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As filed with the Securities and Exchange Commission on July 2, 1998
Registration No. 333-56785
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ON STAGE ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
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Nevada 7929 88-0214292
(State or other jurisdiction of (Primary Standard Industrial) (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
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4625 West Nevso Drive
Las Vegas, NV 89103
(702) 253-1333
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------------------------
Christopher R. Grobl, Esq.
On Stage Entertainment, Inc.
4625 West Nevso Drive
Las Vegas, NV 89103
(702) 253-1333
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------------------
Copies of all communications to:
James W. McKenzie, Jr., Esq.
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Telephone: (215) 963-5000
Facsimile: (215) 963-5299
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |
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CALCULATION OF REGISTRATION FEE
==============================================================================================================================
Title of each class of Amount to Proposed maximum Proposed maximum Amount of
securities to be registered be registered aggregate price per share(1) aggregate offering price(1) registration fee(2)
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Common Stock, par value 905,649 $4.1875 $3,792,405.1875 $1,118.76
$.01 per share.............
==============================================================================================================================
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act based upon the average
of the high and low sales prices reported for such security by the Nasdaq
SmallCap Market on June 29, 1998.
(2) Of this total, $699.22 was paid at the time of the original filing of this
Registration Statement for the 505,649 shares covered thereby at a maximum
offering price of $4.6875 per share. The balance of $419.54 is applicable
to the shares added by this amendment at a maximum offering price of
$4.1875 per share and is being paid upon the filing of this amendment.
----------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
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SUBJECT TO COMPLETION, DATED JULY 2, 1998
PROSPECTUS
ON STAGE ENTERTAINMENT, INC.
905,649 Shares of Common Stock
This Prospectus covers 905,649 shares (the "Shares") of Common Stock,
$.01 par value per share (the "Common Stock"), of On Stage Entertainment, Inc.
(the "Company") offered for the account of certain stockholders of the Company
(the "Selling Stockholders") as described more fully herein. 505,649 shares of
Common Stock offered hereby were issued to certain Selling Stockholders
immediately prior to the Company's initial public offering (the "IPO") in
exchange for their agreement to convert an aggregate of $1,714,064 in
outstanding Company debentures into 505,649 shares of Common Stock (the
"Debenture Conversion"). 400,000 shares of Common Stock offered hereby were sold
to certain of the Selling Stockholders by John W. Stuart, the Chairman and Chief
Executive Officer of the Company, for aggregate consideration of $1,200,000 in
privately negotiated transactions. The Company has agreed to register the Shares
offered hereby.
The Shares may be offered by the Selling Stockholders from time to time
in transactions (which may include block transactions) on the Nasdaq SmallCap
Market, in negotiated transactions, through a combination of such methods of
sale, or otherwise, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling
Stockholders may effect such transactions by selling the Shares to or through
broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of the Shares for whom such broker-dealers may act as agents or to whom they may
sell as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions). The Company will not receive any
of the proceeds from the sale of the Shares by the Selling Stockholders. The
Company has agreed to bear all expenses of registration of the Shares, but all
selling and other expenses incurred by the Selling Stockholders will be borne by
the Selling Stockholders. The Company is registering the Shares pursuant to a
contractual obligation that the Company has to the Selling Stockholders.
The Selling Stockholders and any broker-dealers, agents or underwriters
that participate with the Selling Stockholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any commissions paid or any
discounts or concessions allowed to any such persons, and any profits received
on the resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Selling Stockholders"
and "Plan of Distribution."
The Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "ONST." On June 29, 1998, the closing price of the Common Stock, as
reported by the Nasdaq SmallCap Market, was $4.1875 per share.
----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
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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.
----------
NO 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, THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF
COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
The date of this Prospectus is _____________, 1998
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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.
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 produces and markets live theatrical productions and
operates live theaters and dinner theaters worldwide. 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 and Atlantic City. The Company currently has full-scale,
resident Legends productions running at the Imperial Palace in Las Vegas,
Nevada, Bally's Park Place in Atlantic City, New Jersey, Surfside Theater in
Myrtle Beach, South Carolina, Legends Family Theater in Branson, Missouri,
Legends Theater at the Sheraton Centre in Toronto, Canada and at the Estrel
Residence & Congress Hotel in Berlin, Germany. 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. Also, separate from the
Legends shows and as discussed below, the Company operates King Henry's Feast,
Wild Bill's Dinner Extravaganza and Blazing Pianos(R) ("Blazing Pianos") in the
greater Orlando area as well as Legends of Country in Buena Park, California.
In addition to Legends, the Company has developed and produced 18 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 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
approximately 75 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.
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 187 impersonators and over 255 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 14 subsidiaries: Legends in Concert, Inc., a Nevada corporation; On
Stage Marketing, Inc., a Nevada corporation; Interactive Events, Inc., a Georgia
corporation; On Stage Theaters, Inc., a Nevada corporation; Fort Liberty, Inc.,
a Nevada corporation; Wild Bill's California, Inc., a Nevada corporation;
Blazing Pianos, Inc. a Nevada corporation; King Henry's Inc., a Nevada
corporation; On Stage Theatres Canada, Inc., an Ontario limited liability
company; On Stage Productions, Inc., a Nevada corporation; On Stage Casino
Entertainment,
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Inc., a Nevada corporation; On Stage Events, Inc., a Nevada corporation; On
Stage Theaters North Myrtle Beach, Inc., a Nevada corporation; and On Stage
Theaters Surfside Beach, Inc., a Nevada corporation.
The Offering
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Common Stock offered................................. 905,649 Shares
Common Stock outstanding............................. 7,397,350 Shares(1)
Use of Proceeds...................................... All of the proceeds from the sale of the shares offered hereby will
be received by the Selling Stockholders. The Company will not
receive any of the proceeds from the sale of such shares.
Risk Factors......................................... The securities offered hereby are speculative and involve a high
degree of risk and should not be purchased by investors who cannot
afford the loss of their entire investment. See "Risk Factors."
Nasdaq symbol........................................ ONST
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(1) Does not include: (i) 1,610,000 shares of Common Stock reserved for
issuance upon exercise of redeemable warrants to purchase Common Stock
(the "Warrants"); (ii) an aggregate of 254,500 shares of Common Stock
reserved for issuance upon the exercise of certain warrants (the
"Underwriter's Warrants") sold by the Company to the underwriter of the
IPO, Whale Securities Co., L.P. (the "IPO Underwriter") in connection
with the IPO; (iii) 773,853 shares of Common Stock reserved for
issuance upon the exercise of options granted, and 626,147 shares of
Common Stock reserved for issuance upon the exercise of options
available for future grant, under the Company's Amended and Restated
1996 Stock Option Plan, as amended (the "Option Plan"); (iv) 15,000
shares of Common Stock reserved for issuance upon exercise of an
outstanding non-plan option; (v) 200,000 shares of Common Stock
issuable upon the exercise of a warrant issued to Gerard O'Riordan in
connection with the acquisition by the Company of certain assets of
Gedco USA, Inc. ("Gedco"); (vi) an aggregate of 575,000 shares of
Common Stock issuable upon the exercise of warrants issued to Imperial
Credit Commercial Mortgage Investment Corp. ("ICCMIC") and Imperial
Capital Group, LLC in connection with a $12,500,000 loan extended by
ICCMIC to several subsidiaries of the Company; (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, securities issued
in connection with the sale by the Company on March 26, 1997 of
investment units to various investors for gross proceeds of $1,000,000
(the "Bridge Financing"); (viii) 212,500 shares of Common Stock (the
"Bridge Warrant Shares") underlying 212,500 warrants (the "Bridge
Warrants") sold in the Bridge Financing; (ix) 31,250 shares of Common
Stock issuable upon the exercise of warrants (the "JDK Warrants")
granted to JDK & Associates, Inc. in return for providing investor
relations services to the Company; and (x) 250,000 shares of Common
Stock issuable upon the exercise of warrants (the "Payne Warrants")
granted to Payne Financial Group, Inc. in return for providing investor
relations services to the Company. See "Management - 1996 Stock Option
Plan," "Description of Securities" and "Registration Rights."
5
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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. For the year ended December 31, 1996, the Company had net
income of $900,998. For the year ended December 31, 1997 and for the three
months ended March 31, 1998, the Company had a net loss of $2,946,056 and
$528,726 respectively. 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 generate 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.
Restrictive Debt Covenants. The Company's various loan agreements
contain covenants that, among other things, restrict the ability of the
Company's operating subsidiaries to dispose of assets, incur additional
indebtedness, pay cash dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures,
engage in certain transactions with affiliates or redeem or repurchase the
indebtedness of such subsidiaries. In addition, under the Company's loan
agreements, the Company is required to satisfy financial ratio tests, including
interest expense, fixed charges and total debt coverage ratios. While the
Company is, as of the date of this Prospectus, in compliance with the covenants
and restrictions contained in the various loan agreements, its ability to
satisfy financial tests and ratios could be affected by numerous events beyond
its control, including economic, weather and industry conditions. The breach of
any financial covenant contained in a loan agreement could result in the
termination of certain of the Company's loan facilities (and the acceleration of
the maturity of all amounts outstanding thereunder) and, by virtue of cross
default provisions, the acceleration of the maturity of other indebtedness of
the Company. See "Management Discussion and Analysis of Financial Conditions and
Results of Operations."
Ability to Integrate Gedco Acquisition. On March 13, 1997, the Company
purchased certain assets from Gedco and its affiliates for a purchase price of
$14,000,000, consisting of $11,500,000 in cash and 595,238 shares of Common
Stock valued at $2,500,000 (the "Gedco Acquisition"). Included in the Gedco
Acquisition were substantially all of the income producing assets and associated
real property of Orlando Entertains and LA Entertains, consisting of King
Henry's Feast, Blazing Pianos piano bar, the Fort Liberty shopping complex that
includes a Wild Bill's Dinner Theater, each of which is located in greater
Orlando, Florida, and a second Wild Bill's Dinner Theater located in Buena Park,
California. Gerard O'Riordan, President of Gedco, joined the Company as
President of On Stage Theaters, Inc., a wholly-owned subsidiary of the Company
that manages the acquired dinner theaters and piano bar as well as other
selected theaters. The Gedco Acquisition is significantly larger than any of the
Company's previous acquisitions, and the integration of the operations of Gedco
will be more challenging and require greater resources than the acquisitions
previously undertaken by the Company. In addition, the process of integrating
Gedco will place substantial additional demands upon existing management
resources. There can be no assurance that any long-term benefits will be
realized from the Gedco Acquisition. The inability to successfully manage the
integration of Gedco would have a material adverse effect on the Company's
results of operations and financial condition. See "Risk Factors--Risks Relating
to Proposed Expansion Plans; Possible Inability to Manage Growth."
Dependence on Legends. To date, the Company's revenue has depended
heavily on 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 90%, 86% and 43% of the
Company's net revenue for the years ended December 31, 1996 and 1997, and for
the three months ended March 31, 1998, 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 -- Show Offerings."
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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 up to ten
additional resident productions over the next 36 months, which strategy, if
successful, will place significant pressures on the Company's personnel, as such
growth will require 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 $500,000 to $1,000,000 in the case of a leased theater) associated
with the establishment of a new 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 1997, the Company
discontinued its resident production of Legends in Daytona Beach, Florida as a
result of less than optimal ticket sales in the start-up phase of the show and
an aggregate estimated loss to the Company of at least $877,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Possible Need for Additional Financing. 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 that 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 18 months, there
can be no assurance that 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 financing 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" 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, theaters, dinner
theaters, ticket distributors, and corporate event companies and to market
Legends and other productions 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 such as Blazing
Pianos, Wild Bill's Dinner Extravaganza and King Henry's Feast. The Company
currently intends to enter into such arrangements on a shared revenue and/or
profit basis and to make acquisitions in a manner similar to that used in its
Gedco Acquisition, i.e., through partial equity distributions rather than
through complete cash payments. 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. 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
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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 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 --Show Acquisition and Development."
Control by Principal Stockholder. John W. Stuart, the Company's
Chairman and Chief Executive Officer beneficially owns approximately 46% of the
outstanding Common Stock. Accordingly, Mr. Stuart, together with the Company's
other officers, is 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."
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
8
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on new resident theatrical productions up to nine 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, 1996 and 1997, and for the three months ended March 31, 1998,
approximately 40%, 35% and 22%, 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."
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 -- 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
9
<PAGE>
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 and Chief Executive Officer, 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 "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 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. See "Business -- Legal Proceedings."
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."
10
<PAGE>
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 Continued Public Market; Possible Continued Volatility
of Market Price of Common Stock. There can be no assurance that a regular
trading market for the Common Stock will be sustained. The market prices of the
Company's securities may continue to be characterized by volatility and low
trading volume. 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.
Shares Eligible for Future Sale; Registration Rights. Upon completion
of this offering, the Company will have 7,397,350 shares of Common Stock
outstanding, of which all 905,649 shares offered hereby, as well as the
1,400,000 shares offered in the IPO, will be freely tradable without restriction
or further registration under the Securities Act. The remaining 5,261,238 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, 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 until August 13, 1999 under any circumstances. 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 1,626,926 shares of Common Stock, as
well as warrants convertible into 1,242,000 shares of Common Stock. 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. See "Description of Securities -- Registration Rights" and
"Shares Eligible for Future Sale."
Possible Delisting of Securities from the Nasdaq SmallCap Market; Risks
Relating to Penny Stocks. The Company's Common Stock is listed 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 net tangible assets, a
$1,000,000 market value of the public float and adherence to certain corporate
governance provisions. In addition, continued inclusion requires two
market-makers and a minimum bid price of $1.00 per share. 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. 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 is below $5.00 per share, trading in the Common Stock
will 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
11
<PAGE>
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 IPO Underwriter. The Company has certain
ongoing contractual obligations to the IPO Underwriter such as the Company's
agreement to pay to the IPO Underwriter a fee of 5% of the exercise price for
each Warrant exercised (provided the Warrant exercise is solicited by the IPO
Underwriter and certain other conditions are met) commencing on August 13, 1998;
to use its best efforts to elect a designee of the IPO Underwriter as a member
of the Company's Board of Directors, if requested to do so by the IPO
Underwriter, until August 13, 2000; and, subject to certain limitations and
exclusions, to register, at the Company's expense, the IPO 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 on or before
August 13, 2004.
USE OF PROCEEDS
All of the shares of Common Stock being offered hereby are offered by
the Selling Stockholders. The Company will not receive any of the proceeds from
the sale of such shares.
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 sole 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.
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the SmallCap Market segment of the Nasdaq
Stock Market under the symbol "ONST." The following table sets forth, for the
periods indicated, the high and low sales prices as quoted on the Nasdaq Stock
Market.
Period High Low
- ------ ---- ---
Fiscal 1997:
Third Quarter (beginning on August 14, 1997) $6 $ 4 1/2
Fourth Quarter 6 1/2 3 13/16
Fiscal 1998:
First Quarter 5 7/16 3 1/2
Second Quarter (through June 29, 1998) 5 1/8 3 5/8
The closing price of the Common Stock on June 29, 1998, as reported by the
Nasdaq SmallCap Market was $4.1875.
The approximate number of record holders of the Common Stock as of June 30,
1998 was 87. The Company believes that a larger number of beneficial owners hold
such shares of Common Stock in depositary or nominee form.
12
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at March 31, 1998.
<TABLE>
<CAPTION>
March 31, 1998
--------------
(Dollars in
Thousands)
Short-term debt:
<S> <C>
Line of credit....................................................................... $ 250
Capital leases....................................................................... 353
-------
Total short-term debt............................................................ 603
=======
Long-term debt:
Capital leases....................................................................... 812
Mortgage............................................................................. 12,500
-------
Total long-term debt............................................................. 13,312
=======
Stockholders' equity:
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; 7,190,738 shares
issued and outstanding(1)........................................................... 72
Additional paid-in capital................................................................ 9,834
Accumulated deficit....................................................................... ( 3,858)
-------
Total stockholders' equity........................................................... 6,048
-------
Total capitalization................................................................. $19,963
=======
</TABLE>
- ------------------
(1) Does not include: (i) the Warrants; (ii) the Underwriter's Warrants; (iii)
773,853 shares of Common Stock reserved for issuance upon the exercise of
options granted, and 626,147 shares of Common Stock reserved for issuance
upon the exercise of options available for future grant, under the Option
Plan; (iv) 15,000 shares of Common Stock reserved for issuance upon
exercise of an outstanding non-plan option; (v) 200,000 shares of Common
Stock issuable upon the exercise of a warrant issued to Gerard O'Riordan in
connection with the acquisition by the Company of certain assets of Gedco;
(vi) an aggregate of 575,000 shares of Common Stock issuable upon the
exercise of warrants issued to ICCMIC and Imperial Capital Group, LLC in
connection with a $12,500,000 loan extended by ICCMIC to several
subsidiaries of the Company; (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, securities issued in connection with the Bridge
Financing; (viii) the Bridge Warrant Shares; (ix) 31,250 shares of Common
Stock issuable upon the exercise of the JDK Warrants; and (x) 250,000
shares of Common Stock issuable upon the exercise of the Payne Warrants.
See "Management - 1996 Stock Option Plan," "Description of Securities" and
"Registration Rights."
13
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
The following selected financial data for the two years ended December
31, 1996 and 1997 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, 1997 and 1998, 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, 1998 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>
Years Ended Three Months Ended
December 31, March 31,
------------------------------- ---------------------------------
1996 1997 1997 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenue ........................... $14,278 $ 15,726 $ 2,719 $ 6,205
Gross profit .......................... 5,832 4,313 816 2,288
Operating income (loss) ............... 1,070 (2,105) (401) (183)
Net income (loss) ..................... 901 (2,946) (517) (529)
Basic income (loss) per share(1) ...... 0.23 (0.55) (.12) (.08)
Diluted income (loss) per share(1) .... 0.22 (0.55) (.12) (.08)
Basic average number of common shares
outstanding ......................... 4,002,044 5,365,851 4,486,515 6,714,548
Diluted average number of common shares
outstanding ........................... 4,064,927 5,365,851 4,486,515 6,714,548
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------------- ---------------------
<S> <C> <C>
Working Capital ............................. $ 1,797 $ 299
Total assets................................. 6,477 23,801
Total liabilities............................ 2,401 17,253
Stockholders' equity ........................ 4,076 6,548
</TABLE>
- ------------------
(1) Basic earnings per shares 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 the entity.
