $ (211,583)
========== ========= ========= =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-5
<PAGE>
On Stage Entertainment, Inc.
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Three Months ended
Years ended December 31, March 31,
1995 1996 1996 1997
-------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ....................................... $ (1,333,034) $ 900,998 $ (68,316) $ (517,372)
------------ --------- --------- ----------
Adjustments to reconcile net loss to net cash pro-
vided by (used in) operating activities:
Depreciation and amortization ........................ 524,969 676,306 123,701 147,241
Loss on disposal of property and equipment ............ -- 53,983
Issuance of Common Stock to CFO ........................ -- -- -- 162,129
Increase (decrease) from changes in operating
assets and liabilities, net of effect from pur-
chase of Interactive Events, Inc. (Note 5):
Accounts receivable ................................. 23,236 (262,341) (31,474) 170,599
Inventory .......................................... -- (67,853) -- (6,967)
Offering costs .................................... (313,279) (344,522) (96,178) (162,728)
Deposits .......................................... (76,347) (86,816) (27,389) (121,970)
Pre-opening costs ................................. (83,574) (61,483) (42,442) (112,457)
Prepaid and other assets ........................... (55,875) (125,988) (39,715) (23,963)
Accounts payable and accrued expenses ............... 343,518 56,302 (251,648) (6,623)
Accrued payroll and other liabilities ............... 31,459 415,651 245,077 (57,144)
------------ --------- --------- ----------
Litigation settlement accrual ..................... -- -- -- (100,000)
Total adjustments .............................. 394,107 253,239 (120,068) (111,883)
------------ --------- --------- ----------
Net cash provided by (used in) operating activities ...... (938,927) 1,154,237 (188,384) (629,255)
------------ --------- --------- ----------
Cash used in investing activities
Advances on note receivable from stockholder ............ (122,824) (103,235)
Capital expenditures .................................... (932,449) (987,355) (178,151) (93,517)
Acquisition of Interactive Events, Inc., net of cash
acquired ............................................. -- 45,272 -- --
------------
Net cash used in investing activities ..................... (932,449) (942,083) (300,975) (196,752)
------------ --------- --------- ----------
Cash used in financing activities
Bank overdraft .......................................... (130,823) -- --
Borrowings/repayments under line of credit ............ 200,000 (200,000) (200,000) --
Proceeds from long-term borrowings ..................... 2,289,063 1,000,000 1,000,000 --
Repayments on long-term borrowings ..................... (92,448) (649,099) (46,617) (25,597)
Proceeds from short-term borrowings ..................... -- -- -- --
Repayments on short-term borrowings ..................... (374,318) (92,402) -- --
Proceeds from Bridge Financing ........................... -- -- -- 875,000
------------ --------- --------- ----------
Net cash provided by financing activities ............... 1,891,474 58,499 753,383 849,403
------------ --------- --------- ----------
Net increase in cash and cash equivalents ............... 20,098 270,653 264,024 23,396
Cash and cash equivalents at beginning of year ............ -- 20,098 20,098 290,751
------------ --------- --------- ----------
Cash and cash equivalents at end of year .................. $ 20,098 $ 290,751 $ 284,122 $ 314,147
============ ========= ========= ==========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest ................................................ $ 237,903 $ 287,047 $ 83,555 $ 67,072
Taxes ................................................... $ 1,950 $ 15,789 $ -- $ 2,319
============ ========= ========= ==========
</TABLE>
<PAGE>
Supplemental schedule of noncash investing and financing activities
During 1995 and 1996, $45,798 and $259,855 of lease assets and obligations
were capitalized.
On November 1, 1996, the Company issued 19,284 shares of common stock to
acquire all the net assets of Interactive Events, Inc. The stock was valued at
$121,216 on the date of the transaction. The total purchase price exceeded the
value of the net assets acquired by $63,176 which the Company has allocated to
cost in excess of net assets acquired.
During the three months ended March 31, 1997, the Company completed a
Bridge Financing of unsecured notes payable, common stock and warrants (Note
9). The common stock was valued at $444,000. As no consideration was paid for
the common stock, this amount was considered an original issue discount. During
the three months ended March 31, 1997, the Company exchanged all of its
outstanding warrants for 440,755 shares of common stock.
See accompanying summary of accounting policies and notes to
financial statements.
F-6
<PAGE>
On Stage Entertainment, Inc.
Summary of Accounting Policies
Business Activity
On Stage Entertainment, Inc. (the "Company") is engaged in the
entertainment industry, producing and distributing live stage productions with
continuous running shows in gaming and resort venues in Nevada, Missouri, South
Carolina, New Jersey, and Florida. The Company was incorporated on October 30,
1985 in the state of Nevada.
Accounts Receivable
Accounts receivable and revenue are recorded as the stage productions are
run. Accounts receivable represents cash collected subsequent to the year end
in which the show ran.
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
disclosures of contingent asset and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized as performances are completed.
Inventory
Inventory consists of various stage and lighting supplies and are stated
at cost on a first-in, first-out basis.
Property, Equipment and Leasehold Improvements
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to expense as incurred. Renewals or betterments of
significant items are capitalized. When assets are sold or otherwise disposed,
the cost and related accumulated depreciation or amortization are removed from
the respective accounts, and any resulting gain or loss is recognized.
Depreciation and amortization of property and equipment purchased prior to
January 1, 1996 are provided using accelerated methods while property and
equipment purchased from January 1, 1996 are depreciated on a straight line
basis over the estimated useful lives, as indicated below. Leasehold
improvements are amortized over the lesser of the useful life of the related
asset or the remaining lease term.
Years
-----
Stage equipment .................. 5-7
Scenery and wardrobe ............... 5-7
Furniture and fixtures ............ 5-7
Vehicles ........................... 3
Leasehold improvements ............ 10
Fair Value of Financial Instruments
The Financial Accounting Standards Board issued SFAS No. 107, Disclosures
about Fair Value of Financial Statements, which is effective December 31, 1995.
This statement requires the disclosure of estimated fair values for all
financial instruments for which it is practicable to estimate fair value.
F-7
<PAGE>
The carrying amounts of financial instruments including cash, accounts
receivable, inventory, current maturities of long-term debt, accounts payable,
accrued expenses and accrued payroll and other liabilities approximate fair
value because of their short maturity.
The carrying amount of long-term debt approximates fair value because the
interest rates on these instruments approximate the rate the Company could
borrow at December 31, 1996 and March 31, 1997.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS No. 109"), Accounting for Income Taxes. SFAS No. 109 requires an asset
and liability approach to providing deferred income taxes and specifies that
all deferred tax balances be determined by using the tax rate expected to be in
effect when the taxes will actually be paid or refunds received.
Pre-opening Costs
Pre-opening expenses include the cost incurred to prepare a production for
show. These costs are capitalized and amortized over one year or the life of
the show for those shows which have a minimum guaranteed period.
Cash Equivalents
The Company considers all liquid assets with an initial maturity of three
months or less to be cash and cash equivalents.
Net Loss Per Common Share
Loss per share is based upon the weighted average number of common shares
and common stock equivalents outstanding during each period, as adjusted for
the effect of the application of Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 83. Pursuant to SAB No. 83, common stock issued
by the Company at a price less than the initial public offering price during
the twelve months immediately preceding the initial filing of the offering
together with common stock options and convertible debt issued during such
period with an exercise price less than the initial public offering price, are
treated as outstanding for all periods presented. Loss per share is computed
using a treasury stock method, under which the number of shares outstanding
reflects an assumed use of the proceeds from the issuance of such shares and
from the assumed exercise of such options and convertible debts, to repurchase
shares of the Company's common stock at the initial public offering price.
Except for the provisions of SAB No. 83 described above, common stock
equivalents have been excluded in all years presented in the Statements of
Operations when the effect of their inclusion would be anti-dilutive.
Interim Financial Information
The interim financial statements for the three months ended March 31, 1996
and 1997 are unaudited. In the opinion of management, such statements reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the results of the interim period. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results for the entire year.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the FASB is effective for financial statements for
fiscal years beginning after December 15, 1995. The new standard establishes
guidelines regarding when impairment losses on long-lived assets, which include
plant and equipment, and certain identifiable intangible assets, should be
recognized and how impairment losses should be measured. The Company adopted
this accounting standard on January 1, 1996 and its effects on the financial
position and results of operations were immaterial.
F-8
<PAGE>
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FSAB) is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications is not permitted. The new
standard provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The Company
does not expect adoption to have a material effect on its financial position or
results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
SFAS 123 also encourages, but does not require companies to record compensation
cost for stock-based employee compensation. The Company has chosen to continue
to account for stock-based compensation utilizing the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
In February, 1997. the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). This pronouncement provides a
different method of calculating earnings per share than is currently used in
accordance with APB 15, Earnings per Share. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. This pronouncement is effective for fiscal years
and interim periods ending after December 15, 1997; early adoption is not
permitted. The Company has not determined the effect, if any, of adoption on
its EPS computations.
F-9
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements
(Information with respect to March 31, 1996 and 1997 is Unaudited)
1. Management Plans
The Company's continued growth depends on continued financing.
Management's plan for the Company includes raising additional working capital
through equity financing. The Company has completed a bridge financing of
$1,000,000 in March, 1997 ("Bridge Financing") and has entered into a letter of
intent with Whale Securities Co., L.P. ("Underwriter") relating to a proposed
initial public offering of its securities ("IPO") (see Note 9).