14
<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
theatrical productions and dinner shows 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:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------ -----------------------
1996 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Theatrical productions:
Legends 93.4% 82.4% 90.9% 41.2%
Other 0.8 10.3 5.0 57.2
--- ---- --- ----
Total 94.2 92.7 95.9 98.4
---- ---- ---- ----
Merchandise 4.9 4.3 3.2 1.4
Other 0.9 3.0 0.8 0.2
--- --- ---
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
The first Legends production opened at the Imperial Palace in Las Vegas
in May of 1983. The Company began actively producing additional tribute and
specialty shows since 1994 and produces resident Legends shows in Las Vegas
(since May 1983), Atlantic City (since October 1994), Myrtle Beach (since March
1995), Branson, Missouri (July 1995, April 1996 through October 1996; and June
1997 through August 1997), Toronto, Canada (since May 1998) and Berlin, Germany
(since September 1997).
The Company classifies its theatrical productions and dinner shows
(both its resident and limited-run engagements) into two main categories: (1)
at-risk shows and (2) low-risk shows. At-risk shows classify any of the
Company's resident or longer term limited-run productions where the amount of
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 shows produced by the Company in, and for, large casinos in certain markets
such as Las Vegas). Low-risk shows are contracted productions in which the
client guarantees a fee, which is typical of shows produced by the Company in,
and for, certain casinos and for other commercial clients such a corporations,
cruise lines and theme parks. Revenues attributable to at-risk shows for the
years ended December 31, 1996 and 1997, represented approximately 72% and 63% of
the Company's net revenues, respectively. Revenues attributable to at-risk shows
for the three months ended March 31, 1997 and 1998, represented approximately
56% and 75% of the Company's net revenues, respectively.
The Company has opened five new at-risk shows since 1995: (1) Legends
at the Surfside Theater in Myrtle Beach, South Carolina in March 1995; (2)
Legends at the Grand Palace in Branson, Missouri for a six month run in 1996 and
at the Osmond Family Theater for a three month run in 1997; (3) Legends at the
Coliseum Theater in Daytona Beach, Florida in June 1997; (4) Legends at the
Legends Family Theater in Branson, Missouri in March 1998; and (5) Legends at
the Legends Theater in Toronto, Canada in May 1998. The Company's Legends
production in Myrtle Beach generated a gross profit of approximately $1,461,000
and a 24% gross
15
<PAGE>
margin for the year ended December 31, 1997 and posted a loss of $150,000 and a
negative 34% gross margin, for the three months ended March 31, 1998. The
Company has typically posted such a loss in its first quarter of operations in
prior years due to the seasonality of its business, but anticipates the loss to
be offset by an increase in revenues during its primary season (see Seasonality
and Quarterly Results). The Company's Legends production in Branson generated
approximately $84,000 and 52.4% gross profit margin for the three months ended
March 31, 1998, respectively. Unfortunately, for reasons discussed below, the
Legends production at the Coliseum Theater was not as successful and was
discontinued in December 1997 after generating an operating loss of $877,000. In
addition to the operating loss, the discontinuation of the Daytona Beach
operation generated an additional expense to the Company of $489,285.
The Company believes that the operating performance of Legends at the
Coliseum Theater in 1997 suffered from inadequate market research resulting in
less than optimal ticket sales in the start-up phase of the production. The
lower than anticipated revenue levels, combined with high indirect production
costs associated with the show's four-wall cost structure resulted in losses.
The Company continues to believe that emerging tourist markets, such as Cancun,
Mexico, Pigeon Forge, Tennessee and Toronto, Canada offer attractive
opportunities for future growth. The Company has recently implemented a policy
of opening only proven, branded shows, like Legends, and identifying, where
possible, local marketing partners in similar at-risk situations to increase the
likelihood of success and share any unexpected losses. If the Company determines
that the risk profile of a new market is too high, it will seek a low-risk deal
structure such as a fixed fee structure or a partnership under which the Company
has the right to be the first in line to collect a designated amount of the show
revenues each week.
During 1997 and the first three months of 1998, the Company opened six
new low-risk shows: (1) the Improv(R) Spectacular at the Trump Taj Mahal Hotel
and Casino in Atlantic City, New Jersey, for a sixteen week run, which opened in
March 1997; (2) a Legends show at the Fireside Theater, Fort Atkinson,
Wisconsin, for an eleven week run, which opened in January 1997; (3) a Legends
show at the Empress Casino in Joliet, Illinois, for a sixteen week run which
opened in March 1997; (4) Camouflage Aux Folles, a comedic variety show
featuring talented female impressionists, comedians, singers and dancers which
was presented at the Trump Taj Mahal in Atlantic City, New Jersey for a sixteen
week run which opened in July 1997; (5) A full-scale Legends production at the
Estrel Residence & Congress Hotel in Berlin, Germany which opened in September
1997; and (6) A full-scale revolving production at the Lilly Langtry Theater at
the Sheraton Valley Forge in King of Prussia, Pennsylvania which opened in
January, 1998. These six shows along with the addition of the Atlanta branch
office significantly increased the Company's special events and limited
engagement business. At December 31, 1997, the Daytona Beach show was closed.
The Company initiated expansion of its operations in anticipation of
future sales growth, which significantly increased selling, general and
administrative costs. Since December 1995, the Company has hired seven 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; a Vice President of Corporate Entertainment
in September 1996; an Assistant Vice President of Group Sales in September 1997;
a Vice President of Merchandising in October 1997; and a President of On Stage
Theaters, Inc., a wholly owned subsidiary of the Company, in March 1998. The
Company also added a new branch office in Atlanta, Georgia (through its
acquisition of Interactive Events, Inc.) as well as in-house wardrobe, lighting,
scenery and multimedia departments. At March 31, 1998, the Company maintained
eight administrative offices, including its corporate headquarters in Las Vegas
and branch offices in Atlantic City, Atlanta, Branson, Buena Park, Orlando, Palm
Springs and Myrtle Beach. In June 1998, the Vice President of Marketing and
Assistant Vice President of Group Sales and their related support staff were
terminated as part of a corporate reorganization as a result of the Gedco
Acquisition.
Gedco USA, Inc. Acquisition
On March 13, 1998, the Company completed the Gedco Acquisition in which
it purchased certain assets from Gedco and its affiliates for a purchase price
of $14,000,000, consisting of $11,500,000 in cash and 595,238 shares of Common
Stock valued at $2,500,000.
16
<PAGE>
Included in the Gedco Acquisition were substantially all of the income
producing assets and associated real property of Orlando Entertains and LA
Entertains, consisting of King Henry's Feast, Blazing Pianos piano bar, the Fort
Liberty shopping complex that includes a Wild Bill's Dinner Theater, each of
which is located in greater Orlando, Florida, and a second Wild Bill's Dinner
Theater located in Buena Park, California. Gerard O'Riordan, President of Gedco,
joined the Company as President of On Stage Theaters, Inc., a wholly subsidiary
of the Company that manages the acquired dinner theaters and piano bar as well
as other selected theaters.
The Company funded the cash portion of the purchase price and
transaction fees and expenses with $12.5 million of mortgage financing from
ICCMIC. ICCMIC has committed a total of $20,000,000, of which $7,500,000 is
remaining to finance the Company's future real estate related acquisitions. In
connection with the loan agreement entered into between the Company and ICCMIC
on March 13, 1998 (the "Loan Agreement"), the Company granted ICCMIC the right
to provide the Company with up to an additional $30 million of similar mortgage
financing. In connection with the financing, the Company issued ICCMIC and
Imperial Capital Group LLC (an affiliate of ICCMIC), an aggregate of 575,000
warrants immediately exercisable into Common Stock at an exercise price of
$4.44. Those warrants were valued at $500,000 and are accounted for as an
original issue discount. In addition, concurrent with the ICCMIC financing, Mark
Karlan, the President of ICCMIC, was named a member of the Company's Board of
Directors.
The components of the purchase price and its allocation to the assets
and liabilities were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase Price:
Liabilities assumed......................................................... $ 986,044
Issuance of 595,238 restricted shares of common stock...................... 2,500,000
-------------
3,486,044
Costs of acquisition incurred............................................... 1,645,874
Cash paid................................................................... 11,500,000
-------------
$16,631,918
=============
</TABLE>
The acquisition was accounted for as a purchase and the assets acquired
were recorded at a fair market value. The building and equipment are being
depreciated over twenty and three years, respectively, under the straight-line
method. The allocation of the purchase price was as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash................................................................................. $ 383,444
Inventory............................................................................ 120,084
Prepaid expenses..................................................................... 157,516
Land................................................................................. 11,275,507
Building............................................................................. 3,214,740
Equipment............................................................................ 730,627
Deferred financing acquisition expenses.............................................. 750,000
-------------
$16,631,918
=============
</TABLE>
The assets acquired and liabilities assumed were transferred to either
the Company's wholly-owned subsidiary, On Stage Theaters, Inc., or a wholly
owned subsidiary of On Stage Theaters, Inc., concurrent with the acquisition.
The Company has elected to consolidate the operations of the assets
acquired in the Gedco Acquisition retroactively to January 1, 1998. Therefore,
the pre-acquisition gain of $366,516 has been added to the consolidated totals
in the statement of operations for the quarter ended March 31, 1998, and this
amount has been deducted from loss before income taxes, thereby having no effect
on net loss for the period. The effect of this consolidation of operations prior
to acquisition was an increase in net sales of approximately $3,099,071.
17
<PAGE>
Subsequent Events
On April 23, 1998 the Company formed six (6) new Nevada subsidiaries.
These subsidiaries include: On Stage Productions, Inc., On Stage Merchandise,
Inc., On Stage Casino Entertainment, Inc., On Stage Events, Inc., On Stage
Theaters North Myrtle Beach, Inc., and On Stage Theaters Surfside Beach, Inc.
In March 1997, in connection with the IPO, the Company agreed with the
IPO Underwriter that the Company would neither loan nor advance any sums to or
on behalf of John W. Stuart, the Company's Chairman and Chief Executive Officer,
other than those sums advanced to Mr. Stuart from December 31, 1996 through the
date of the IPO, without the IPO Underwriter's prior consent. On October 23,
1997 and subsequently on November 17, 1997, the Company received authorization
from the IPO Underwriter to advance Mr. Stuart an aggregate of $105,483
(including principal and interest) and on March 25, 1998, the Company again
received authorization from the IPO Underwriter to advance $150,000 for
settlement of certain litigation pending against Mr. Stuart related to his
involvement in the Legends in Concert, Hawaii show. On June 25, 1998 Mr. Stuart
repaid the Company $107,596.03. This $107,596.03 was derived by Mr. Stuart from
the proceeds of the sale to the Selling Stockholders of 400,000 shares of Common
Stock offered hereby. Therefore, as of June 26, 1998, Mr. Stuart owed the
Company an aggregate of $107,596.03, which bears interest at a rate of 6% per
annum, matures on June 26, 1999 and is evidenced by a promissory note.
On June 30, 1998, the Company purchased from Calvin Gilmore
Productions, Inc. ("Calvin Gilmore"), an indirect, wholly-owned subsidiary of
Fox Family Worldwide, Inc. ("Fox Family"), for $1 million in cash and 206,612
shares of Common Stock, certain live entertainment theater assets, including a
fee simple in the Legends in Concert Theater, and a leasehold interest in the
Eddie Miles Theater, both located in Myrtle Beach (the "Calvin Gilmore
Acquisition"). The Company funded the cash portion of the Calvin Gilmore
Acquisition using the $20 million mortgage financing facility that it maintains
with ICCMIC. See "-- Mortgage Financing Commitment." In connection with the
Calvin Gilmore Acquisition, the Company granted to Calvin Gilmore certain
piggyback registration rights commencing on July 1, 1999, certain demand
registration rights commencing on July 1, 2000, and agreed to appoint Mel Woods,
President and Chief Operating Officer of Fox Family, to the Company's Board of
Directors by July 30, 1998. Neil H. Foster resigned from the Company's Board of
Directors on June 26, 1998, to create a vacancy for the appointment of Mr.
Woods.
On June 30, 1998, in a separate transaction, Calvin Gilmore purchased
169,537 shares of Common Stock from Mr. Stuart for $737,485.95, causing Calvin
Gilmore to hold, in the aggregate, approximately 5% of equity in the Company.
Results of Operation
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
------------------------ -------------------------
1996 1997 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.0 73.0 70.0 63.1
Gross profit 40.8 27.5 30.0 36.9
Selling, general and administrative 28.6 31.5 39.4 36.8
Depreciation and amortization 4.7 6.2 5.4 3.0
Loss on discontinued location 0.0 3.1 0.0 0.0
----- ----- ----- -----
Operating profit (loss) 7.5 (13.3) (14.8) (2.9)
Other (income) loss 0.0 0.0 0.0 (0.6)
Interest expense, net 1.1 (5.3) 4.1 0.2
Subsidiary operations for period not owned 0.0 0.0 0.0 6.0
----- ----- ----- -----
Pre-tax income (loss) 6.4 (18.6) (18.9) (8.5)
Income taxes 0.1 0.1 0.1 0.0
Net income (loss) 6.3% (18.7)% (19.0)% (8.5)%
===== ===== ----- =====
</TABLE>
18
<PAGE>
Net loss for the three months ended March 31, 1997 was $517,372, as
compared to net loss of $528,726 for the three months ended March 31, 1998.
Quarter Ended March 31, 1998 versus Quarter Ended March 31, 1997
Net Revenues. Revenues increased by 128.3% to $6,205,000 for the
quarter ended March 31, 1998 compared to $2,718,000 for the quarter ended March
31, 1997. The Company's revenue is derived from four principal operating
divisions: Theaters, Corporate Events, Merchandise, and Casino Entertainment.
Theaters revenues were approximately $4,084,000 for the quarter ended
March 31, 1998 compared to $569,000 for the quarter ended March 31, 1997, an
increase of $3,515,000, or 617.4%. Contributing to this increase were increases
of approximately: (i) $566,000, attributable to full scale Legends shows at the
Estrel Residence & Congress Hotel in Berlin, Germany, and at the Christy Lane
Theater in Branson, Missouri, along with a resident variety show at the Sheraton
Valley Forge Hotel in King of Prussia; and (ii) $3,099,000, attributable to the
consolidation of operations of the Gedco Acquisition, retroactively to January
1, 1998. These increases were partially offset by decreases of approximately:
(a) $104,000, attributable to the discontinuation of the Legends show on Premier
Cruise Lines due to a sale of the vessels to a new company; and (b) $46,000,
attributable to the resident Legends show in Myrtle Beach, South Carolina.
Corporate Events revenues were $540,000 for the quarter ended March 31,
1998 compared to $625,000 for the quarter ended March 31, 1997, a decrease of
$85,000 or 13.6%. This decrease was mainly attributable to a reduction of
$209,000, in limited engagements which included the discontinuation of the
Legends Celebrity Series at the Empress Casino in Joliet, Illinois, which ran in
1997 but not in 1998. These decreases were partially offset by increases in
revenues of approximately $124,000 from other corporate events.
Merchandise revenues were approximately $56,000 for the quarter ended
March 31, 1998 compared to $67,000 for the quarter ended March 31, 1997, a
decrease of $11,000 or 16.4%. This decrease was mainly attributable to a
19
<PAGE>
decrease in photo revenues at the Fireside Restaurant & Playhouse, due to the
discontinuation by Fireside of merchandise sales during 1998.
Casino Entertainment revenues were approximately $1,525,000 for the
quarter ended March 31, 1998 compared to $1,457,000 for the quarter ended March
31, 1997, an increase of $69,000, or 4.7%. Contributing to this increase were
increases of approximately: (i) $120,000, attributable to the Camouflage Aux
Follies, at the Taj Mahal Hotel and Casino in Atlantic City, New Jersey, which
ran in 1998, but not in 1997; (ii) $39,000, attributable to the Legends show at
the Bally's Park Place in Atlantic City, New Jersey; and (iii) $66,000,
attributable to Fiesta! Fiesta!, at the Taj Mahal Hotel and Casino in Atlantic
City, New Jersey, which ran in 1998, but not in 1997. These increases were
partially offset by decreases of approximately: (a) $64,000, attributable to a
resident Legends show at the Imperial Palace in Las Vegas; and (b) $92,000,
attributable to An Evening at the Improv(R) Spectacular for Trump's Taj Mahal in
Atlantic City, which ran in 1997 but not in 1998.
Costs of Revenues. Total costs of revenues were $3,917,000 for the
quarter ended March 31, 1998 compared to $1,903,000 for the quarter ended March
31, 1997, an increase of $2,014,000, or 105.9%. Costs of revenues decreased to
63.1% of net revenues for the quarter ended March 31, 1998, as compared to 70.0%
for the quarter ended March 31, 1997. This decrease in cost of sales as a
percentage of revenues was primarily attributable to a change in the mix of the
Company's revenues due to the inclusion of the Gedco Acquisition revenues which
have lower costs of revenues (49.4%) than: Casino Entertainment (63.8%);
Corporate Events (63.9%); or Theaters (103.8%, exclusive of the Gedco
consolidation). The increase in total costs of revenues was partially offset by
a decrease in costs of revenue (22.8%) in the Merchandise Division.
Selling, General and Administrative. Selling, general and
administrative costs were approximately $2,282,000 for the quarter ended March
31, 1998 as compared to $1,070,000 for the quarter ended March 31, 1997, an
increase of $1,212,000, or 113.3%. Selling, general and administrative costs
decreased to 36.8% of net revenues for the quarter ended March 31, 1998, as
compared to 39.4% for the quarter ended March 31, 1997. The increase in total
cost was primarily attributable to the inclusion of the Gedco Acquisition
selling, general and administrative expense of $1,079,000, and increases in
automobile expenses, insurance, professional services, rent, advertising, and
promotion and investor relations. These decreases were partially offset by
decreases in salaries and commissions.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended March 31, 1998 increased by $41,000, or 28.0%, as compared to the
quarter ended March 31, 1997. The increase was primarily due to capital
additions to current shows, new shows, goodwill amortization and an increase in
assets as a result of the Gedco Acquisition.
Operating Loss. The Company's operating loss was approximately $183,000
for the quarter ended March 31, 1998, compared to an operating loss of $401,000
for the quarter ended March 31, 1997, a decrease of $218,000, or 54%.
Operating loss for the quarter ended March 31, 1998 includes a pre-acquisition
gain of Gedco's operations of $366,516.
Interest Expense, Net. Interest expense for the quarter ended March 31,
1998 decreased by $100,000, or 88%, as compared to the quarter ended March 31,
1997. The decrease was primarily due to a decrease in the average borrowing
level for the quarter ended March 31, 1998 as compared to the quarter ended
March 31, 1997.
Other Income. Other income for the quarter ended March 31, 1998 was
attributable to a sign-on bonus received from a new supplier.
Subsidiary Operations for Period Not Owned. The Company has elected to
consolidate the operations of the assets acquired in the Gedco Acquisition
retroactively to January 1, 1998. Therefore, the pre-acquisition gain of
$366,516 has been added to the consolidated statement of operations for the
quarter ended March 31, 1998.
20
<PAGE>
Income Taxes. The Company is a Nevada corporation with a substantial
portion of 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
quarter ended March 31, 1998. Income taxes for the quarters ended March 31, 1997
and 1998, relate to income taxes due in those states other than Nevada in which
the Company conducts business. At March 31, 1997 and 1998, the Company had
federal net operating loss carryforwards of approximately $1,174,847 and
$3,024,097, respectively. Under Section 382 of the Internal Revenue Code,
certain significant changes in ownership that the Company is currently
undertaking may restrict the future utilization of these tax loss carryforwards.
The net deferred tax assets have a 100% valuation allowance, as management
believes at this time it is more likely than not that the deferred tax assets
will not be realized.
Year Ended December 31, 1997 versus Year Ended December 31, 1996
Net Revenue. Net revenue consists of sales of the Company's theatrical
productions, concessions, merchandise and income generated from equipment
rental. Net revenue for the year ended December 31, 1997 increased by
$1,448,000, or 10.1% from $14,278,000 to $15,726,000, as compared to the year
ended December 31, 1996. Contributing to this increase were increases of
approximately: (i) $1,985,000, attributable to limited engagements and corporate
events, which included limited engagements of Legends Celebrity Series at the
Empress Casino in Joliet, Illinois and the Company's joint ventures (An Evening
at the Improv(R) Spectacular and Camouflage Aux Folles) at the Taj Mahal Hotel
and Casino in Atlantic City, New Jersey, each of which ran in 1997, but not in
1996; (ii) $679,000, attributable to the Legends show in Daytona Beach, Florida,
which ran in 1997, but not in 1996. These increases were partially offset by
decreases in sales of: (a) $52,000, attributable to the resident Legends show at
the Imperial Palace in Las Vegas, Nevada; (b) $34,000, attributable to the
resident Legends show at Bally's Park Place in Atlantic City, New Jersey; (c)
$317,000, attributable to the resident Legends show in Myrtle Beach, South
Carolina; (d) $64,000, attributable to the Legends show on Premier Cruise Lines
which was discontinued due to a sale of the vessels to a new company; (e)
$741,000, attributable to the Legends show in Branson, Missouri, which ran only
three months in the year ended December 31, 1997 (from June 1997 to August 1997)
in the Osmond Family Theater, as opposed to six months in the year ended
December 31, 1996 (from April 1996 to October 1996) in the Grand Palace, a
larger venue; and (f) $8,000, attributable to the decrease of other revenue.
Direct Production Costs. Direct production costs include salaries for
impersonators, stars, singers, dancers, musicians, technicians, choreographers,
wardrobe personnel, production managers, concession personnel, license fees,
electronic supplies, lighting, sound, wardrobe, sets, props, and the cost of
goods for merchandise as well as food and beverage. Direct production costs for
the year ended December 31, 1997 increased by $1,671,000, or 27.5%, as compared
to the year ended December 31, 1996. Direct production costs increased to 49.2%
of net revenue for the year ended December 31, 1997, as compared to 42.6% for
the year ended December 31, 1996. The increase was primarily attributable to the
high direct running costs of the Daytona show (8.6% of the total direct
operating expenses) and increases in salaries and the cost of make-up, wardrobe
and operating supplies. These increases were partially offset by decreases in
costs associated with insurance premiums and electronic supplies.
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,
1997 increased by $1,296,000, or 54.5%, as compared to the year ended December
31, 1996. Indirect production costs increased to 23.3% of net revenue for the
year ended December 31, 1997, as compared to 16.6% for the year ended December
31, 1996. This increase was primarily attributable to the high indirect costs of
the Daytona show (21.6% of the total indirect operating expenses) and increases
in salaries and the cost of advertising, promotion, freight, shipping, rent, and
insurance. These increases were partially offset by decreases in costs
associated with bank charges and entertainment expenses.
Selling, General and Administrative. Selling, general and administrative
expenses include management salaries, finance, operations, development,
marketing and technical salaries, office supplies, rent, utilities and legal
expenses.
21
<PAGE>
Selling, general and administrative expenses for the year ended December 31,
1997 increased by $861,000, or 21.1%, as compared to the year ended December 31,
1996. Selling, general and administrative expenses as a percent of net revenue
was 31.5%, as compared to 28.6% for the year ended December 31, 1996. This
increase was primarily due to increases in costs associated with salaries,
automobile allowances, freight, shipping, office supplies, telephone,
commissions, advertising, promotion, and bad debts as well as one time charges
of approximately $162,000 and $221,000, resulting from the issuance of 40,532
shares of common stock to Kiran Sidhu, the Company's Chief Financial Officer and
forgiveness of a promissory note from John W. Stuart, the Company's Chairman and
Chief Executive Officer (the "Stuart Note"), respectively. As of August 12,
1997, the Stuart Note, which together with principal and interest totaled
$221,000, was forgiven in full. On October 23, 1997 and November 17, 1997, the
Company, with the consent of the Underwriter, agreed to advance an aggregate of
$100,000 to Mr. Stuart, which is evidenced by two promissory notes. The notes
bear interest at 8% per annum and mature on December 31, 1998. At December 31,
1997, Mr. Stuart owed the Company a total of $136,194, including accrued
interest on the promissory notes of $1,041, personal charges of $17,007 to a
corporate credit card and $18,146 in show fees received by Stuart on behalf of
the Company. Mr. Stuart has since repaid $35,153 to the Company. The Company has
agreed with the IPO Underwriter not to loan or advance any further sums to Mr.
Stuart, without the prior consent of the IPO Underwriter.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 1997 increased by $306,000, or 45.2%, as compared to the year ended
December 31, 1996. The increase in depreciation and amortization was primarily
attributable to pre-opening costs which were capitalized in 1996, but expensed
in 1997.
Expenses at Discontinued Location. The Company decided to close its Legends
production in Daytona Beach on December 31, 1997. As part of the closing, the
Company incurred additional expenses of $489,285 during 1997. The Company
intends to transfer substantially all of the furniture and equipment at the
Daytona Beach facility to other locations scheduled to debut performances in
1998. Also, the Company is currently in negotiations with a third party to
potentially sublease the Daytona Beach theater. In addition to the expenses
incurred in discontinuing the operations in Daytona Beach, the Company realized
an operating loss of $877,000. This operating loss resulted from low net
revenues which were less than the direct and indirect production costs during
the shows' run.
Interest Expense, Net. Interest expense for the year ended December 31,1997
increased by $681,000, or 445.3%, as compared to the year ended December 31,
1996. The increase was primarily attributable to one time, non-recurring,
interest expense charges of $194,000 related to the conversion of certain
convertible debentures (the Debentures) and an original issue discount of
$366,000 related to a bridge loan. These increases were partially offset by
interest income of $59,000 earned from the Company's investment of approximately
49% of the net proceeds generated from the initial public offering of the
Company's common stock and redeemable warrants.
Income Taxes. Income taxes for the years ended December 31, 1997 and December
31, 1996 relate to income taxes in those states other than Nevada in which the
Company conducts business.
Seasonality and Quarterly Results
The Company's business has been, and is expected to remain, highly
seasonal, with the majority of its revenue being generated during the months of
April through October. Part of the Company's business strategy is to increase
sales in tourist markets that experience their peak seasons from November
through March, so as to offset this seasonality in revenues. The Gedco
Acquisition should also help to decrease the seasonality of the Company's
business since Gedco's revenue has historically been less seasonal. The Company
is exploring opportunities to open shows in markets such as Florida and Arizona,
domestically, and Australia, South Africa, and Mexico, abroad, which the Company
believes, could also help mitigate the effect of this seasonality.
The following table sets forth the Company's net revenue for each of
the last nine quarters ended March 31, 1998:
22
<PAGE>
<TABLE>
<CAPTION>
Net Revenues ($ in thousands)
March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
Fiscal 1996.......................... $2,347 $4,266 $4,591 $3,074
Fiscal 1997.......................... $2,719 $3,979 $5,071 $3,957
Fiscal 1998.......................... $6,205 -- -- --
</TABLE>
Tax Net Operating Losses
At December 31, 1996 and 1997, and March 31, 1998, the Company had
federal net operating loss carryforwards of approximately $657,214, $2,495,371
and $3,024,097 (unaudited), respectively. Under Section 382 of the Internal
Revenue Code, certain significant changes in ownership that the Company is
currently undertaking may restrict the future utilization of these tax loss
carryforwards. The net deferred tax assets have a 100% valuation allowance, as
management believes at this time it is more likely than not that the deferred
tax assets will not be realized.
Liquidity and Capital Resources
General
The Company has historically met its working capital requirements
through a combination of cash flow from operations, equity and debt offerings
and traditional bank financing. The Company anticipates, based on its 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 Company's current cash, cash equivalent
balances, anticipated revenue from operations and its working capital line will
be sufficient to fund its current operations and contemplated capital
requirements over the next 18 months. However, the Company's internal expansion
and acquisition strategies will require additional debt and/or equity financing.
In the event the Company's plans or assumptions change, prove to be incorrect,
or if balances and/or anticipated revenues otherwise prove to be insufficient,
the Company would need 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 would require it to relinquish rights to a substantial portion of
its revenues) and/or seek additional financing prior to the end of such period.
For the quarter ended March 31, 1997, the Company used cash of $629,000
in operations. As of March 31, 1997, the Company had approximately $314,000 in
cash and cash equivalents. For the quarter ended March 31, 1998, the Company
used cash of $1,017,000 in operations. As of March 31, 1998, the Company had
approximately $1,195,000 in cash and cash equivalents. The operating deficits
for both quarters were primarily attributable to business seasonality, and an
increase in selling, general and administrative costs.
The net cash used in investing activities for the quarter ended March
31, 1997 of $197,000, was primarily attributable to capital expenditures and
direct advances (which were subsequently written off at August 13, 1997) on
notes receivable to Mr. Stuart. The net cash used in investing activities for
the quarter ended March 31, 1998 of $12,762,000, was primarily attributable to
direct acquisition costs related to the Gedco Acquisition.
Net cash provided by financing activities for the quarter ended March
31, 1997 of $849,000, was primarily attributable to a series of debt and bank
financings. Net cash provided by financing activities for the quarter ended
March 31, 1998 of $12,650,000, was primarily attributable to ICCMIC's funding of
$12,500,000 for the Gedco Acquisition.
At March 31, 1997, the Company had a working capital deficit of
approximately $351,000, which resulted primarily from business seasonality,
increased operating expenses and advances paid to Mr. Stuart in the amount of
23
<PAGE>
approximately $103,000. At March 31, 1998, the Company had working capital of
approximately $298,000, primarily attributable to an increase in pre-paid
tickets and monies received from the Gedco Acquisition.
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. For the year ended December 31, 1997, the Company had
a net cash deficit from operations of $441,000. This operating deficit was
primarily attributable to the losses incurred at the Company's Daytona Beach
show and increases in selling, general and administrative expenses incurred in
anticipation of future growth.
The net cash used in investing activities for the year ended December
31, 1996 of $942,000, was primarily attributable to capital expenditures and
advances (which were subsequently written off at December 31, 1996) on notes
receivable from Mr. Stuart. The net cash used in investing activities for the
year ended December 31, 1997 of $1,241,000, was primarily attributable to
advances on notes receivable to Mr. Stuart ($221,000 of which was forgiven by
the Company on August 13, 1997 and $35,000 which was paid back to the Company on
February 4, 1998), capital expenditures and direct acquisition costs related
with the Gedco Acquisition of $258,000.
On August 13, 1997, the Company completed an initial public offering of
1,400,000 shares of common stock at $5.00 per share and redeemable warrants to
purchase 1,610,000 shares of its common stock at $0.10 per warrant. The net
proceeds to the Company of the IPO, after underwriting discounts, commissions
and expenses, was approximately $4,856,000, net of offering costs incurred by
the Company of approximately $1,414,000.
Net cash provided by financing activities for the year ended December
31, 1996 of $58,000, was primarily attributable to a series of debt and bank
financings. Net cash provided by financing activities for the year ended
December 31, 1997 of $3,716,000 was primarily generated from the IPO. This
increase in cash was partially offset by the repayment of a $750,000 bridge loan
(the DYDX Loan).
At December 31, 1996, the Company had a working capital deficit of
approximately $103,000, due primarily from advances paid to Mr. Stuart. As of
December 31, 1996, such advances (including principal and interest) amounted to
approximately $860,000. At December 31, 1997 the Company had working capital of
approximately $1,797,000, due primarily from proceeds derived from the sale of
the Company's common stock and redeemable warrants from the IPO. The proceeds of
the IPO were partially offset by increases in inventory and deposits.
On August 13, 1997, the Company converted all of the $1,714,064 of
principal amount under the Debentures into an aggregate of 905,649 shares of
common stock. The aforementioned conversion was based upon a ratio of 295 shares
of common stock per each $1,000 principal amount of Debenture. The conversion
resulted 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 share of common
stock).
On August 13, 1997, the Company paid off the DYDX Loan in full, which,
with principal and interest, totaled $773,000.
As of December 31, 1996, the Company had a term loan outstanding in the
principal amount of $150,000, with First Security Bank of Nevada, which accrued
interest at a rate of 11.5% per annum. On October 10, 1997, the Company paid off
this term loan, in full, which, including all outstanding principal and accrued
interest, was $19,091.
Working Capital Line
In May 1997, First Security Bank of Nevada ("First Security") issued a
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. On March
28, 1998, First Security increased the line of credit from $250,000 to
$1,000,000 and extended the expiration date of the line to March 25, 1999. As of
May 14, 1998, the Company had drawn $1,000,000 on the line of credit.
24
<PAGE>
Capital Equipment Financing Commitment
On September 29, 1997, First Security Leasing Company, a Utah
corporation, approved the Company for a $500,000 capital lease line of credit,
which was subsequently increased to $1,000,000 on March 28, 1998. Advances under
this capital lease line incur interest at a rate of 9.75% per annum. The
financing commitment will expire on September 29, 1998. As of May 28, 1998, the
Company had drawn $1,000,000 on the capital lease line.
Mortgage Financing Commitment
On March 13, 1998, the Company entered into the Loan Agreement with
ICCMIC pursuant to which ICCMIC agreed to provide the Company with up to
$20,000,000 of mortgage financing. On the same date, the Company used
$12,500,000 of said facility to fund the cash portion of the Gedco Acquisition
and related fees. In connection with the Loan Agreement, the Company provided
ICCMIC with the right to provide the Company with up to an additional
$30,000,000 of mortgage related financing. In addition concurrent with the
ICCMIC financing, Mark Karlan, the President of ICCMIC, was named a member of
the Company's Board of Directors, filling a vacancy created by the resignation
of Kenneth Berg.
Impact of Inflation
The Company believes that inflation has not had a material impact on
its operations. However, substantial increases in material costs could adversely
affect the operations of the Company for future periods.
Year 2000
The Company is in full compliance with Year 2000 standards. The Company
has invested in the latest hardware and software and has implemented purchasing
standards that requires Year 2000 compliance from all vendors. The Company
anticipates no problems in maintaining this compliance into the future.
The Company is actively coordinating with vendors, creditors and
financial service organizations to prepare for possible repercussions of
non-compliance. While the Company cannot ultimately control these outside
entities, the Company is exerting every influence to promote future compliance
in order to minimize impact to its business.
New Accounting Pronouncements
Disclosure of Information about Capital Structure
Statement of Financial Accounting Standard No. 129, Disclosure of
Information about Capital Structure, (SFAS 129) issued by the Financial
Accounting Standards Board (the FASB) is effective for financial statements
ended December 15, 1997. The new standard reinstates various securities
disclosure requirements previously in effect under Accounting Principles Board
Opinion No. 15, which has been superseded by Statements of Financial Accounting
Standard No. 128. The Company adopted SFAS 129 on December 15, 1997, and it had
no effect on its financial position or results of operations.
Reporting Comprehensive Income
Statement of Financial Accounting Standard No. 130, Reporting
Comprehensive Income, (SFAS 130) issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. On January 1, 1998, the Company adopted
SFAS 130 and it had no effect on its financial position or results of
operations.
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Disclosures about Segments of an Enterprise and Related Information
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, (SFAS 131) issued by the FASB
is effective for financial statements with fiscal years beginning after December
15, 1997. Earlier application is permitted. SFAS 131 requires that public
companies report certain information about operating segments, products,
services and geographical areas in which they operate and their major customers.