2. Property, Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
-------------- ---------------
(unaudited)
<S> <C> <C>
Stage equipment ....................................... $ 1,997,340 $ 2,124,060
Scenery and wardrobe .................................... 854,976 918,249
Furniture and fixtures ................................. 678,912 581,821
Vehicles ................................................ 6,434 6,434
Leasehold improvements ................................. 188,279 188,894
----------- -----------
3,725,941 3,819,458
Less accumulated depreciation and amortization ......... (1,937,718) (2,067,117)
----------- -----------
Total property, equipment and leasehold improvements, net $ 1,788,223 $ 1,752,341
=========== ===========
</TABLE>
3. Notes Payable and Long-Term Debt
In 1995, the Company negotiated bank financing of $600,000. Under the
terms of the financing agreements, the Company was granted a $200,000 line of
credit with an interest rate of 11.0% and a term loan of $400,000 with an
interest rate of 11.5%. Two performance contracts are pledged as collateral to
these loans. As of December 31, 1995, $200,000 had been drawn on the line of
credit and was repaid in full in 1996 and the line of credit expired in July
1996.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
-------------- ------------
(unaudited)
<S> <C> <C>
8% convertible subordinated debentures payable ("Deben-
tures"), due in monthly installments of interest only (a) . $ 1,714,064 $1,714,064
DYDX LP Loan (b) .......................................... 750,000 750,000
Bridge Notes (Note 9) ....................................... -- 556,000
11.5% note payable to bank, due in monthly installments of
$15,405, including interest through September 1997,
secured by two performance contracts ..................... 149,721 106,682
Capital lease obligations with interest ranging from 16.9%
to 20.8%, due in monthly installments ranging from
$102 to $1,633, including interest various maturities
dates through April 2000, secured by office and commu-
nication equipment 242,116 259,944
------------ -----------
Total long-term debt ....................................... 2,855,901 3,386,690
------------ -----------
Less current maturities .................................... 228,510 741,273
------------ -----------
$ 2,627,391 $2,645,417
============ ===========
</TABLE>
F-10
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
3. Notes Payable and Long-Term Debt -- (Continued)
Aggregate maturities of long-term debt are as follows:
Years ending
December 31, Amount
-------------- ------------
1997 ................... $ 228,510
1998 ................... 838,036
1999 ................... 1,786,625
2000 ................... 2,730
------------
$ 2,855,901
============
(a) From June through November 1995, the Company conducted a private
placement of units of its securities (the "Debenture Units"), each $50,000
Debenture Unit consisting of (i) a $50,000 principal amount 8% convertible
subordinated debenture of the Company due on August 31, 1997, with interest
payable monthly (the "Original Debentures") and (ii) the right, under certain
circumstances, to receive an A and a B Warrant of the Company, for aggregate
proceeds of $1,989,064 (the "1995 Private Placement"). The rights to receive
such A or B Warrants were subsequently terminated prior to the issuance of such
warrants.
In July 1996, in order to (i) extend the maturity date of the Original
Debentures and (ii) eliminate certain covenants in the Original Debentures that
were disadvantageous to the Company, the Company offered to either (a) exchange
the outstanding Debenture Units for Debentures due January 4, 1999, or (b) to
repurchase the Debenture Units upon the terms and subject to the conditions set
forth in an Offer to Exchange or Repurchase the Debenture Units, dated July 24,
1996 (the "Exchange or Repurchase Offer"). The Debentures issued in connection
with the Exchange or Repurchase Offer bear interest at the rate of 8% per
annum, payable monthly, and, when issued, were convertible at the option of
their holders into shares of Common Stock at the rate of 266.67 shares per each
$1,000 principal amount of Debenture at any time prior to maturity. There are
no warrants attached to the Debentures. In connection with the Exchange or
Repurchase Offer, the holders of $1,714,064 principal amount of the Original
Debentures tendered their Debenture Units in exchange for Debentures in the
same principal amount and holders of $275,000 principal amount of the Original
Debentures opted to have them repurchased. Consequently, the Company currently
has outstanding $1,714,064 principal amount of Debentures. In February 1997,
the Company and the Debenture holders entered into an agreement pursuant to
which all of the Debentures will automatically be converted into an aggregate
of 505,649 shares of Common Stock (the "Debenture Shares") immediately prior to
the consummation of an IPO, in connection with the Pending Debt Conversion,
based on a conversion ratio of 295 shares per each $1,000 principal amount of
Debenture (see Note 9).
(b) On February 29, 1996, the Company entered into a loan agreement with
DYDX (the "Original DYDX Agreement") pursuant to which the Company borrowed
$1,000,000 from DYDX. Under the Original DYDX Agreement, the DYDX Loan accrued
interest at a rate of 8% per annum, was to mature on January 1, 1998 and was
secured by a security agreement pursuant to which DYDX had a lien on
substantially all of the present and future assets of the Company. In addition,
under the terms of the Original DYDX Agreement, if the Company did not file an
initial public offering registration statement by June 30, 1996 it would be in
default under the DYDX Loan.
On June 27, 1996, the Company and DYDX entered into an Extension
Agreement, whereby the Company had to either file an initial public offering
registration statement or release a private placement memorandum to potential
investors by July 15, 1996 or it would be in default under the DYDX Loan.
Subsequently, on November 19, 1996, the Company and DYDX entered into a Second
Extension Agreement, whereby the date by which the Company had to file a
registration statement was extended until February 14, 1997. In connection with
this Second Extension, the Company repaid $250,000 principal amount of the DYDX
Loan, leaving an outstanding loan balance of $750,000. On February 9, 1997, the
Company and DYDX entered into a Third Extension Agreement, whereby the
Company's filing date was extended until March 31, 1997.