The Company does not expect adoption of SFAS 131 to have a material effect, if
any, on its financial position or results of operations.
Reporting on the Costs of Start-up Activities
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities," (SOP 98-5) issued by the American Institute of Certified Public
Accountants is effective for financial statements beginning after December 15,
1998. SOP 98-5 requires that the costs of start-up activities, including
organization costs, be expensed as incurred. Start-up activities are defined
broadly as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer (excluding ongoing customer
acquisition costs, such as policy acquisition costs and loan origination costs)
or beneficiary, initiating a new process in an existing facility, or commencing
some new operation. The Company does not expect adoption of SOP 98-5 to have a
material effect, if any, on its financial position or results of operations.
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BUSINESS
General
The Company produces and markets live theatrical productions and
operates live theaters and dinner theaters worldwide. 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 and Atlantic City. The Company currently has full-scale,
resident Legends productions running at the Imperial Palace in Las Vegas,
Nevada, Bally's Park Place in Atlantic City, New Jersey, Surfside Theater in
Myrtle Beach, South Carolina, Legends Family Theater in Branson, Missouri,
Legend Theater at the Sheraton Centre in Toronto, Canada and at the Estrel
Residence & Congress Hotel in Berlin, Germany. 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. Also, separate from the
Legends shows and as discussed below, the Company operates King Henry's Feast,
Wild Bill's Dinner Extravaganza and Blazing Pianos(R) ("Blazing Pianos") in the
greater Orlando area as well as Legends Goes Country in Buena Park, California.
In addition to Legends, the Company has developed and produced 18 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 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
approximately 75 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 three months ended March 31, 1997 and 1998, approximately 18%
and 60%, respectively, of the Company's net revenue was generated from resort
and urban tourist markets; approximately 55% and 22%, respectively, of the
Company's net revenue was generated in gaming markets, predominately Las Vegas
and Atlantic City; and approximately 31% and 17%, 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. For the year
ended December 31, 1997, approximately 47% of the Company's net revenue was
generated from resort and urban tourist markets; approximately 35% of the
Company's net revenue was generated in gaming markets, predominantly Las Vegas
and Atlantic City; and approximately 17% 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 (where the Company assumes the responsibility for the cost of the
theater, whether leased or purchased, and all of the costs associated with the
production and is the recipient of all of the show's potential revenues, profits
and/or losses) 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 potential, while riskier, is often substantially
greater with such "four-wall" tourist productions than those associated with
shows produced by the Company for its casino gaming clients.
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.
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Industry Background
Resort and Urban Tourist Markets
In 1996, approximately 96 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 99 golf courses and 11 live entertainment
venues, was one of the five most popular destinations during the summer of 1996,
according to a survey reported by the American Automobile Association.
Interestingly, Myrtle Beach enjoys this top tourists rating despite only having
25,000 hotel rooms versus Las Vegas' 105,000 rooms (with 20,750 additional rooms
to be completed by 2000). 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.
In 1996, a record number of 39.2 million tourists visited Orlando,
Florida, which was ranked as the top theme park destination for 1996 by the
National Tourism Association. Orlando's hotel industry is keeping up with the
demands of the visitors with over 85,000 hotel rooms available in 1996, an 8%
growth over the prior 4 years. In March 1998, the Company acquired King Henry's
Feast, Wild Bill's Dinner Extravaganza and Blazing Pianos, all located in the
greater Orlando area.
Anaheim, California, home of Disneyland, hosted 37.5 million visitors
in 1997. The Anaheim Convention Center, in conjunction with Disneyland, has
announced a plan to spend over $2 billion over the next five years to revitalize
the convention center and surrounding areas, and expand Disneyland. Expansion
plans for Disneyland include the construction of (i) a 750-room Craftsman-style
hotel, (ii) a second theme park to be named "Disney's Californian Adventure,"
and (iii) a 200,000 square foot entertainment, dining and retail complex joining
the two theme parks. In March 1998, the Company acquired Wild Bill's Dinner
Extravaganza performed at the Wild Bill's Dinner Theater in Buena Park,
California, which is in close proximity to Anaheim. On May 4, 1998, the Company
changed the show from Wild Bill's Dinner Extravaganza to Legends Goes Country.
Branson, Missouri attracted 5.8 million visitors to 36 live theater
venues in 1995 and was The National Tour Association's number one domestic tour
destination. 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 has presented Legends in Branson since 1995 for limited runs, with
successful results. Recently, based on the Company's favorable experience in the
market, the Company decided to "four-wall" in Branson, renting the Christy Lane
Theater in August 1997 and renaming it the Legends Family Theater.
Legends reopened in Branson at the Legends Family Theater on March 13, 1998.
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 -- Phoenix, Arizona; San Diego and San Francisco,
California; Orlando and Miami, Florida; Chicago,
Illinois; New Orleans, Louisiana; New York City, New
York; Corpus Christi and South Padre Island, Texas;
and Montreal and Vancouver, Canada.
International -- Australia, England, France, Germany, Japan, Korea,
Philippines, Singapore and Spain.
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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 79 casino
hotels. Over forty 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. The Company is aware of at least four new casino hotel projects in
development in Clark County, Nevada that will contain showrooms suitable for
live entertainment.
The second largest gaming market in the United States is Atlantic City,
New Jersey with 14 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 and Fiesta!
Fiesta! at the Trump Taj Mahal, 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 Place. Furthermore, the Company is aware of at least
one new casino hotel project under development in Atlantic City and believes
that it will also contain a showroom 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 have 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 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, the Philippines, New Zealand and Australia. Several Mediterranean
islands have had legalized gaming for years. For example, Cyprus has 18 casinos
in operation and permits are pending for an additional 30 casinos.
The Company continuously researches 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, Darwin and
Melbourne, Australia; Sun City, South Africa; Cyprus;
and Turkey.
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 toward the resort and urban tourist market, as evidenced by the
changing composition of the
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Company's net revenues over the last two years (during such period its revenues
from gaming markets decreased from 40% to 35% of its total net revenues and its
revenues from resort and urban tourist markets increased from 59% to 63% 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), cruise ships (Royal Caribbean Cruise Lines,
Singapore Cruise Lines), and at major fairs (Dade County Youth Fair, Illinois
State Fair). In addition, in 1996 and 1997, the Company produced approximately
80 and 185 events, respectively, for such diverse clients as McDonald's, Bell
South, Home Depot, IBM, Norwest Bank, and Anheuser Busch.
Show Offerings
The Company has developed and produced 18 different theatrical
productions since its founding in 1985. These productions include Legends, other
tribute shows, a variety of musical reviews, magic shows, ice skating
productions, 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 and Chief Executive Officer, 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 175 impersonation artists portraying over 75 different legends in its
13-year history. In 1996, 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, Branson and Berlin. For the years
ended December 31, 1996, 1997, and the three months ended March 31, 1997 and
1998, revenues attributable to Legends productions (including both resident and
limited-run engagements) and the sale of related Legends merchandise accounted
for approximately 90%, 87%, 80%, and 43%, 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 .8%, 10.4%, 5.0% and 57.2% of the Company's net
revenue for the years ended
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December 31, 1996, 1997, and for the three months ended March 31, 1997 and 1998,
respectively. The Company's non-Legends productions include, among others, the
following:
"Camouflage Cabaret" -- Features female impersonators recreating
memorable performances of Stars on stage and screen such as Judy
Garland and Carol Charming in a full stage production show. The show
was targeted to the mid-level casino market by featuring a star-studded
cast, live band, and special effects. This was the second run of this
popular show at the Trumps Taj Majal in Atlantic City, New Jersey. The
first run concluded a six-week run on August 31, 1997. The second run
at the Taj Majal concluded March 6, 1998 after a twelve week run.
"Collage de Cirque" -- combines performances by a ten year boy who has
won international awards in a flying act, a Low wire act, comedic
juggler and a troupe of colorful "Girls on Stilts" who perform
production numbers while walking on balls, juggling and stilt-walking.
The production neatly combines elements of the circus with musical
production numbers. Comedic elements include a juggler and a balloon
act in which a man actually inserts himself inside a large balloon.
"Collage de Cirque" completed a twelve week engagement at Lily
Langtry's Theater at the Sheraton Valley Forge Hotel in Pennsylvania
July 12, 1998.
"Fiesta, Fiesta" -- A musical production show featuring the romantic
vocal stylings of recording artist Sergio Albert, who plays the piano
and trumpet. He is surrounded by a troupe of dancers in a production
celebrating the Latin culture and music. The ventriloquist Sammy King
adds the comedic element making a Mexican parrot talk. "Fiesta, Fiesta"
completed a twelve week engagement at the Trumps Taj Majal in Atlantic
City in May 1998.
In addition, as a result of the Gedco Acquisition, the Company also produces the
following shows:
"King Henry's Feast" -- a two hour dinner show that takes the patrons
back to the time of King Henry VIII. The show includes a sword
swallower, a jester, a trapeze act and a sword fight. The show runs
every day throughout the year at the Company's King Henry's Feast
Castle located in Orlando, Florida.
"Wild Bills's Dinner Extravaganza" -- a two hour dinner show that
features the best of the Wild West. The show includes Indian tribal
dances, gun fighting, and showgirls. The show runs every day throughout
the year at the Company's Fort Liberty Complex in Kissimmee, Florida.
"Blazing Pianos" -- an interactive piano bar featuring three talented
comedic piano players and vocalists, who simultaneously play song
requests from patrons on three pianos. The shows run nightly throughout
the year at the Company's Blazing Pianos Bar in Orlando, Florida.
"Legends Goes Country" -- a two hour dinner show that features
recreations of country music stars through use of impersonators. The
show runs every day throughout the year at the Company's Wild Bill's
Dinner Theater in Buena Park, California.
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 easier to market and implement than new show concepts, as a result of their
built-in recognition among ticket and tour wholesalers, it generally intends to
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 titled An Evening at the
Improv(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
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profits generated by the show. In March 1997, the Company began performing An
Evening at the Improv(R) Spectacular for the Trump 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 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 company, as well as the rights to
two interactive dinner shows, Frankie and Angie Get Married and Wake Up Shamus
O'Reilly, in exchange for 30,304 shares of Common Stock and 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. 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 to the above-mentioned acquisitions, the Company also
periodically conceives 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,
utilizes 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 Orlando. 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 (primarily through
acquisitions) in order to target, on a regional basis, new commercial clients
and effectively service, and sell additional shows to, existing clients.
In the casino, theme and amusement park, and cruise markets, the
Company markets its shows directly to entertainment directors and senior
executives or through agents that have established relationships with such
individuals. 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
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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 65% 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 three years,
publicity exposure for the Company included impersonator appearances at the 1996
Miss Universe Pageant, on Jay Leno's Tonight Show from Las Vegas, on VH1's Route
96, on CNN's Burden of Proof and on Wheel-of-Fortune.
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.
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, 1996, 1997, and the three months ended March 31, 1997 and 1998, sales of
merchandise accounted for approximately 4.8%, 4.4%, 3.2% and 1.4% 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
33
<PAGE>
economies of scale, ensure consistent quality of product, and obtain sales data
in a timely manner. See "Intellectual Property."
Talent
The Company has featured approximately 175 impersonators and numerous
variety acts (magicians, dancers, aerial acts, jugglers, clowns, sword fighters,
jesters and 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 and Myrtle Beach, 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 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 prepares 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.
Operations and Show Implementation
The Company has developed a centralized operation capable of producing
multiple shows of varying complexity simultaneously. The Company's team of
professionals, including sound, lighting, multimedia, costume and scenic
personnel, have many 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.
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 1998), 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
34
<PAGE>
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 which produce other forms of live theatrical shows, the
Company also competes directly against a large number of smaller independent
producers who sometimes produce tribute 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 currently 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.
In Orlando, Florida and Buena Park, California, where the Company
operates dinner theaters, other major competing dinner theater shows include
Medieval Times, Arabian Nights, and Wizards. The dinner theater market is highly
competitive and the Company finds itself competing with other forms of live
entertainment in addition to the dinner theaters, primarily theme parks.
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.
The Legends service mark was also registered in the United Kingdom in
November 1996 and applications for its registration in Canada, Japan, Mexico and
with the European Union are currently pending. The Company anticipates filing
applications for protection of its Legends service mark in France and several
other foreign countries, as need be. 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
35
<PAGE>
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.
In addition to the above, the Company has filed trademark applications
for various show concepts (Legends of the Rat Pack, Atlantic City Experience,
Las Vegas Experience and Camouflage Aux Folles) and names (Legends Casino,
Legends Hotel, and Legends in Concert Hotel & Casino). All of the applications
are currently pending.
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 sales tax 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.
Employees
As of June 7, 1998, the Company employed approximately (i) 270
full-time employees, including 58 singer/dancers, 27 musicians, 76 operational
personnel, 33 administrative personnel, 39 marketing personnel, 39 box
36
<PAGE>
office/concession personnel and its 6 executive officers; and (ii) 386 part-time
employees. In addition, the Company retains impersonators and certain other
principal acts 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
the Circuit Court of the Seventeenth Judicial Circuit of the State of Florida
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 dismissed for improper venue and was refiled by
the plaintiffs in the Circuit Court of the Thirteenth Judicial Circuit of the
State of Florida. 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 preproduction 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.
The Plaintiff subsequently made a demand for arbitration with the American
Arbitration Association, which determined that the administration of this matter
be conducted by its Regional Office in Los Angeles. This matter has been
scheduled for an arbitration hearing with the American Arbitration Association
on September 15, 1998 in Las Vegas, Nevada. 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 to secure his obligations and performances under the Indemnification
Agreement.
On May 28, 1998, Silver State Property Management, a Nevada
corporation, Roger A. Bergmann Enterprises, a Nevada corporation, and R.E. Lyle
Corp., a Nevada corporation (collectively, "Plaintiffs"), filed a complaint in
the Second Judicial District Court of the State of Nevada in and for the County
of Washoe alleging, among other things, that John W. Stuart, acting in his
capacity as Chairman of the Board and Chief Executive Officer of the Company,
breached an oral agreement to purchase Plaintiff's respective interests in the
Legends in Concert production in Hawaii for an aggregate purchase price of
$1,000,000. The Company is currently preparing an answer to the complaint,
denying that such alleged oral agreement ever existed.
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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.
Properties
The Company's corporate headquarters consist of approximately 16,000
square feet of office and warehouse space located in Las Vegas, Nevada. The
lease will expire in February 1999. The table provided below lists certain
information regarding the Company's other facilities. The Company believes that
its existing facilities are suitable and adequate for its current operations.
<TABLE>
<CAPTION>
Square Type of
Location Footage Possession Lease Expiration Principal Function
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Las Vegas, NV 5,376 Lease 07/98 Warehouse
4,669 Lease 2/99 Warehouse
- --------------------------------------------------------------------------------------------------------------------------
Atlantic City, NJ 2,000 Lease 09/99 Office
(1) Lease 06/98 Residential
- --------------------------------------------------------------------------------------------------------------------------
Myrtle Beach, SC 16,171 Lease 12/04 Theater/Office
- --------------------------------------------------------------------------------------------------------------------------
Daytona Beach, FL 30,000 Lease 11/98 Theater
- --------------------------------------------------------------------------------------------------------------------------
Branson, MO 27,500 Lease 12/98 Theater/Office
- --------------------------------------------------------------------------------------------------------------------------
Toronto, Ontario 9,410 Lease 02/03 Theater
627 Lease Month-to-Month Office
- --------------------------------------------------------------------------------------------------------------------------
Atlanta, GA 6,000 Lease 10/98 Office/Warehouse
- --------------------------------------------------------------------------------------------------------------------------
Buena Park, CA 27,599 Lease (2) 06/10 Theater
- --------------------------------------------------------------------------------------------------------------------------
Orlando, FL 10,000 Lease (3) 10/00 Office/Bar
- --------------------------------------------------------------------------------------------------------------------------
Orlando, FL 3,640 Lease 06/02 Warehouse
- --------------------------------------------------------------------------------------------------------------------------
Kissimmee, FL 31,350 Own (4) N/A Retail
18,221 Own (5) N/A Theater
- --------------------------------------------------------------------------------------------------------------------------
Orlando, FL 15,500 Own (6) N/A Theater
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of seven condominium units for use by the Company's performers
when they are performing in the Company's Legends show at Bally's Park
Place in Atlantic City, New Jersey. The Company leases these units from
John W. Stuart, the Chief Executive Officer of the Company, and his wife.
(2) The Company's wholly-owned subsidiary, On Stage Theaters, Inc. ("On Stage
Theaters"), subleases this property from Wild Bill's California, Inc., a
wholly-owned subsidiary of On Stage Theaters. Wild Bill's California, Inc.
leases the property from an unrelated third party.
(3) On Stage Theaters subleases this property from Blazing Pianos, Inc., a
wholly-owned subsidiary of On Stage Theaters. Blazing Pianos, Inc. leases
the property from an unrelated third party.
(4) This property is owned by Fort Liberty, Inc., a wholly-owned subsidiary of
On Stage Theaters.
(5) This property is owned by Fort Liberty, Inc., a wholly-owned subsidiary of
On Stage Theaters. On Stage Theaters leases this property from Fort
Liberty, Inc.
(6) This property is owned by King Henry's, Inc., a wholly-owned subsidiary of
On Stage Theaters. On Stage Theaters leases this property from King
Henry's, Inc.
38
<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 ....................... 55 Chairman and Chief Executive Officer
David Hope (1) ....................... 39 President, Chief Operating Officer and Director
Kiranjit S. Sidhu .................... 33 Senior Vice President, Chief Financial Officer and Treasurer
Christopher R. Grobl ................. 30 General Counsel and Secretary
Mark S. Karlan (2) ................... 39 Director
Jules Haimovitz (1)(2) ............... 47 Director
James L. Nederlander (2).............. 38 Director
Mark Tratos (1) ...................... 46 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.
David Hope has served as the President, Chief Operating Officer and as
a director 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.