F-11
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
3. Notes Payable and Long-Term Debt -- (Continued)
In order to effect the Bridge Financing, the Company and DYDX entered into
an Amended and Restated Loan Agreement as of March 19, 1997 in connection with
which the security agreement executed in connection with the Original DYDX
Agreement and DYDX's security interest in the Company's assets were terminated,
the maturity date of the DYDX Loan was extended to coincide with that of the
Bridge Notes and its interest rate was raised to 9% per annum. The Company
intends to repay the DYDX Loan in full upon the consummation of, and using
proceeds from, the proposed IPO.
4. Commitments and Contingencies
Leases
The Company leases a theater in Myrtle Beach, South Carolina. The lease
was a one-year lease with two one-year options and one seven year option. If
all options are exercised, the lease will expire in December 2004. The Company
exercised the first and second options and intends to exercise the remaining
seven-year option. Lease expense escalates as follows, 1996, $300,000; 1997,
$330,000; 1998 through 2004, $350,000 each year.
The Company rents office and warehouse facilities under several operating
leases for $11,745 per month, all expiring February 1999. The leases have an
annual 5% escalation clause, effective each March. Monthly rents from March
1996 through February 1997 will be $12,332; from March 1997 through February
1998, $12,949; and from March 1998 through February 1999, $13,596. The Company
is responsible for insurance, personal property taxes, and repairs on the
property. The Company has an option to purchase the building for $1,300,000.
This option expires July 19, 1997.
The Company rents warehouse facilities for $897 per month through March
1998. The lease has an annual 5% escalation clause, effective each March.
Monthly rents from March 1996 through February 1997 will be $933 and from March
1997 through February 1998 will be $986.
The Company leases office space in Atlantic City, New Jersey for $380 per
month, expiring April 30, 1997.
The Company leases condominiums in New Jersey from its principal
stockholder on a one-year lease for $7,833 per month through June 1997.
The Company leased condominiums in Myrtle Beach, South Carolina for $5,390
per month through March 1996. The leases were automatically extended on a
month-to-month basis after that date.
The Company leases various office equipment under operating leases in
monthly installments totalling $848 per month with maturity dates through March
2000.
The Company leases the Coliseum Theater and related office space located
in Daytona Beach, Florida. The lease, which will expire in April 1998, provides
for monthly rent in the amount of $10,000. The Company has the option to extend
this lease until April, 2007.
The Company's Atlanta office consists of 6,000 square feet of office and
warehouse space located in Atlanta, Georgia. The lease expires on October 31,
1998 and the total rent for the premises is approximately $1,000 per month.
Rent and lease expense included in production costs for the three months
ended March 31, 1996 and 1997 was $120,778 and $138,781. Rent and lease expense
included in selling, general and administrative expenses for the three months
ended March 31, 1996 and 1997 was $39,383 and $49,714.
F-12
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
4. Commitments and Contingencies -- (Continued)
The total minimum rental commitment at December 31, 1996 is as follows:
Year ending December 31, Amount
------------------------ ------------
1997 .................. $ 761,530
1998 .................. 642,206
1999 .................. 497,218
2000 .................. 473,628
Thereafter ............ 1,523,628
------------
$ 3,898,210
============
Employment Contracts
The Company has employment agreements with certain executive officers and
employees, the terms of which expire at various dates through May, 2000. Such
agreements provide for minimum salary levels and incentive bonuses based on
prescribed formulas over their terms. These agreements were amended in February
1997 (see Note 9).
Aggregate commitments related to employment contracts are as follows:
Years ending December 31, Amount
------------------------- ------------
1997 ..................... $ 780,442
1998 ..................... 652,850
1999 ..................... 384,167
2000 ..................... 132,292
------------
$ 1,949,751
============
Legal Proceedings
The Company is a party to various legal proceedings in the ordinary course
of its business. The Company believes that the nature of the proceedings are
typical for a company of its size and scope in the entertainment industry, and
that none of these proceedings are material to its financial position, results
of operations and changes in cash flows.
5. Stockholder's Equity
Interactive Purchase
On November 1, 1996, the Company entered into a common stock purchase with
Interactive Events, Inc. ("Interactive"). Interactive is in the business of
creating and implementing interactive events for parties and conventions. The
terms of the agreement were that the owner of Interactive would receive 30,304
shares of the Company's common stock and an option to acquire 15,000 shares at
the IPO price exercisable for a five year period beginning at the date of the
IPO for a total purchase price of $121,216 which was based on the fair value of
the common stock at the date of the purchase. The common shares issued were
19,284 at November 1, 1996 with the remaining shares of 11,020 to be issued on
November 1, 1997. The transaction was accounted for as a purchase transaction.
All the assets and liabilities of Interactive were recorded at their fair value
of $58,040 at the date of the purchase and the Company recorded $63,176 as the
excess of the purchase price over the net assets acquired which is being
amortized over ten years. Since this is recorded as a purchase transaction, the
operations for Interactive are included in the Company's operations as of the
date of the acquisition.
F-13
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
5. Stockholder's Equity -- (Continued)
Warrants
In September 1995, the Company granted warrants to purchase an aggregate
of 382,927 shares of the Company's common stock for certain financial
consulting services and warrants to purchase an aggregate of 11,019 shares of
the Company's common stock for legal services, in each case provided in
connection with the 1995 Private Placement. These warrants are exercisable at
$3.76 per share, which approximates fair market value at the date of grant.
In connection with the closing of the DYDX Loan and subsequent extensions
(see Note 3(b)), the lender was issued warrants to purchase 550,974 shares of
the Company's common stock in February 1996 at an original exercise price per
share equal to the initial public offering price of the Company's common stock.
In connection with the Third Extension, on February 9, 1997, the Company split
the original DYDX warrant into two warrants, one in the name of DYDX for the
purchase of 440,779 shares of Common Stock and the other in the name of an
affiliate of DYDX, for the purchase of 110,195 shares of Common Stock, and
reduced the exercise price of both warrants to $3.99 per share which
approximated the fair market value on the date of the reduction.
The Company exchanged all of its outstanding warrants into shares of the
Company's common stock, on a cashless basis on March 17, 1997 ("Warrant
Exchange") (see Note 9).
1996 Stock Option Plan
The Option Plan was approved by the Board of Directors and the Company's
then sole stockholder on August 7, 1996. Pursuant to an amendment to the Option
Plan, effected on March 19, 1997, an aggregate of 785,000 shares of Common
Stock have been reserved for issuance pursuant to options granted and available
for grant under the Option Plan. The Option Plan is designed to further the
interests of the Company by strengthening the desire of employees to continue
their employment with the Company and by securing other benefits of the
Company.
Under the Option Plan, a committee (the "Committee") has been appointed by
the Board of Directors to administer the Option Plan and is authorized, to
grant options thereunder to all eligible employees of the Company, including
certain officers and directors of the Company as well as to others providing
services to the Company. The Option Plan provides for the granting of both (i)
"incentive stock options" as defined in Section 422 of the Internal Revenue
Code of 1986, as amended, which are intended to qualify for special federal
income tax treatment ("ISOs") to employees (including officers and employee
directors) and (ii) "non-qualified stock options" ("NQSOs") to employees
(including officers and employee directors) and consultants. Options can be
granted under the Option Plan on such terms and at such prices as determined by
the Committee, except that in the case of ISOs, the per share exercise price of
such options cannot be less than the fair market value of the Common Stock on
the date of grant. In the case of an ISO granted to a 10% stockholder (a "10%
Stockholder"), the per share exercise price cannot be less than 110% of such
fair market value. To the extent that the grant of an option results in the
aggregate fair market value of the shares with respect to which incentive stock
options are exercisable by a grantee for the first time in any calendar year
exceed $100,000, such option will be treated under the Option Plan as an NQSO.
Options granted under the Option Plan will become exercisable after the
vesting period or periods specified in each option agreement. Except as
otherwise determined by the Committee, options become exercisable as to
one-third of the shares subject to the option on each of the first, second and
third anniversaries of the date of grant of the option. Options are not
exercisable, however, after the expiration of ten years from the date of grant
(or five years from such date in the case of an ISO granted to a 10%
Stockholder) and are not transferable other than by will or by the laws of
descent and distribution.
F-14
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
5. Stockholder's Equity -- (Continued)
Except as the Committee may determine with respect to NQSOs, if the holder
of an option granted under the Option Plan ceases to be an employee, options
granted to such holder shall terminate three months (12 months if the
termination is a result of the death or disability of the employee) from the
date of termination of employment and shall be exercisable as to only those
options exercisable as of the date of termination.
Options
In March 1996, the Company hired a new President and Chief Operating
Officer (the "President"). As part of the new President's employment agreement,
the Company granted him options to purchase 311,300 shares of the Company's
common stock. The President has elected to classify 75,132 of the options as
ISOs which vest in three equal annual installments commencing on the date of
the grant. The remaining 236,168 are to be classified as NQSOs, of which
one-half vest immediately, one-quarter vest on the first anniversary of the
grant date, and the balance vest on the second anniversary of such grant. The
exercise price of all of the President's stock options is $3.99 per share,
which is the fair value at the date of grant.
In August 1995, the Company hired a new Chief Financial Officer ("CFO").
In connection with his employment the CFO was granted 24,794 stock options in
August 1996 which will vest in accordance with the vesting parameters set forth
in the 1996 Stock Option Plan at an exercise price equal to the sale price of
the Company's shares to the public in the IPO.
In February 1997 the CFO entered into an amended employment agreement
under which he was granted 85,000 additional stock options (see Note 9). In
August and December 1996, the Company granted options to purchase a total of
120,359 shares of the Company's common stock to certain other employees of the
Company.
These options were granted under the Company's 1996 Stock Option Plan and
have an exercise price of $5.00 per share. Unless otherwise determined by the
Committee, the options have a term of ten years from the date of grant and are
subject to earlier termination in certain events related to the termination of
employment. The options vest in three equal annual installments commencing on
the first anniversary of the date of the grant.