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. Mr. Sidhu holds a Master of Business Administration degree 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.
39
<PAGE>
Mark S. Karlan has been a director of the Company since March 1998. Mr.
Karlan has been President, Chief Executive Officer and a Director of Imperial
Credit Commercial Mortgage Investment Corp., a publicly traded real estate
investment trust, since July 1997. From 1990 to 1997, Mr. Karlan was a private
real estate investor managing all aspects of approximately $100 million of real
estate transactions including the acquisition, financing, leasing and sale of
office, retail, industrial and residential assets. Mr. Karlan received a
Bachelor of Arts degree in Economics from Harvard College in 1980 and a Master
of Business Administration degree from the Harvard Business School and a Juris
Doctor degree from the Harvard Law School, both in 1994.
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. 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.
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.
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 a Juris Doctor degree from Lewis and Clark
Law School in 1979. 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.
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
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 Mr. Nederlander, Class II is comprised of Messrs. Karlan 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 the IPO, the Company agreed that it will, for a
period of three years commencing on August 13, 1997, upon the request of the IPO
Underwriter, nominate and use its best efforts to elect a designee of the IPO
Underwriter (which designee may change from time to time) as a director of the
Company or, at the IPO Underwriter's option, appoint such designee as a
non-voting advisor to the Company's Board of Directors. The IPO 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.
40
<PAGE>
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.
Compensation of Directors
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 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, for the
years ended December 31, 1997 and 1996, certain compensation paid by the Company
to its Chief Executive Officer and the other most highly paid executive officers
of the Company, whose cash compensation exceeded $100,000 for the year ended
December 31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Long Term
Compensation Compensation
----------------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/ SARs Compensation
---------------------------- ---- ------ ----- ------------ ------------- ------------
<S> <C> <C> <C> <C>
John W. Stuart......................... 1997 $250,000 -- $ 239,398(1) -- $9,615(2)
Chairman and Chief Executive Officer 1996 $250,000 -- $1,780,424(3) -- --
David Hope............................. 1997 $221,461 $ 37,865 -- -- --
President and Chief Operating Officer 1996 $130,769 -- $ 23,673(4) 311,300 --
Kiranjit S. Sidhu...................... 1997 $161,596 $162,129(5) -- 85,000 --
Senior Vice President 1996 $123,461 -- -- 24,794 --
</TABLE>
- ------------------
(1) Includes $221,500 in compensation representing the forgiveness of certain
indebtedness owed by Mr. Stuart to the Company.
(2) Represents payment of unused vacation time carried forward from prior
years.
(3) Includes $1,780,424 in compensation representing the forgiveness of certain
indebtedness owed by Mr. Stuart to the Company.
(4) Includes $9,212 representing car and health insurance allowances and
$14,461 representing non-recurring relocation-related expenses.
(5) Represents the issuance of 40,532 shares of Common Stock to Mr. Sidhu
pursuant to his employment agreement.
Option Grants. The following table sets forth certain information
regarding stock options granted during the year ended December 31, 1997 to the
persons named in the Summary Compensation Table.
41
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
----------------------------------------------------------
Potential Realizable
Value At Assumed
Percent of Annual Rates of Stock
Total Options Price Appreciation For
Granted to Option Term(2)
Options Employees in Exercise Expiration ---------------
Name Granted(1) 1997 Price Date 5% 10%
---- ---------- ---- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
John W. Stuart..................... -- -- -- -- -- --
Chairman and Chief Executive Officer
David Hope......................... -- -- -- -- -- --
President and Chief Operating Officer
Kiranjit S. Sidhu.................. 85,000 77% $4.00 08/13/07 $213,824 $541,872
Senior Vice President
</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.
(2) The potential realizable values are based on an assumption that the stock
price of the Common Stock starts equal to the exercise price shown for the
particular option grant and appreciates at the annual rate shown
(compounded annually) from the date of grant until the end of the term of
the option. These amounts are reported net of the option exercise price,
but before any taxes associated with exercise or subsequent sale of the
underlying stock. The actual value, if any, an option holder may realize
will be a function of the extent to which the stock price exceeds the
exercise price on the date the option is exercised and also will depend on
the option holder's continued employment through the vesting period. The
actual value to be realized by the option holder may be greater or less
than the values estimated in this table.
Year End Values. The following table summarizes option exercises during
1997 and the value of vested and unvested options for the persons named in the
Summary Compensation Table at December 31, 1997. Year-end values are based upon
a price of $4.125 per share, which was the closing market price of a share of
the Company's Common Stock on December 31, 1997.
Aggregated Option Exercises in Last Year and
Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at December 31, 1997 December 31, 1997 (1)
---------------------------- ----------------------------
Shares Acquired
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Stuart -- -- -- -- -- --
David Hope -- -- 311,300 -- $42,026 --
Kiranjit S. Sidhu -- -- 93,265 16,529 $10,625 0
</TABLE>
- ----------
(1) Values calculated using the closing market price of a share of the
Company's Common Stock on December 31, 1997 and the per share exercise
price of the individual's options.
42
<PAGE>
Employment Agreements
John W. Stuart. On February 1, 1997, the Company entered into an
employment agreement with Mr. Stuart to employ him as its Chairman 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 family health insurance 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 which is
subject to potential annual 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, 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 family health
insurance and a $500 monthly automobile allowance. 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, any non-vested options held by Mr. Hope 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. Mr. Sidhu's employment
contract, which expires on May 31, 2000, provides for an annual salary of
$165,000 and eligibility for 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. Sidhu is also eligible to receive a bonus under the Executive
Bonus Plan, at the discretion of the Board of Directors; and, in addition to his
salary, he receives family health insurance 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 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 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
stockholders 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 1,400,000
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.
43
<PAGE>
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 April 26, 1998, options to purchase 627,153 shares have been
granted under the Option Plan, including options to purchase 311,300, 109,794,
26,000 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 April 26, 1998, to non-employee directors of the Company.
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 Mr. Stuart, who is not eligible for bonuses under the plan) in 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
---- ------------------------
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 IPO Underwriter, and should not be construed to imply or
predict any future earnings of the Company.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 30, 1998,
or such other date as set forth in the notes to this table, regarding the
beneficial ownership of Common Stock by (i) each person known by the Company to
be the beneficial owner of more than five percent of the outstanding Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company named in the Summary Compensation Table included elsewhere in this
Prospectus and (iv) by all current executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address (1) Beneficially Owned (2) Class (2)
- --------------------------------------------------------- -------------------------- --------------------------
<S> <C> <C>
John W. Stuart (3)....................................... 3,413,223 46.1%
David Hope (4)........................................... 328,550 4.4%
Kiranjit S. Sidhu (5).................................... 143,922 2.0%
James L. Nederlander (6)................................. 10,000 *
Mark Tratos (7).......................................... 10,000 *
Jules Haimovitz (8)...................................... 10,000 *
Mark S. Karlan (9)....................................... 325,000 4.4%
Calvin Gilmore Productions, Inc. (10) ................... 376,149 5.1%
Hanover Restaurants, Inc................................. 595,238 8.0%
Imperial Credit Industries, Inc (11)..................... 575,000 7.8%
All executive officers and directors as a group
(9 persons) (12)....................................... 4,245,103 57.4%
</TABLE>
- --------------------
*Less than one percent
(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
Securities and Exchange Commission, a person is deemed to be the beneficial
owner of Common Stock that can be acquired by such person within 60 days
from July 2, 1998 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 July 2, 1998
have been exercised. Percentages herein assume a base of 7,190,738 shares
of Common Stock outstanding as of July 2, 1998.
(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. Does
not include 75,000 shares of Common Stock issuable upon exercise of stock
options that are not currently exercisable.
(4) Includes (i) 311,300 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options and (ii) 8,750 shares of Common Stock
issuable upon the exercise of immediately exercisable warrants. Does not
include 50,000 shares of Common Stock issuable upon exercise of stock
options that are not currently exercisable.
(5) Includes (i) 101,530 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options and (ii) 5,625 shares of Common Stock
issuable upon the exercise of immediately exercisable warrants. Does not
include 38,264 shares of Common Stock issuable upon exercise of stock
options that are not currently exercisable.
(6) Represents 10,000 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options.
(7) Represents 10,000 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options. Does not include 10,000 shares of
Common Stock issuable upon the exercise of stock options that are not
currently exercisable.
(8) Represents 10,000 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options. Does not include 20,000 shares of
Common Stock issuable upon the exercise of stock options that are not
currently exercisable.
45
<PAGE>
(9) Represents 325,000 shares of Common Stock issuable upon the exercise of an
immediately exercisable warrant granted to Imperial Credit Commercial
Mortgage Investment Corp. ("ICCMIC"). Mr. Karlan is the President, Chief
Executive Officer, Treasurer and a Director of ICCMIC. See footnote 11
below. Does not include 10,000 shares of Common Stock issuable upon the
exercise of stock options that are not currently exercisable.
(10) An indirect, wholly-owned subsidiary of Fox Family Productions Worldwide,
Inc. 206,612 of these shares were acquired as a result of the Calvin
Gilmore Acquisition. 169,537 shares were acquired from John Stuart on
June 30, 1998.
(11) Includes 325,000 shares of Common Stock issuable upon the exercise of an
immediately exercisable warrant granted to ICCMIC. ICCMIC is managed by
Imperial Credit Commercial Asset Management Corporation, which is a wholly
owned subsidiary of Imperial Credit Industries, Inc. Imperial Credit
Industries, Inc. also beneficially owns approximately 8.9% of the
outstanding common stock of ICCMIC. Also includes 250,000 shares of Common
Stock issuable upon the exercise of an immediately exercisable warrant
granted to Imperial Capital Group, LLC (the "LLC"). Imperial Credit
Industries, Inc. has a 60% interest in the LLC. Imperial Credit Industries,
Inc. disclaims the beneficial ownership of the shares of Common Stock held
by the LLC. All information provided in this footnote 11 was derived from a
Schedule 13G filed by Imperial Credit Industries, Inc. with the Securities
and Exchange Commission on April 3, 1998.
(12) Includes (i) 438,973 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options and (ii) 339,375 shares of Common
Stock issuable upon the exercise of immediately exercisable warrants. Does
not include 65,345 shares of Common Stock issuable upon the exercise of
stock options, including 40,000 shares of Common Stock subject to options
granted to non-employee directors of the Company, that are not currently
exercisable.
CERTAIN TRANSACTIONS
As of December 31, 1996, Mr. Stuart owed the Company a total of
$1,637,413 principal amount under an 8% promissory note, plus accrued interest
thereon of $143,011. On, and as of such date, the Company forgave all $1,780,424
(the "Original Stuart Debt Forgiveness"). In March 1997, in connection with the
IPO, the Company agreed with the IPO Underwriter that it would neither loan nor
advance any sums to or on behalf of Mr. Stuart, other than those sums advanced
to Mr. Stuart between December 31, 1996 and the effective date of the IPO,
without the prior consent of the IPO Underwriter. Between December 31, 1996 and
August 13, 1997, the Company advanced an additional $222,000 (including
principal and interest) to Mr. Stuart all of which amount was forgiven by the
Company on August 13, 1997. On each of October 23, 1997 and November 17, 1997,
the Company received authorization from the IPO Underwriter to advance Mr.
Stuart $50,000, and on March 25, 1998, the Company received authorization to
advance up to an additional $150,000 to Mr. Stuart to be used for the settlement
of certain litigation pending against Mr. Stuart in connection with his
involvement in the Legends in Concert show in Hawaii (see below). On June 25,
1998, Mr. Stuart repaid the Company $107,596.03. This $107,596.03 was derived by
Mr. Stuart from the proceeds of the sale to the Selling Stockholders of 400,000
shares of Common Stock offered hereby. Therefore, as of June 26, 1998, Mr.
Stuart owed the Company a total of $114,051.79, which includes principal and
interest at a rate of 6% per annum (the "Aggregate Advance"). The Aggregate
Advance is evidenced by a promissory note and is payable in full on June 26,
1999.
In February 1997, Mr. Stuart granted to Senna Venture Capital Holdings,
Inc., an affiliate of DYDX Legends Group L.P. ("DYDX" and a lender to the
Company), an option to purchase 142,292 of his shares of Common Stock at an
exercise price of $5.00 per share, in consideration for (i) DYDX waiving a
technical default under a certain loan agreement entered into between DYDX and
the Company and (ii) DYDX's agreement in connection with such waiver to allow
the Original 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
46
<PAGE>
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 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, 1999. 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 $94,000 for each of the years ended
December 31, 1996 and 1997.
Pursuant to the terms of the employment agreement between the Company
and Mr. Sidhu, on April 13, 1998, the Company advanced to Mr. Sidhu $63,213 (the
"Tax Loan") in order to satisfy Mr. Sidhu's income tax liability incurred in
connection with the grant from the Company to Mr. Sidhu of 40,532 shares of
Common Stock. Mr. Sidhu executed a promissory note in favor of the Company in
connection with the Tax Loan. The promissory note provides for interest on the
Tax Loan to accrue at 8% per annum, is secured by 40,532 shares of Common Stock
owned by Mr. Sidhu and becomes due on April 12, 1999.
On March 13, 1998, several subsidiaries of the Company (the "Single
Purpose Subsidiaries") entered into a loan agreement with Imperial Credit
Commercial Mortgage Investment Corp. ("ICCMIC"). Pursuant to the loan agreement,
the Single Purpose Subsidiaries borrowed an aggregate of $12.5 million from
ICCMIC (the "ICCMIC Loan"). The Company, as the ultimate parent of the Single
Purpose Subsidiaries, has guaranteed the full repayment of the ICCMIC Loan. The
ICCMIC Loan accrues interest at a variable rate (currently 10.27%) and becomes
due in March 2008. In connection with the ICCMIC Loan, (i) ICCMIC agreed to
provide the Company with a total credit facility of up to $20 million ($12.5
million of which was drawn down on March 13, 1998) and (ii) the Company granted
to ICCMIC and a related entity (see footnote 11 to Principal and Selling
Stockholders Table) warrants to purchase an aggregate of 575,000 shares of
Common Stock at an exercise price of $4.44. These warrants were valued at
$500,000 and are accounted for as an original issue discount to be amortized
over the life of the loan. Mr. Karlan, a director of the Company, is the
President, Chief Executive Officer and a Director of ICCMIC.
47
<PAGE>
SELLING STOCKHOLDERS
The following tables set forth certain information with respect to the
Common Stock beneficially owned by each Selling Stockholder as of June 29, 1998,
and as adjusted to give effect to the sale of such securities. The Shares are
being registered to permit public secondary trading of such securities, and the
Selling Stockholders may offer such securities for resale from time to time. See
"Plan of Distribution."
505,649 shares of Common Stock being offered by the Selling
Stockholders were issued in connection with the Debenture Conversion. In
connection with the Debenture Conversion, the Company agreed to register all
such shares of Common Stock. 400,000 shares of Common Stock being offered hereby
were sold to certain of the Selling Stockholders by John W. Stuart, the Chairman
and Chief Executive Officer of the Company, for aggregate consideration of
$1,200,000 in private negotiated transactions in which such Selling Stockholders
received registration rights in connection with the private sales. Except as set
forth below, none of such Selling Stockholders has had a material relationship
with the Company within the past three years other than as a result of ownership
of the securities of the Company. The Shares may be offered from time to time by
the Selling Stockholders named below or their nominees, and this Prospectus may
be required to be delivered by persons who may be deemed to be underwriters in
connection with the offer or sale of such securities. See "Plan of
Distribution." In accordance with the rules of the Commission, the columns
"Shares Beneficially Owned After Offering" show the amount of securities owned
by Selling Stockholders after the offering. The numbers in such columns assume
all Shares registered and offered by this Prospectus, shown in the column,
"Number of Shares Offered" are sold by the Selling Stockholders. However, the
Selling Stockholders are not required to sell any of the Shares offered, and the
Selling Stockholders may sell as many or as few Shares as they choose. See "Plan
of Distribution."
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering (1) Number Owned After Offering (1)
--------------------------- of Shares ------------------------
Name Number Percent Sold Number Percent
- ---- ------ ------- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Arthur Kanfer............................... 4,425 * 4,425 -- --
Chad Nellis................................. 20,355 * 20,355 -- --
Christopher Tyler........................... 3,835 * 3,835 -- --
Clarence and Ada Miller Family Trust........ 17,700 * 17,700 -- --
Cynthia Wall................................ 5,900 * 5,900 -- --
Darin Nellis................................ 1,770 * 1,770 -- --
David Fox................................... 5,900 * 5,900 -- --
Eric Shiu................................... 29,500 * 29,500 -- --
Gene Smith.................................. 1,180 * 1,180 -- --
Gerard Hendricks............................ 69,786 * 69,786 -- --
Jack Calkins................................ 1,475 * 1,475 -- --
Jackie Francis.............................. 1,475 * 1,475 -- --
JDK & Associates, Inc. (2).................. 209,725 2.8 86,288 123,437 1.7
Jessica Taylor.............................. 2,950 * 2,950 -- --
John Calkins................................ 1,475 * 1,475 -- --
Josh Regier................................. 4,425 * 4,425 -- --
Kenneth Berg (3)............................ 172,069 2.3 59,000 113,069 1.5
Kim Choy Trust.............................. 29,500 * 29,500 -- --
Philip Shin and Greg Shin................... 14,750 * 14,750 -- --
Robert Moes................................. 7,375 * 7,375 -- --
Roberto Amendola............................ 590 * 590 -- --
Ryan Nellis................................. 2,950 * 2,950 -- --
Scott Freedman.............................. 14,750 * 14,750 -- --
Scott Nellis................................ 7,670 * 7,670 -- --
Southwest Marketing I, LLC.................. 76,301 1.0% 59,000 17,301 *
William Walters............................. 75,750 * 39,750 36,000 *
Wing Hin Chau............................... 29,500 * 29,500 -- --
Zarko Vuletic and Irma Vyketuc JT........... 7,375 * 7,375 -- --
Joseph E. Haick 38,000 * 38,000 -- --
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering (1) Number Owned After Offering (1)
--------------------------- of Shares ------------------------
Name Number Percent Sold Number Percent
- ---- ------ ------- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Joseph W. McSherry 10,000 * 10,000 -- --
Robert Mittman (4) 32,500 * 10,000 22,500 *
Eamon J. Twomey 2,000 * 2,000 -- --
Ronald Nash 25,000 * 25,000 -- --
Jeffrey Silverman 25,000 * 25,000 -- --
John Pappajohn 25,000 * 25,000 -- --
Robert Toricelli (5) 33,000 * 10,000 23,000 *
Elliot Broidy 203,000 2.7% 100,000 103,000 1.4
Allan Siemons 15,000 * 15,000 -- --
Forstmann Partners (6) 25,000 * 25,000 -- --
Anthony Forstmann (6) 5,000 * 5,000 -- --
Mark Siegel 15,000 * 15,000 -- --
Matthew Gohd (7) 289,000 3.9% 15,000 274,000 3.7
Julie T. McMahon 5,000 * 5,000 -- --
Arthur Goldberg 50,000 * 50,000 -- --
--------
905,649
=======
</TABLE>
- ----------
*Less than one percent
(1) As required by regulations of the Securities and Exchange Commission, the
number of shares shown as beneficially owned includes shares which can be
purchased within 60 days after June 10, 1998.
(2) Includes (i) 32,232 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options granted by John W. Stuart, the
Company's Chairman and Chief Executive Officer and (ii) 31,250 shares of
Common Stock issuable upon the exercise of immediately exercisable
warrants. Joseph Kowal, the President of JDK & Associates, Inc., served as
a director of the Company from February 18, 1995 until January 27, 1997.
Between October 1, 1997 and March 31, 1998, JDK & Associates, Inc., served
as the Company's investor relations firm.
(3) Includes 35,813 shares of Common Stock issuable upon the exercise of
immediately exercisable stock options granted by John W. Stuart, the
Company's Chairman and Chief Executive Officer. Mr. Berg served as a
director of the Company from August 6, 1995 until January 21, 1998.
(4) Includes 22,500 shares of Common Stock issuable upon the exercise of
warrants that are exercisable within 60 days from July 2, 1998.
(5) Includes 15,000 shares of Common Stock issuable upon the exercise of
warrants that are exercisable within 60 days from July 2, 1998.
(6) Anthony Forstmann is the general partner of Forstmann Partners.
(7) Includes 240,000 shares of Common Stock issuable upon the exercise of
warrants that are exercisable within 60 days from July 2, 1998.
49
<PAGE>
PLAN OF DISTRIBUTION
The distribution of the Shares by the Selling Stockholders is not
subject to an underwriting agreement. The Shares offered by the Selling
Stockholders may be sold from time to time at designated prices that may be
changed, at market prices prevailing at the time of sale, at prices relating to
such prevailing market prices or at negotiated prices. In addition, the Selling
Stockholders may sell the Shares through customary brokerage channels, either
through broker-dealers acting as agents or principals. The Selling Stockholders
may effect such transactions by selling Shares to or through broker-dealers, and
such broker-dealers may receive compensation in the form of underwriting
discounts, concessions, commissions, or fees from the Selling Stockholders
and/or purchasers of the Shares for whom such broker-dealers may act as agent,
or to whom they sell as principal, or both (which compensation to a particular
broker-dealer might be in excess of customary commissions). Any broker-dealers
that participate with the Selling Stockholders in the distribution of Shares may
be deemed to be underwriters and any commissions received by them and any profit
on the resale of Shares positioned by them might be deemed to be underwriting
discounts and commissions within the meaning of the Securities Act of 1933, in
connection with such sales.
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 June 30, 1998, there were 7,397,350 shares of Common
Stock outstanding held by approximately 87 stockholders of record 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.
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.
50
<PAGE>
Public Warrants
The Warrants entitle the registered holders 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 IPO 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 IPO
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 day on which the Company gives notice (the "Call Date") has
been at least 150% of the then effective exercise price of the Warrants and the
Company obtains the written consent of the IPO 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 have been 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 IPO 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.
Bridge Warrants
The Bridge Warrants are exercisable at an exercise price of $5.50 per
share until March 19, 2002; however, neither the Bridge Warrants nor the Bridge
Warrant Shares are transferable by the holders thereof until August 13, 2000.
The investors in the Bridge Financing have been granted certain registration
rights relating to the Bridge Warrant Shares. See "- Registration Rights."
51
<PAGE>
Registration Rights
Upon the consummation of this offering, the holders of 1,626,926 shares
of Common Stock and the holders of warrants convertible into 1,242,000 shares of
Common Stock will be entitled to certain rights with respect to the registration
of such shares under the Securities Act.
The holders of the 440,755 shares of Common Stock (which were exchanged
for all of the Company's warrants outstanding on March 17, 1997) (the "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 August 13, 1998. 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
August 13, 1998.
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 August 13, 1999. If such
registration statement is not declared effective by the Commission by August 13,
1999, then, commencing on the first day of the 25th month following August 13,
1997, 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, additional shares of Common Stock.
In connection with the IPO, the Company agreed to grant to the IPO
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.
The Company granted certain piggyback registration rights to the holder
of 595,238 shares of Common Stock issued in connection with the Gedco
Acquisition. The piggyback registration rights permit the holder to request the
Company to include the 595,238 shares of Common Stock in any registration
statement in which John W. Stuart, the Chairman and Chief Executive Officer of
the Company, proposes to register any shares of the Common Stock that he owns.
The rights, which are currently exercisable, expire on March 13, 2001. Also in
connection with the Gedco Acquisition, and pursuant to the terms of an
employment agreement entered into between the Company and Gerard O'Riordan, the
Company granted to Mr. O'Riordan a warrant to purchase 200,000 shares of Common
Stock. The Company has agreed to register the shares of Common Stock underlying
the warrant within 90 business days following the date on which the warrant is
exercised.
The Company granted to ICCMIC and Imperial Capital Group, LLC warrants
to purchase an aggregate of 575,000 shares of Common Stock in connection with
ICCMIC's March 13, 1997 loan of $12,500,000 to several subsidiaries of the
Company. The holders of the warrants were granted piggyback registration rights
with respect to the 575,000 shares of Common Stock underlying the warrants. The
piggyback registration rights enable the holders to request the Company to
include the shares in a registration statement filed by the Company (whether
such registration is made on behalf of the Company or on behalf of any of its
security holders) at any time after January 1, 1999.
The Company granted certain piggyback registration rights with
respect to (i) the 206,612 shares of Common Stock issued to Calvin Gilmore in
connection with the Calvin Gilmore Acquisition and (ii) the 169,537 shares of
Common Stock purchased by Calvin Gilmore from Mr. Stuart on June 30, 1998. The
piggyback registration rights permit Calvin Gilmore to request the Company to
include these 376,149 shares of Common Stock in any registration statement that
the Company files on or after July 1, 1998 and before July 1, 2013. Beginning on
July 1, 2000 and lasting as long as Calvin Gilmore owns any of such 376,149
shares of the Company, Calvin Gilmore also has the right to request one Demand
Registration with respect to such shares.
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.
52
<PAGE>
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 General
Corporation Law (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 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
53
<PAGE>
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.
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
54
<PAGE>
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 completion of the offering, the Company will have 7,397,350 shares
of Common Stock outstanding based upon the number of shares outstanding as of
June 30, 1998. All of the Shares offered pursuant to this Prospectus were, prior
to consummation of the offering, outstanding but not freely tradeable. Upon
consummation of the offering, 2,136,112 shares will be freely tradeable without
restriction or further registration under the Securities Act unless acquired by
an "affiliate" of the Company as that term is defined in Rule 144 ("Rule 144")
under the Securities Act, which shares will be subject to the resale limitations
of Rule 144 described below.
The remaining 5,261,238 shares of Common Stock outstanding are deemed
"restricted securities" as that term is defined under Rule 144. In general,
under Rule 144 as currently in effect, a stockholder who has beneficially owned
for at least one year shares privately acquired directly or indirectly from the
Company or from an affiliate of the Company, and persons who are affiliates of
the Company who have acquired the shares in registered transactions, will be
entitled to sell within any three month period a number of shares that does not
exceed the greater of: (i) 1% of the outstanding shares of the Common Stock; or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements relating to the manner and notice of sale and the
availability of current public information about the Company.
In general under Rule 144(k), as currently in effect, a stockholder,
who is not an affiliate of the Company, and who has beneficially owned such
shares for at least two years, may sell all of such stockholder's shares without
the volume limitations of Rule 144 described above.
On June 8, 1998, the Company filed a registration statement on Form S-8
under the Securities Act to register 785,000 shares of Common Stock issued or
issuable under the Option Plan. After the effective date of such registration
statement, shares issued under the Option Plan will be freely tradeable without
restriction or further registration under the Securities Act, unless acquired by
affiliates of the Company. The investors in the Bridge Financing have agreed
that the securities received in such financing may not be sold until August 13,
1999, under any circumstances.
Prior to this offering, the market for the Company's securities has
been characterized by volatility and low trading volume. No predictions can be
made with respect to the effect, if any, that public sales of shares of the
Common Stock or the availability of shares for sale will have on the market
price of the Common Stock after the offering. Sales of substantial amounts of
Common Stock in the public market following the offering, or the perception that
such sales may occur, could adversely affect the market price of the Common
Stock or the ability of the Company to raise capital through sales of its equity
securities. See "Risk Factors -- Shares Eligible for Future Sale."
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.
55
<PAGE>
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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements, and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements, and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C., as
well as the regional offices of the Commission located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois and 7 World Trade Center,
Suite 1300, New York, New York. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements, and other
information that are filed through the Commission's Electronic Data Gathering,
Analysis and Retrieval System. This Web site can be accessed at
http://www.sec.gov. The Common Stock of the Company is quoted on the Nasdaq
National Market. Reports, proxy statements and other information concerning the
Company may be inspected at the offices of the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement, including all exhibits thereto,
may be obtained from the Commission's principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission, or may be examined without
charge at the offices of the Commission described above.
56
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On Stage Entertainment, Inc. and Subsidiaries
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Certified Public Accountant's Report ...............................................................F-2
Consolidated 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
Supplemental schedule of noncash investing and financing activities...................................F-7
Summary of accounting policies.................................................................F-8 - F-11
Notes to financial statements.................................................................F-12 - F-24
</TABLE>
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 sheets of On Stage Entertainment, Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
stockholder's equity (deficit) and cash flows for each of 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 1997, and the results of its operations and its cash flows
for each of the two years then ended, in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Los Angeles, California
February 14, 1998, except for Note 12
which is as of March 20, 1998
F-2
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1996 1997 1998
------- ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents ............................................... $ 290,751 $ 2,323,559 $ 1,195,187
Accounts receivable ..................................................... 490,465 455,340 963,995
Inventory ............................................................... 67,853 118,700 299,771
Deposits ................................................................ 231,601 342,096 465,385
Prepaid and other assets ................................................ 236,295 271,338 353,472
Pre-opening costs, net .................................................. 129,180 -- 804,410
Notes receivable from stockholder (Notes 6 and 12) ...................... -- 136,194 158,568
------------ ------------ ------------
1,446,145 3,647,227 4,240,788
------------ ------------ ------------
Total current assets..........................................
Property, equipment and leasehold improvements (Notes 1 and 2) ................ 3,725,941 5,008,835 20,807,049
Less: Accumulated depreciation and amortization .............................. (1,937,718) (2,553,347) (2,706,258)
------------ ------------ ------------
Property, equipment and leasehold improvements, net ........................... 1,788,223 2,455,488 18,100,791
------------ ------------ ------------
Cost in excess of net assets acquired, net of accumulated amortization
of $1,053, $7,370 and $10,941 (unaudited) (Note 4) ........................ 62,123 116,415 112,845
Direct acquisition costs (Note 12) ............................................ -- 258,133 100,557
Deferred costs ................................................................ 657,801 -- 1,246,301
------------ ------------ ------------
$ 3,954,292 $ 6,477,263 $ 23,801,282
============ ============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses...................................... $ 599,045 $ 880,286 $ 2,108,065
Accrued payroll and other liabilities ..................................... 621,986 698,499 1,230,492
Litigation settlement accrual ............................................. 100,000 -- --
Current maturities of long-term debt (Note 2) ............................. 228,510 271,918 603,332
------------ ------------ ------------
Total current liabilities .................................... 1,549,541 1,850,703 3,941,889
------------ ------------ ------------
DYDX LP Loan (Notes 2 and 4) .................................................. 750,000 -- --
Long-term debt, less current maturities (Note 2) .............................. 1,877,391 550,332 13,311,891
------------ ------------ ------------
Total liabilities .................................................. 4,176,932 2,401,035 17,253,780
------------ ------------ ------------
Commitments and contingencies (Note 4)
Stockholders' equity (deficit) (Notes 2 and 4)
Preferred stock, par value $1 per share, 1,000,000 shares
Authorized; none issued and outstanding .............................. -- -- --
Common stock, par value $0.01 per share; authorized 25,000,000
shares; 4,002,044, 6,595,500 and 7,190,738 (unaudited) shares ....... 40,020 65,955 71,907
issued and outstanding
Additional paid-in-capital ............................................... 121,024 7,340,013 10,334,061
Accumulated deficit ...................................................... (383,684) (3,329,740) (3,858,466)
------------ ------------ ------------
Total stockholders' equity (deficit) .............................. (222,640) 4,076,228 6,547,502
------------ ------------ ------------
$ 3,954,292 $ 6,477,263 $ 23,801,282
============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-3
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, Three months ended
March 31,
1996 1997 1997 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues ......................................... $ 14,278,082 $ 15,726,074 $ 2,718,777 $ 6,205,371
Costs of sales ....................................... $ 8,446,367 11,413,524 1,902,888 3,917,328
------------ ------------ ------------ ------------
Gross profit ......................................... 5,831,715 4,312,550 815,889 2,288,043
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative (Note 7) . 4,085,624 4,946,135 1,069,832 2,282,216
Depreciation and amortization (Note 8) ....... 676,306 982,180 147,241 188,621
Expenses at discontinued location (Note 9) ... -- 489,285 -- --
------------ ------------ ------------ ------------
Total operating expenses .......... 4,761,930 6,417,600 1,217,073 2,470,837
------------ ------------ ------------ ------------
Operating income (loss) ............................. 1,069,785 (2,105,050) (401,184) (182,794)
Interest expense, net (See Note 10) .................. 152,998 834,333 113,869 13,760
Other income ......................................... -- -- -- (35,599)
Subsidiary operations for period not owned
(Note 12) ............................................ -- -- -- 366,516
------------ ------------ ------------ ------------
Income (loss) before income taxes .................... 916,787 (2,939,383) (515,053) (527,471)
Income taxes (Note 11) ............................... 15,789 6,673 2,319 1,255
------------ ------------ ------------ ------------
Net Income (loss) (See Note 11) ...................... $ 900,998 $ (2,946,056) $ (517,372) $ (528,726)
============ ============ ============ ============
Basic income (loss) per share ........................ $ 0.23 $ (0.55) $ (.12) $ (.08)
============ ============ ============ ============
Diluted net income (loss) per share .................. $ 0.22 $ (0.55) $ (.12) $ (.08)
============ ============ ============ ============
Basic average number of common shares outstanding .... 4,002,044 5,365,851 4,486,515 6,714,548
============ ============ ============ ============
Diluted average number of common shares outstanding .. 4,064,927 5,365,851 4,486,515 6,714,548
============ ============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-4
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated 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, December 31, 1995 ........ 3,982,760 $ 10,000 $ -- $(1,254,854) $(1,244,854)
Effects of stock splits (Notes 4) . -- 29,828 -- (29,828) --
Acquisition of Interactive Events,
Inc. (Note 4)...................... 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 (Note 2)................ 195,500 1,956 364,344 -- 366,300
Issuance of common stock to
officer (Note 4).................. 40,532 405 161,724 -- 162,129
Warrant exchange (Note 4) ......... 440,755 4,408 (4,408) -- --
Issuance of stock in connection
with Interactive Events
acquisition (Note 4).............. 11,020 110 60,500 -- 60,610
Issuance of common stock in
connection with the initial public
offering (Note 4)................. 1,400,000 14,000 4,841,975 -- 4,855,975
Issuance of common stock in
connection with the Debentures
conversion (Note 4)............... 505,649 5,056 1,794,854 -- 1,799,910
Net loss for the year ............. -- -- -- (2,946,056) (2,946,056)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ........ 6,595,500 $ 65,955 $ 7,340,013 $(3,329,740) $ 4,076,228
Issuance of stock in connection
with the Gedco USA, Inc.