The option activity during the years ended December 31, 1995 and 1996 and
the three months ended March 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
----------- ---------
<S> <C> <C>
Outstanding at January 1, 1995 ........................ -- $ --
Granted ................................................ 24,794 $ 5.00
-------- -------
Outstanding at December 31, 1995 ..................... 24,794 $ 5.00
Granted ................................................ 431,659 $ 4.27
-------- -------
Outstanding at December 31, 1996 ..................... 456,453 $ 4.31
======== =======
Cancelled (unaudited) ................................. (26,535) $5.00
Granted (unaudited) .................................... 187,485 $4.55
-------- -------
Options Outstanding at March 31, 1997 (unaudited) ...... 617,403 $4.35
======== =======
Options exercisable at December 31, 1996 ............... 143,128 $ 3.99
======== =======
Options exercisable at March 31, 1997 (unaudited) ...... 228,128 $3.99
======== =======
</TABLE>
F-15
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
5. Stockholder's Equity -- (Continued)
Information relating to stock options and warrants at December 31, 1996
summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------------- ---------------------------
Weighted Average Weighted Average
Exercise Price -------------------------------------------- ---------------------------
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- ---------------- --------- ------------- ---------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$3.99 311,300 10 $3.99 143,128 $ 3.99
$4.00 85,000 10 $4.00 85,000 $4.00
$5.00 221,103 10 $5.00 -- --
-------- --- ----- -------- -------
617,463 10 $4.19 228,128 $3.99
======== === ===== ======== =======
</TABLE>
Information relating to stock options and warrants at March 31, 1997
summarized by exercise price are as follows (unaudited):
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------------- ---------------------------
Weighted Average Weighted Average
Exercise Price -------------------------------------------- ---------------------------
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- ---------------- --------- ------------- ---------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$3.99 311,300 10 $3.99 143,128 $3.99
$4.00 187,485 10 $4.00 85,000 $4.00
$5.00 118,618 10 $5.00 -- --
-------- --- ----- -------- ------
617,403 10 $4.19 228,128 $3.99
======== === ===== ======== ======
</TABLE>
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant, and
in accordance with accounting for such options utilizing the intrinsic value
method there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value at the grant dates consistent with the
method of SFAS 123, the Company's net income and earnings per share for the
years ended December 31, 1995 and 1996 and the three months ended March 31,
1997 would have been reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
Three months ended
March 31,
1995 1996 1996 1997
------------- -------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss
As reported ...... $ (412,121) $ (19,915) $ (68,316) $ (517,372)
Pro forma ......... $ (419,833) $ (446,460) $ (68,316) $ (739,836)
Loss per share
As reported ...... $ (.10) $ (.00) $ (.02) $ (.12)
Pro forma ......... $ (.10) $ (.11) $ (.02) $ (.18)
</TABLE>
The fair value of option grants is estimated on the date of grants
utilizing the Black-Scholes option-pricing with the following weighted average
assumptions for the year ended December 31, 1996 and the three months ended
March 31, 1997, expected life of 10 years: expected volatility of 2.42%,
risk-free interest rates of 6.0%, and a 0% dividend yield. The weighted average
fair values at date of grant for options granted during 1996 and the three
months ended March 31, 1997, approximated $1.60 and $1.48 per option,
respectively.
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above proforma numbers are
not indicative of the financial impact had the disclosure provisions of FASB
123 been applicable to all years of previous option grants. The above numbers
do not include the effect of options granted prior to 1995 that vested in 1995
and 1996.
F-16
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
5. Stockholder's Equity -- (Continued)
Stock Split
In June 1996, the Company effected a 72,550-for-1 split of its common
stock and increased the number, and par value, of the authorized shares of
common stock, from 100,000 to 25,000,000 shares and from a par value of $1.00
per share to $.01 per share. All common shares, common stock warrants, options
and grants and loss per share information disclosed in the financial statements
and notes have been adjusted to give retroactive effect for the stock split
(see Note 9).
6. Significant Venues and Concentration of Credit Risk
Revenues from certain venues comprised 10% or more of total revenues. The
following table shows the percentage of revenues of these venues to total
revenues.
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
---------------------------- ---------------------------
1995 1996 1996 1997
------ ------ ------------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Venue A ...... 34% 29% 47% 36%
Venue B ...... 12 11 16 14
Venue C ...... 22 32 18 18
Venue D ...... -- 12 -- --
---- --- ---- ----
68% 84% 81% 68%
==== === ==== ====
</TABLE>
7. Note Receivable from CEO and Principal Stockholder
At December 31, 1995, the Company had a note receivable of $920,913 from
the Chief Executive Officer and principal stockholder of the Company. During
the year ended December 31, 1996, the Company advanced an additional $716,500
evidenced by three promissory notes. As of December 31, 1996, the total amount
due from the Chief Executive Officer and principal stockholder of the Company
was $1,780,424. The notes bore interest at 8% per annum and were due on June
30, 1997. At December 31, 1996 the note receivable balance included accrued
interest income of $143,011.
As of December 31, 1996, the Company agreed to forgive all $1,780,424 of
the outstanding amount due from the principal stockholder. Consequently,
$920,913 and $859,511 of such amount were included as part of principal
stockholder compensation in the Statement of Operations for the years ended
December 31, 1995 and 1996, respectively. In connection with the Company's
agreement with the Underwriter relating to the Bridge Financing, the Company
agreed not to advance more than an additional $200,000 to the principal
stockholder retroactively as of January 1, 1997 and that, in the future, it
will not forgive more than $220,000 aggregate amount of additional indebtedness
(including interest) incurred by the principal shareholder since December 31,
1996. As of March 31, 1997, the Company had advanced $103,235 to the principal
stockholder.
8. Income Taxes
Income taxes in the statement of operations consists of the following:
Three months ended
Years ended December 31, March 31,
---------------------- ----------------------------
1995 1996 1996 1997
--------- ---------- ------------- ------------
(unaudited) (unaudited)
Current
Federal ...... $ -- $ -- $-- $ --
State ......... 1,950 15,789 -- 2,319
-------- --------- ---- -------
$ 1,950 $ 15,789 $-- $2,319
======== ========= ==== =======
F-17
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
8. Income Taxes -- (Continued)
Deferred taxes are as follows:
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
1996 1997
-------------------------- -------------------
(unaudited)
<S> <C> <C>
Deferred tax assets:
Litigation accrual .................. $ 34,000 $ --
Net operating loss carryforward ...... 223,453 399,448
--------- ---------
Total deferred tax assets ............... 257,453 399,448
Deferred tax liability:
Pre-opening costs ..................... (43,921) (51,974)
--------- ---------
Net deferred tax assets ............... 213,532 347,474
Less: Valuation allowance ............... (213,532) (347,474)
--------- ---------
$ -- $ --
========= =========
</TABLE>
The net deferred tax assets have a 100% valuation allowance as management
cannot determine if it is more likely than not that the deferred tax assets
will be realized.
Income taxes in the statement of operations differs from the amount
computed by applying the U.S. Federal income tax rate (34%) because of the
effect of the following items:
<TABLE>
<CAPTION>
Three months
Years ended December 31, ended March 31,
--------------------------- ----------------------------
1995 1996 1996 1997
------------- ----------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
U.S. Federal statutory rate applied to pretax
income (loss) .................................... $ (453,232) $306,339 $(22,888) $(175,906)
Permanent differences ........................... 510 510 500 500
State income taxes, net of Federal benefit ...... 1,950 15,789 -- 2,319
Benefit of net operating loss carryforward ...... -- (306,849) -- --
Tax effect of unrecognized net operating loss
carryforward .................................... 452,722 -- 22,388 175,406
----------- --------- --------- ----------
$ 1,950 $ 15,789 $ -- $ 2,319
=========== ========= ========= ==========
</TABLE>
At December 31, 1996 and March 31, 1997, the Company had Federal net
operating loss carryforwards of approximately $657,214 and $1,174,847,
respectively. Under Federal Tax Law IRC Section 382, certain significant
changes in ownership that the Company is currently undertaking may restrict the
future utilization of these tax loss carryforwards.
9. Subsequent Events
Warrant Exchange
On March 17, 1997, the Company exchanged all of its outstanding warrants
for shares of its common stock (the "Warrant Exchange Shares") (the "Warrant
Exchange"). The number of Warrant Exchange Shares issued to each warrant holder
in the Warrant Exchange was equal to the number of warrants held by such holder
divided by the exercise price of the holder's warrants, based on the number and
price of the warrants prior to the Reverse Split. As a result of the Warrant
Exchange, all of the Company's currently outstanding warrants were canceled and
exchanged for a total of 799,956 Warrant Exchange Shares on a pre-Reverse Split
basis, which amount was reduced to 440,755 shares in connection with the
Reverse Split. The Warrant Exchange had no effect upon the Company's earnings.
F-18
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
9. Subsequent Events -- (Continued)
Reverse Stock Split and Other Stock Transactions
On March 18, 1997, the Company effectuated a 1 for 1.814967 reverse stock
split of the Company's common stock ("Reverse Split"). Accordingly, $29,828 was
transferred from retained earnings to common stock and the Company has retired
26,422 of the principal stockholder's shares of common stock. All common
shares, common stock warrants, options and grants and loss per share
information disclosed in the financial statements and notes have been adjusted
to give effect to the Reverse Split and the retirement of the principal
stockholder common stock.
Bridge Financing
On March 26, 1997, the Company completed a Bridge Financing of $1,000,000
of unsecured non-negotiable notes, common stock and warrants through the
Underwriter. Each Bridge Unit consisted of (i) a 9% promissory note of the
Company in the principal amount of $50,000, maturing upon the consummation, and
payable out of the proceeds of the proposed IPO, (ii) 10,000 shares of Common
Stock and (iii) 12,500 warrants, each to purchase one share of Common Stock at
an exercise price of $4.00 per share. None of the securities issued in
connection with the Bridge Financing may be transferred until 12 months
following the proposed IPO. The net proceeds to the Company after deducting the
Placement Agent's commissions and other offering expenses were $825,000. The
Common Stock was assigned a value of $444,000. As no consideration was paid for
the Common Stock, this amount is considered an original issue discount and will
be amortized to interest expense over the term of the related notes payable.