acquisition (unaudited) (Note 12).. 595,238 5,952 2,494,048 -- 2,500,000
Warrants issued in connection
with mortgage financing
(unaudited) (Note 12) ............. -- -- 500,000 -- 500,000
Net loss (unaudited)................ -- -- -- (528,726) (528,726)
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1998 (unaudited) 7,190,738 $ 71,907 $10,334,061 $(3,858,466) $ 6,547,502
=========== =========== =========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-5
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Years ended Three Months ended
December 31, March 31,
1996 1997 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ............................... $ 900,998 $ (2,946,056) $ (517,372) $ (528,726)
------------ ------------ ------------ ------------
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization ................. 676,306 676,306 147,241 160,180
Interest paid in common stock ................. -- 194,228 -- --
Loss on disposal of property and equipment .... 53,983 (10,834) -- --
Issuance of common stock to officer ........... -- 162,129 162,129 --
Non-cash interest ............................. -- 366,300 -- --
Reverse litigation accrual .................... -- (25,000) -- --
Forgiveness of note receivable from
stockholder ................................... -- 221,521 -- --
Increase (decrease) from changes in operating assets and
liabilities:
Accounts receivable ......... (262,341) 46,723 170,599 (508,655)
Inventory ................... (67,853) (50,847) (6,967) (60,987)
Deferred costs .............. (344,522) 657,801 (162,728) --
Deposits .................... (86,816) (110,495) (121,970) (123,289)
Pre-opening costs ........... (61,483) 129,180 (112,457) (804,410)
Prepaid and other assets .... (125,988) (35,043) (23,963) 75,382
Accounts payable and
accrued expenses .......... 56,302 281,243 (6,623) 241,735
Accrued payroll and other
liabilities ............... 415,651 76,513 (57,144) 531,993
Litigation settlement accrual -- (75,000) (100,000) --
------------ ------------ ------------ ------------
Total adjustments ............................. 253,239 2,504,725 (111,883) (488,051)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities .... 1,154,237 (441,331) (629,255) (1,016,777)
------------ ------------ ------------ ------------
Cash flows from investing activities
Advances on note receivable from stockholder.. -- (357,715) (103,235) (55,000)
Repayments on note receivable from stockholder ......... -- -- -- 32,626
Capital expenditures ......................... (987,355) (625,612) (93,517) (134,363)
Acquisition of Interactive Events Inc.,
net of cash acquired ........................ 45,272 -- -- --
Payment for purchase of Gedco, USA, net of cash
received (Note 12) ..................................... -- -- -- (12,116,556)
Direct acquisition costs ......................... -- (258,133) -- (488,298)
------------ ------------ ------------ ------------
Net cash used in investing activities .................. (942,083) (1,241,460) (196,752) (12,761,591)
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years ended Three Months ended
December 31, March 31,
1996 1997 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Borrowings/Repayments under line of credit ....... (200,000) -- -- 250,000
Proceeds from short-term borrowing ............... 1,000,000 -- -- --
Proceeds from long-term borrowing ................ -- -- -- 12,500,000
Repayments on long-term borrowing ................ (649,099) (1,140,376) (25,597 (100,004)
Repayments on short-term borrowing ............... (92,402) -- -- --
Proceeds from bridge notes ....................... -- 875,000 875,000 --
Payments of bridge notes ......................... -- (875,000) -- --
Net proceeds from sale of common
stock and warrants ............................ -- 4,855,975 -- --
------------ ------------ ------------ ------------
Net cash provided by financing activities .............. 58,499 3,715,599 849,403 12,649,996
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ... 270,653 2,032,808 23,396 (1,128,372)
Cash and cash equivalents at beginning of period
20,098 290,751 290,751 2,323,559
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ............. $ 290,751 $ 2,323,559 $ 314,147 $ 1,195,187
============ ============ ============ ============
Supplemental disclosure of cash flow information Cash
paid during the period for:
Interest ....................................... $ 287,047 $ 278,059 $ 67,072 $ 22,923
Taxes .......................................... $ 15,789 $ 6,673 $ 2,319 $ 1,255
============ ============ ============ ============
</TABLE>
F-6
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Supplemental schedule of noncash investing and financing activities
During 1996 and 1997, $259,855 and $712,405 of lease assets and
obligations were capitalized, respectively.
During 1997, the Company borrowed an aggregate of $1,000,000 from 21
private investors, in return for which the Company issued to such investors
unsecured non-negotiable notes payable, which accrued interest at an annual rate
of 9% and which matured upon the consummation the initial public offering (the
"Bridge Notes"), Common Stock and warrants (collectively, the "Bridge
Financing"). The Common Stock issued in connection with the Bridge Financing was
valued at $366,300. As no consideration was paid for the Common Stock, this
amount is considered an original issue discount and amortized over the term of
the Bridge Notes.
During 1997, the Company exchanged all of its outstanding warrants for
440,755 shares of Common Stock, which had no effect on the Company's earnings.
During 1997, the Company sold equipment with a historical cost of
approximately $55,000 at a gain. The Company accepted a note receivable as
payment for the sale.
Upon the consummation of the Company's initial public offering, 1,799,910
of outstanding convertible debentures were converted into 505,549 shares of
common stock.
During 1997 the Company issued 11,020 shares of common stock in connection
with the Interactive Events acquisition.
During the quarter ended March 31, 1998, the Company issued 595,238 shares
of Common Stock in connection with the Gedco Acquisition (unaudited) (Note 12).
In connection with mortgage financing related to the Gedco Acquisition,
the Company issued 575,000 warrants to purchase the Company's Common Stock to
the lender and an affiliate of the lender which was valued at $500,000 and
accounted for as an original issue discount (unaudited).
During the three months ended March 31, 1997 and 1998, $0 and $442,997 of
lease assets and other obligation, principally pre-opening costs, were
capitalized, respectively (unaudited).
See accompanying summary of accounting policies
and notes to financial statements.
F-7
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Summary of Accounting Policies
Business Activity
On Stage Entertainment, Inc. (the "Company") produces and sells live
entertainment and operates live theaters and dinner theaters worldwide. The
Company has continuous running shows in gaming and resort venues in California,
Florida, Missouri, Nevada, New Jersey, Pennsylvania and South Carolina.
The Company was incorporated on October 30, 1985 in the state of Nevada.
Principles of Consolidation
The balance sheet reflects the accounts of On Stage Entertainment, Inc.
and its wholly-owned subsidiaries Legends in Concert, Inc., a Nevada
corporation, On Stage Marketing, Inc., a Nevada corporation and Interactive
Events, Inc., a Georgia corporation. The consolidated statements of operations
for the year ended December 31, 1997 include the results of operations of the
above-listed companies for the period presented. The consolidated statement of
operations for the year ended December 31, 1996 include the results of
operations of On Stage Entertainment, Inc., Legends In Concert, Inc. and On
Stage Marketing, Inc. for the period presented and the results of Interactive
Events, Inc. from November 1, 1996. All significant intercompany transactions
and balances have been eliminated in consolidation. The consolidated group is
referred to collectively and individually as the "Company."
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 assets 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.
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 related assets useful life 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
Land ............................................................ 0
Buildings......................................................... 20
F-8
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)
Impairment of Long-Lived Assets
The Financial Accounting Standards Board ("FASB") issued 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")
which is effective for financial statements for fiscal years beginning after
December 15, 1995. This 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 is applying the concepts to intangibles and productive
assets periodically.
Stock Based Compensation
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 non-employees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
SFAS No. 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", and comply with pro forma disclosure
requirements. 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.
Earnings (Loss) Per Share
On March 3, 1997, the FASB issued Statement of Financial Accounting
Standard 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 the entity, similar to fully diluted
earnings per share. Except where the provisions of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 98 are applicable, potential dilutive
securities have been excluded in all years presented in the Statements of
Operations when the effect of their inclusion would be anti-dilutive. SFAS 128
is effective for fiscal years and interim periods after December 15, 1997; early
adoption is not permitted. The Company has adopted this pronouncement during the
fiscal year ended December 31, 1997. The effect of restating 1996 earnings per
share to conform to SFAS 128 was to increase basic earnings per share by $0.01.
The Company's diluted net income per share for the year ended December 31,
1996, includes 62,883 common shares that would be issued upon exercise of
311,300 stock options. For the year ended December 31, 1997, potential dilutive
securities representing outstanding 720,938 options and 2,077,000 outstanding
warrants are not included since their effect would be anti-dilutive. For the
year ended December 31, 1996, potential dilutive securities representing 456,453
outstanding stock options are not included because their exercise price was
greater than the average market price of the common shares.
For the three months ended March 31, 1997, potential dilutive
securities representing 617,403 outstanding options and 212,500 outstanding
warrants are not included, since their effect would be anti-dilutive. For the
three months ended March 31, 1998, potential dilutive securities representing
563,953 outstanding stock options and 2,913,250 outstanding warrants are not
included, since their effect would be anti-dilutive (unaudited).
F-9
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Statements", ("SFAS No. 107") issued by the FASB became
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.
The carrying amounts of financial instruments including cash, accounts
receivable, current maturities of long-term debt, accounts payable 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, 1997.
The Company has notes receivable from the Chief Executive Officer
("CEO"). Due to the related-party nature of these receivables the fair value
cannot be determined.
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 a one year period, or over
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/or cash equivalents.
Concentration of Credit Risk
The Company places its cash and temporary cash investments with banking
institutions. At December 31, 1997 and March 31, 1998, the Company had
$2,600,788 and $1,095,187 (unaudited) on deposit at one bank. Account balances
at an individual bank are insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000.
Interim Financial Information
The interim financial statements for the three months ended March 31,
1997 and 1998 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, 1998 are not necessarily
indicative of the results for the entire year.
F-10
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)
New Accounting Standards
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129") issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Account Principles Board Opinion No. 15, which has been superseded
by SFAS No. 129. The Company adopted of SFAS No. 129 as of December 15, 1997,
and it had no effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. On January 1, 1998, the Company adopted
SFAS 130 and it had no effect on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") issued by
the FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. Earlier application is permitted. SFAS No. 131 requires that
the public companies report certain information about operating segments,
products, services and geographical areas in which they operate and their major
customers. The Company does not expect adoption of SFAS No. 131 to have an
effect on its financial position or results of operations; however, disclosures
on certain of these items may be expanded.
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities," (SOP 98-5) issued by the American Institute of Certified Public
Accountants is effective for financial statements beginning after December 15,
1998. SOP 98-5 requires that the costs of start-up activities, including
organization costs, be expensed as incurred. Start-up activities are defined
broadly as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer (excluding ongoing customer
acquisition costs, such as policy acquisition costs and loan origination costs)
or beneficiary, initiating a new process in an existing facility, or commencing
some new operation. The Company does not expect adoption of SOP 98-5 to have a
material effect, if any, on its financial position or results of operations.
Reclassifications
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
F-11
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Financial Statements
1. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
---------- ------------- ----------
(unaudited)
<S> <C> <C> <C>
Stage equipment............................................. $1,997,340 $ 2,267,456 $2,390,518
Scenery and wardrobe........................................ 854,976 1,047,750 1,109,566
Furniture and fixtures...................................... 678,912 1,002,674 1,898,989
Vehicles.................................................... 6,434 12,757 12,757
Leasehold improvements...................................... 188,279 678,198 908,877
Land ...................................................... - - 11,273,959
Buildings................................................... - - 3,212,383
---------- ------------ -----------
3,725,941 5,008,835 20,807,049
Less accumulated depreciation and amortization.............. 1,937,718 2,553,347 (2,706,258)
---------- ----------- -----------
Total property, equipment and leasehold improvements, net... $1,788,223 $ 2,455,488 $18,100,791
=========== =========== ===========
</TABLE>
The cost of assets held under capital leases was $308,072 and $1,008,432 at
December 31, 1996 and 1997, respectively. The cost of assets held under capital
leases was $1,008,432 at March 31, 1998 (unaudited).
2. Notes Payable and Long-Term Debt
Debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
8% convertible subordinated debentures payable ("Debentures"),
due in monthly installments of interest only (a)............ $1,714,064 $ - $ -
DYDX LP Loan (b)............................................. 750,000 - -
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 - -
Line of credit bearing interest at 10%....................... - - 250,000
Capital lease obligations with interest ranging from 9.7% to
30.7% due in monthly installments ranging from $ 265
to $18,202, including interest various maturities dates
through April 2000, secured by office communication
equipment, and production equipment........................ 242,116 822,250 1,165,223
10.2% mortgage note due in monthly installments of
interest only (Note 12)...................................... - - 12,500,000
---------- ----------- ----------
Total debt.................................................. 2,855,901 822,250 13,951,223
Less current maturities...................................... 228,510 271,918 603,332
---------- ----------- -----------
$2,627,391 $ 550,332 $13,311,891
========== =========== ===========
</TABLE>
F-12
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Notes Payable and Long-Term Debt (Continued)
As of December 31, 1997 the future minimum lease payments under capital
leases are as follows:
Capital
Year Leases
---- -------
1998........................................................ $ 359,373
1999........................................................ 320,657
2000........................................................ 266,730
2001........................................................ 2,706
---------
Total....................................................... 949,466
=========
Less: amounts representing interest costs................... 127,216
---------
Net present values.......................................... 822,250
Less: capital lease obligations included in short-term debt. 271,918
---------
Long term capital lease obligations......................... $ 550,332
=========
(a) From June through November 1995, the Company conducted a private
placement of units of its securities (the "Debenture Units"), with 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").
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. On August 13, 1997, the Company
converted the entire $1,714,064 principal amount of Debentures into an aggregate
of 505,649 shares of Common Stock. The aforementioned conversion was based upon
a ratio of 295 shares of Common Stock per each $1,000 principal amount of
Debentures. The conversion resulted in a one time, non-recurring, interest
expense charge in the amount of $194,228 (based on an imputed value of $ 4.00
per share of Common Stock).
(b) On February 29, 1996, the Company entered into a loan agreement with
DYDX Legends Group, L.P. ("DYDX") pursuant to which the Company borrowed
$1,000,000 from DYDX (the "DYDX Loan"). 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, 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.
The Company and DYDX entered into several extension agreements, one of
which included the repayment of $250,000.
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 DYDX Loan 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
F-13
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Notes Payable and Long-Term Debt (Continued)
rate was raised to 9% per annum. On August 13, 1997, the Company paid off, in
full, all outstanding principal and accrued interest, $773,014, owed by the
Company under the DYDX loan.
Bridge Financing
On March 26, 1997 Company completed a Bridge Financing of $1,000,000 of
unsecured non-negotiable notes, common stock and warrants through the Company's
underwriter, Whale Securities Co., L.P. (the "Placement Agent"). The net
proceeds to the Company after deducting the Placement Agent's commissions and
other offering expenses were $875,000. The common stock was assigned a value of
$444,000 less expenses of $77,700 resulting in a charge to equity of $366,300.
As no consideration was paid for the common stock, this amount is considered an
original issue discount and interest expense over the term of the related notes
payable. On August 13, 1997, the Company paid off, in full, all outstanding
principal and accrued interest, $1,036,746, owed by the Company under the Bridge
Notes.
Lines of Credit
In May 1997, First Security Bank issued a line of credit to the Company
for up to $250,000. On March 23, 1998 the line was increased to $1,000,000.
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.
John W. Stuart, the Company's Chairman and CEO, has personally guaranteed the
line of credit. No balance was outstanding at December 31, 1997. At March 31,
1998, $250,000 was outstanding.
On September 29, 1997, First Security Leasing Company approved for the
Company a $1,000,000 lease line. Advances under the line of credit incur
interest at a rate of 9.75% per annum. The financing commitment will expire on
September 29, 1998. No balance was outstanding at December 31, 1997.
3. Commitments and Contingencies
Leases
The Company's corporate headquarters consist 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 $14,614 per month.
The Company's corporate warehouses consist of approximately 5,376 and
4,669 square feet located at 4695 West Nevso Drive, Las Vegas, Nevada. The
leases, which will expire in July, 1998 and in November 1998, provides for
monthly rent for the premises of $2,289 and $3,506, respectively.
The Company's East Coast office consists of approximately 2,000 square
feet of space located at Egg Harbor Township in Atlantic City, New Jersey. The
lease, which will expire in September, 1999, provides for monthly rent in the
amount of $1,725. In addition, the Company leases seven condominium units for
use by its performers in Atlantic City from the Company's CEO and his wife. The
aggregate rent for such apartments is currently $12,671 per month. The current
lease term expires on June 30, 1998.
The Company leases and operates the Surfside Theater and related office
space in Myrtle Beach, South Carolina. The Lease, which will expire on December
31, 2004, provides for monthly rent for the premises of $29,166.
The Company leases the Coliseum Theater in Daytona Beach, Florida. The
lease, which will expire in November, 1998, provides for monthly rent for the
premises of $10,000.
F-14
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. Commitments and Contingencies (Continued)
Leases (Continued)
The Company leases and operates the Legends Family Theater and related
office space in Branson, Missouri. This lease, which will expire in December,
1998, provides for monthly rent for the premises is $13,000.
The Company leases and operates the Toronto Legends theater in Toronto,
Ontario. This lease, which will expire in February, 2003, provides for monthly
rent for the premises is $9,410.
The Toronto Legends Theater office consists of approximately 627 square
feet of space located at Toronto, Ontario. This lease, which is currently on a
month to month basis, provides for monthly rent in the amount of $1,286.
The Company's Atlanta, Georgia office consists of 6,000 square feet of
office and warehouse space. This 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 years ended
December 31, 1996 and 1997 was $301,918 and $595,425, respectively. Rent and
lease expense included in selling, general and administrative expense for the
years ended December 31, 1996 and 1997 was $214,383 and $252,905, respectively.
Rent and lease expense included in production costs for the
three-months ended March 31, 1997 and 1998 was $138,781 and $143,520
(unaudited), respectively. Rent and lease expenses included in selling, general
and administrative expenses for the three months ended March 31, 1997 and 1998
was $49,714 and $74,852 (unaudited), respectively.
The total minimum rental commitment at December 31, 1997 is as follows:
Year ending
December 31, Amount
------------ ------
1998............................................. $ 1,022,159
1999............................................. 506,813
2000............................................. 462,920
2001............................................. 462,920
2002............................................. 462,920
Thereafter.......................................... $ 718,822
-----------
$ 3,636,554
===========
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 which, among other things, extended their then
current employment agreements through May 31, 2000. In connection with each of
their respective employment agreements, the CEO, President and CFO also entered
into confidentiality and non-compete agreements with the Company.
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. 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.
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.