Debt Conversion
The Company currently has outstanding $1,714,064 principal amount of
Debentures. The conversion ratio for the Debentures is 266.67 shares of Common
Stock per each $1,000 principal amount of Debenture, which, if all of the
Debentures were converted, would result in the issuance of an aggregate of
457,092 shares of Common Stock (the "Debenture Shares"). In February 1997, the
Company and the Debenture holders entered into an agreement pursuant to which
all of the Debentures will be converted into 505,649 Debenture Shares, based on
an increased conversion ratio of 295 shares per each $1,000 principal amount of
Debenture, immediately prior to the consummation of the proposed IPO (the "Debt
Conversion"). If effected, the Debt Conversion will result in a one time,
non-recurring, interest expense charge to the Company in the estimated amount
of $194,228.
Proposed Initial Public Offering
The Company has a letter of intent with the Underwriter in connection with
its proposed underwriting of an IPO of 1,400,000 shares of the common stock of
the Company and warrants to purchase 1,400,000 shares of the common stock of
the Company for anticipated aggregate gross proceeds of approximately
$7,140,000.
Employment Contracts
On February 1, 1997, the Company entered into an employment agreement with
the principal stockholder to employ him as its Chairman of the Board and Chief
Executive Officer until May 31, 2000. In accordance with this employment
agreement, the principal stockholder will receive an annual salary of $250,000
and may be entitled to receive an annual 10% increase of his base salary
amount. The Company has the right to terminate the principal stockholder's
employment at any time without cause, provided that the Company pays the
principal stockholder a lump sum payment equal to one year's base salary, car
allowance and insurance allowance. Also in February 1997, the Company amended
the employment agreements with the CFO and the President and extended their
agreements to May 31, 2000. In connection with each of their respective
employment agreements, the CEO, President and CFO also entered into a
confidentiality and non-compete agreements with the Company.
F-19
<PAGE>
On Stage Entertainment, Inc.
Notes to Financial Statements -- (Continued)
(Information with respect to March 31, 1996 and 1997 is Unaudited)
9. Subsequent Events -- (Continued)
In connection with the CFO's amended employment agreement the Company has
granted him options to purchase 85,000 shares of common stock, which are
immediately exercisable at $4.00 per share, which represented the fair market
value of the Common Stock on the date of grant. The Company also issued the CFO
40,532 shares of Common Stock upon the closing of the Bridge Financing. The
issuance of these shares will result as a one time compensation charge to the
Company of $162,128.
Non-employee Directors' Options
On or about January 1, 1997, (and again on March 17, 1997, when two new
non-employee directors were elected) the Company issued an aggregate of 80,000
options to its non-employee directors under the Company's 1996 Option Plan. The
Options have a strike price of $5.00 per share and vest at the rate of 2,500
options per board meeting actually attended, up to a maximum vesting of 10,000
options in any given year. These options are accounted for in accordance with
SFAS No. 123. Compensation expense in connection with the non-employee director
grants were not recorded in the accompanying financial statements as it was
considered immaterial.
Executive Bonus Plan
In March 1997, the Company implemented a three-year Executive Bonus Plan,
administered by the Compensation Committee. Under the Executive Bonus Plan an
annual bonus pool of up to 5% of the Company's audited pre-tax earnings, after
non-recurring charges such as original issue discount, compensation and
interest expense charges and excluding extraordinary items ("Pre-Tax
Earnings"), may be established for distributions at the discretion of the
Company's Board of Directors, to the Company's executive officers (other than
the Chairman and CEO who is not eligible for bonuses under the plan) in 1998,
1999 and 2000, provided that the Company achieves at least minimum Pre-Tax
Earnings for the respective preceding fiscal year as follows:
Minimum
Pre-Tax
Year Earnings
---- ------------
1997 .................. $ 1,850,000
1998 .................. 5,000,000
1999 .................. 8,700,000
F-20
<PAGE>
===============================================================================
No dealer, sales person or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the secur- ities offered by this
Prospectus, or an offer to sell or a solicitation of an offer to buy any
securities by anyone in any jurisdiction in which such offer or solicitation is
not authorized or is unlawful. The delivery of this Prospectus shall not, under
any circumstances, create any implication that the information contained herein
is correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
Page
------
Prospectus Summary ..................... 3
Risk Factors ........................... 9
Use of Proceeds ........................ 18
Dilution ................................. 19
Dividend Policy ........................... 20
Capitalization ........................... 21
Selected Financial Data .................. 22
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ........................... 23
Business ................................. 33
Management .............................. 50
Principal and Selling Stockholders ...... 57
Certain Transactions ..................... 59
Description of Securities ............... 60
Shares Eligible for Future Sale ......... 65
Underwriting ........................... 66
Legal Matters ........................... 68
Experts ................................. 68
Additional Information .................. 68
Index to Financial Statements ............ F-1
------------------------
Until September 7, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the shares of Common Stock offered hereby,
whether or not participating in this distribution, 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.
===============================================================================
<PAGE>
===============================================================================
[LOGO]
1,400,000 Shares
of Common Stock
and
Redeemable Warrants to
Purchase 1,400,000 Shares of
Common Stock
------------
PROSPECTUS
------------
Whale Securities Co., L.P.
August 13, 1997
===============================================================================