F-15
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. Commitments and Contingencies (Continued)
Aggregate commitments related to employment contracts are as follows:
Years ending December 31, Amount
- ------------------------- ------
1998............................................... $ 927,524
1999............................................... 534,646
2000............................................... 197,770
----------
$1,659,940
==========
Executive Bonus Plan
In March 1997, the Company implemented a three-year Executive Bonus Plan,
administered by the Board of Director's Compensation Committee. Under the
Executive Bonus Plan, an annual bonus pool of up to 5% of the Company's audited
pre-tax earnings, after non-recurring charges such as original issue discount,
compensation and interest expense charges, but excluding extraordinary items
("Pre-Tax Earnings"), may be established for distributions at the discretion of
the Company's Board of Directors, to the Company's executive officers (other
than the Chairman and CEO who is not eligible for bonuses under the Executive
Bonus Plan) in 1998, 1999 and 2000, provided that the Company achieves at least
minimum Pre-Tax Earnings for the respective preceding year as follows:
Minimum
Pre-Tax
Year Earnings
---- ---------
1998.................................................$ 5,000,000
1999................................................. 8,700,000
2000................................................. 8,900,000
-----------
$22,600,000
===========
Legal Proceedings
The Company is a party to various legal proceeding 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.
4. Stockholder's Equity
Initial Public Offering
On August 13, 1997, the Company completed an initial public offering of
1,400,000 shares of Common Stock at $5.00 per share and redeemable warrants to
purchase 1,610,000 shares of Common Stock at $0.10 per Warrant (the "IPO"). The
net proceeds to the Company of the offering after underwriting discounts,
commissions and expenses was approximately $4,855,975.
Stock Split
In June 1996, the Company effectuated a 72,550-for-1 split of its common
stock and increased the number of the authorized shares of common stock from
100,000 to 25,000,000 shares and simultaneously decreased the par value from
$1.00 per share to $.01 per share ("Stock Split"). All common shares, common
F-16
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Stockholder's Equity (Continued)
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.
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 accumulated deficit 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 income (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.
Interactive Purchase
On November 1, 1996, the Company entered into a common stock purchase
with Interactive Events, Inc. ("Interactive"), which creates and implements
interactive events for parties and conventions. The Company issued 19, 284 and
11,020 shares of common stock on November 1, 1996 and November 1, 1997,
respectively, as payment. The Company recorded $129,180 as the excess of the
purchase price over the net assets acquired, which is being amortized over ten
years. Since this transaction was accounted for as a purchase, the operations of
Interactive Events are included in the Company's operations as of the date of
the acquisition. The operations prior to November 1, 1996 were immaterial.
Warrants Converted to Common Stock
In connection with the closing of the DYDX Loan and subsequent extensions
(see Note 2(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
(the "DYDX Warrant"). In connection with the Third Extension of the DYDX Loan,
the Company split the 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
approximates fair market value at the date of the reduction.
On March 17, 1997, the Company exchanged all of its outstanding warrants
for shares of its common stock (the "Warrant Exchange Shares) on a cashless
basis (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.
1996 Stock Option Plan
The Board of Directors and the Company's then sole stockholder approved
the Company's Incentive Stock Option Plan on August 7, 1996 (the "Option Plan").
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 incentivizing
their employees to continue to work for the betterment of the Company in return
for sharing in the success of the Company through the Option Plan.
F-17
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Stockholder's Equity (Continued)
1996 Stock Option Plan (Continued)
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) non-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
successful completion of 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.
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 (post Reverse-Split) 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 was the fair value at the date of grant.
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.
In February 1997 the CFO entered into an amended employment agreement
under which he was granted 85,000 additional stock options (see Note 3).
F-18
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Stockholder's Equity (Continued)
Non-employee Directors' Options
In March 1997, the Company provided for each non-employee director of the
Company to receive, in addition to reimbursement of expenses incurred in
attending Board meetings, an option to purchase 10,000 shares of Common Stock
each year that he or she 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 Director meetings during the Grant Year. One-quarter of
the annual option grant shall vest as of each of the Grant Year's first three
scheduled Board of Director meetings and the remainder of such option 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.
The option and warrant activity during the years ended December 31, 1996
and 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise
and Warrants Price
------------- ---------
<S> <C> <C>
Outstanding at January 1, 1996..................................... 24,794 $5.00
Granted............................................................ 431,659 4.27
------- ----
Outstanding at December 31, 1996................................... 456,453 4.31
Cancelled.......................................................... 8,000 5.00
Granted ........................................................... 2,790,240 5.63
Exercised.......................................................... 440,755 5.00
========= ====
Options outstanding at December 31, 1997 .......................... 2,797,938 5.52
Cancelled (unaudited) ............................................. (45,735) 5.00
Granted (unaudited) ............................................... 725,000 4.35
--------- ----
Options outstanding at March 31, 1998 (unaudited) ................. 3,477,203 4.55
========= ====
Options exercisable at March 31, 1998 (unaudited) ................. 1,289,072 5.28
========= ====
Options exercisable at December 31, 1997........................... 1,282,822 5.29
========= ====
Options exercisable at December 31, 1996........................... 228,128 $3.99
========= ====
</TABLE>
Information relating to stock options and warrants at December 31, 1997
summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------------------- ----------------------------------
Exercise Weighted Average Weighted Average
Price
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- --------------- ------------ -------------- ------------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
$3.99 311,300 10 $3.99 286,256 $3.99
$4.00 85,000 10 $4.00 85,000 $4.00
$5.00 324,638 10 $5.00 55,884 $5.00
$5.50 1,822,500 5 $5.50 757,368 $5.50
$8.25 114,500 5 $8.25 44,232 $8.25
$9.08 140,000 5 $9.08 54,082 $9.08
------------ -------------- ------------------ ------------ ------------------
2,797,938 6.3 $5.52 1,282,822 $5.29
============ ============== ================== ============ ==================
</TABLE>
F-19
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Stockholder's Equity (Continued)
Non-employee Directors' Options (Continued)
Information relating to stock options and warrants at March 31, 1998
summarized by exercise price are as follows (unaudited):
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------------------- ----------------------------------
Exercise Weighted Average Weighted Average
Price
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- --------------- ------------ -------------- ------------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
$3.99 311,300 9.8 $3.99 286,256 $3.99
$4.00 235,000 6.7 $4.00 91,250 $4.00
$4.44 575,000 5.0 $4.44 - $ -
$5.00 278,903 9.8 $5.00 55,884 $5.00
$5.50 1,822,500 4.8 $5.50 757,368 $5.50
$8.25 114,500 4.8 $8.25 44,232 $8.25
$9.08 140,000 4.8 $9.08 54,082 $9.08
------------ -------------- ------------------ ------------ ------------------
3,477,203 5.8 $4.55 1,289,072 $5.28
============ ============== ================== ============ ==================
</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, 1996 and 1997 and the quarters ended March 31, 1997 and 1998 would
have been reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
Three Months ended March 31,
1996 1997 1997 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Income (loss)
As reported.............. $ 900,998 $(2,946,056) (517,372) (528,726)
Pro forma................ $ 555,773 $(3,335,419) (739,836) (563,352)
Basic Income (loss) per share
As reported ............. $ 0.23 $ (0.55) (.12) (0.08)
Pro forma ............... $ 0.14 $ (0.62) (.18) (.08)
Diluted income (loss) per share
As reported.............. $ 0.22 $ (0.55) (.12) (.08)
Pro forma................ $ 0.14 $ (0.62) (.18) (.08)
</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 in 1996, expected life of 10 years: expected volatility of
2.42%, risk-free interest rates of 6.0%, and a 0% dividend yield. The fair value
was calculated in 1997 using the following assumptions: expected life of 10
years, expected volatility of 38.06%, risk-free interest rates of 6%, and a 0%
dividend yield. The weighted average fair value at date of grant for options
granted during 1996 and 1997 approximated $1.60 and $1.71 per option,
respectively.
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 quarter 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 value at date of grant for options
granted during the quarter ended March 31, 1997 was $1.48 per option. There were
no options granted to employees for the three months ended March 31, 1998
(unaudited).
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above pro forma numbers are
not indicative of the financial impact had the disclosure provisions of FASB No.
123 been applicable to all years of previous option grants.
F-20
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Non-employee Directors' Options
5. 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>
Years ended December 31, Three months ended March 31,
------------------------ ---------------------------
1996 1997 1996 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Venue A................................................. 29% 25% 36% 14.9%
Venue B................................................. 11 - 14 17.8
Venue C................................................. 32 28 18 16.0
Venue D................................................. 12 10 - 15.0
-- -- --- ----
84% 63% 68% 63.7%
== == === =====
</TABLE>
6. Note Receivable from CEO and Principal Stockholder
On October 23, 1997 and November 17, 1997, the Company obtained the
written consent of the Underwriter to advance the CEO the amounts totaling
$100,000 (the "Advances"), which advances bear interest at a rate of 10% per
annum, mature December 31, 1998 and are evidenced by promissory notes executed
by the CEO in favor of the Company.
At December 31, 1997, the notes receivable balance was $136,194 including
accrued interest income of $1,041. The difference ($35,153) between the December
31, 1997 ending balance ($136,194) and the note receivable were personal charges
($17,007) to the corporate credit card and $18,146 in show fees received by
Stuart on behalf of the Company. Mr. Stuart has since repaid the $35,153 to the
Company. The Company has agreed with the Underwriter not to loan or advance any
further sums to Mr. Stuart, without the prior consent of the Underwriter. (See
Note 13.)
7. Selling, General and Administrative
As of December 31, 1996, the Company agreed to forgive all of the
outstanding amounts due from the principal stockholder and release all
collateral against the notes. As a result, the Company recorded a $859, 511
charge during 1996 for the forgiveness of debt.
As of August 12, 1997, the Note from stockholder, which together with
principal and interest totaled $221,000, was forgiven in full. The Company has
agreed with the Underwriter not to loan or advance any further sums to the CEO,
without the prior written consent of the Underwriter.
As more fully discussed in footnote 4, the issuance of shares to the CFO
resulted in a one time, non-recurring, compensation charge of $162,128.
8. Depreciation and Amortization.
Depreciation and amortization for the year ended December 31, 1997
increased by $306,000, or 45.2%, as compared to the year ended December 31,
1996. The increase in depreciation and amortization was primarily attributable
to pre-opening costs capitalized in 1996, which were expensed in 1997.
F-21
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Expenses at discontinued location
The Company decided to close its Legends production in Daytona Beach on
December 31, 1997. As part of the closing, the Company incurred additional
expenses of $489,285 during 1997. The Company intends to transfer substantially
all the furniture and equipment at the Daytona Beach facility to other locations
which are scheduled to debut performances in 1998. Also, the Company is
currently in negotiations with a third party to potentially sublease the Daytona
Beach theater.
10. Interest Expense
As more fully discussed in note 2, the conversion of the Debentures
resulted in a one time, non-recurring, interest expense charge of $194,228 for
the year ended December 31, 1997 and the Bridge Financing resulted $366,000
original issue discount and interest expense for the year ended December 31,
1997 .
11. Income Taxes
Income taxes in the statement of operations consists of the following:
<TABLE>
<CAPTION>
Years ended Three months ended
December 31, March 31,
------------------------ ---------------------------
1996 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current (unaudited) (unaudited)
Federal $ - $ - $ - $ -
State 15,789 6,673 2,319 1,255
------- ------ ------- -------
$15,789 $ 6,673 $ 2,319 $ 1,255
======= ======= ======= =======
</TABLE>
Deferred taxes are as follows:
<TABLE>
<CAPTION>
Years ended Three months ended
December 31, March 31,
------------------------ ---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets: (unaudited)
Litigation accrual $ 34,000 $ 21,080 $ -
Net operating loss carryforward 223,453 848,426 1,328,009
--------- -------- ------------
Total deferred tax assets 257,453 869,506 1,328,009
Deferred tax liability:
Pre-opening costs (43,921) - (273,499)
--------- -------- ------------
Net deferred tax assets 213,532 869,506 1,054,510
Less: Valuation allowance (213,532) (869,506) (1,054,510)
--------- -------- ------------
$ - - $ -
========= ======== ============
</TABLE>
The net deferred tax assets have a 100% valuation allowance as
management believes at this time it is more likely than not that the deferred
tax assets will not be realized.
F-22
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. Income Taxes (Continued)
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>
Years ended December 31, Three Months ended March 31,
1996 1997 1997 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
U.S. Federal statutory rate
applied to pretax income (loss)..$ 306,339 $(999,390) $(175,906) $(179,340)
Permanent differences.............. 510 5,663 500 -
State income taxes, net
of Federal benefit............... 15,789 2,269 2,319 1,255
Benefit of net operating
loss carryforward................$ (306,849) - - -
Tax effect of unrecognized net
operating loss carryforward...... - 998,131 175,406 178,085
---------- --------- --------- ---------
$ 15,789 $ 6,673 $ 2,319 $ 1,255
========== ========= ========= =========
</TABLE>
At December 31, 1996, 1997 and March 31, 1998 the Company had Federal net
operating loss carryforwards of approximately $657,214, $2,495,371 and
$3,024,097 (unaudited) 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.
12-Gedco USA, Inc. Acquisition
On March 13, 1998, the Company completed its acquisition of certain
assets from Gedco USA, Inc. and its affiliates for a purchase price of
$14,000,000, consisting of $11,500,000 in cash and 595,238 shares of Common
Stock valued at $2,500,000 (the "Gedco Acqusition").
Included in the Gedco Acquisition were substantially all of the
income producing assets and associated real property of Orlando Entertains and
LA Entertains, consisting of King Henry's Feast, Blazing Pianos piano bar, the
Fort Liberty shopping complex that includes a Wild Bill's Dinner Theater, each
of which is located in greater Orlando, Florida, and a second Wild Bill's Dinner
Theater located in Buena Park, California. Gerard O'Riordan, President of Gedco
USA, Inc., joined the Company as President of On Stage Theaters, Inc., a wholly
subsidiary of the Company that manages the acquired dinner theaters and piano
bar as well as other selected theaters.
The Company funded the cash portion of the purchase price and
transaction fees and expenses with $12.5 million of mortgage financing from
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC"). The loan
accrues interest at a variable rate (currently 10.27%) and becomes due in 2008.
ICCMIC has committed a total of $20,000,000, of which $7,500,000 is remaining to
finance the Company's future real estate related acquisitions. In connection
with the loan agreement entered into between the Company and ICCMIC on March 13,
1998 (the "Loan Agreement"), the Company granted ICCMIC the right to provide the
Company with up to an additional $30 million of similar mortgage financing. In
connection with the financing, the Company issued ICCMIC and Imperial Capital
Group LLC (an affiliate of ICCMIC), an aggregate of 575,000 warrants immediately
exercisable into Common Stock at an exercise price of $4.44. These warrants were
valued at $500,000 and accounted for as an original issue discount to be
amortized over the life of the loan. In addition, concurrent with the ICCMIC
financing, Mark Karlan, the President of ICCMIC, was named a member of the
Company's Board of Directors, filling a vacancy created by the resignation of
Kenneth Berg.
F-23
<PAGE>
The components of the purchase price and its allocation to the assets
and liabilities are as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase Price:
Liabilities assumed.............................................. $ 986,044
Issuance of 595,238 restricted shares of common stock........... 2,500,000
-------------
3,486,044
Costs of acquisition incurred.................................... 1,645,874
Cash paid...................................................... 11,500,000
-------------
$16,631,918
=============
</TABLE>
The acquisition was accounted for as a purchase and the assets acquired
were recorded at a fair market value. The building and equipment are being
depreciated over twenty and three years, respectively, under the straight-line
method. The allocation of the purchase price was as follows:
Cash ...................................... $ 383,444
Inventory ................................. 120,084
Prepaid expenses .......................... 157,516
Land ...................................... 11,275,507
Building .................................. 3,214,740
Equipment ................................. 730,627
Deferred financing acquisition expenses ... 750,000
-----------
$16,631,918
===========
The assets acquired and liabilities assumed were transferred to
either the Company's wholly-owned subsidiary, On Stage Theaters, Inc., or a
wholly owned subsidiary of On Stage Theaters, Inc., concurrent with the
acquisition.
The Company has elected to consolidate the operations of the assets
acquired in the Gedco Acquisition retroactively to January 1, 1998. Therefore,
the pre-acquisition gain of $366,516 has been added to the consolidated totals
in the statement of operations for the quarter ended March 31, 1998, and this
amount has been deducted from loss before income taxes, thereby having no effect
on the net loss for the period. The effect of this cosolidation of operations
prior to acquisition was an increase in net sales of approximately $3,099,071.
The unaudited pro forma results of operations presented below reflect
the Company's operations as though the acquisition had taken place at the
beginning of each period presented. The pro forma results have been prepared for
comparative purposes only, and are not necessarily indicative of what the actual
results of operations would have been had such acquisitions occurred at the
beginning of the periods presented, or what results of operations will be in the
future.
Year Ended December 31,
-----------------------
Three months ended
1996 1997 March 31, 1998
------------ ------------ ----------------
Revenues .................. $ 29,967,308 $ 29,601,646 $ 6,205,371
Operating income
(loss) ................. 3,451,672 618,756 (182,794)
Net income (loss) ......... 1,949,681 (1,922,522) (528,726)
Basic income (loss)
per share .............. .42 (.30) (.08)
Diluted net income
(loss) per share ....... .42 (.30) (.08)
Basic average
number of common
shares outstanding ...... 4,597,282 6,396,079 6,714,548
Diluted average
number of common
shares outstanding ...... 4,660,165 6,396,079 6,714,548
13-Subsequent Events (unaudited)
In March 1997, in connection with the IPO, the Company agreed with the
IPO Underwriter that the Company would neither loan nor advance any sums to or
on behalf of John W. Stuart, the Company's Chairman and Chief Executive Officer,
other than those sums advanced to Mr. Stuart from December 31, 1996 through the
date of the IPO, without the IPO Underwriter's prior consent. On October 23,
1997 and subsequently on November 17, 1997, the Company received authorization
from the IPO Underwriter to advance Mr. Stuart an aggregate of $105,483
(including principal and interest) and on March 25, 1998, the Company again
received authorization from the IPO Underwriter to advance $150,000 for
settlement of certain litigation pending against Mr. Stuart related to his
involvement in the Legends in Concert, Hawaii show. On June 25, 1998 Mr. Stuart
repaid the Company $107,596.03. This $107,596.03 was derived by Mr. Stuart from
the proceeds of the sale to the Selling Stockholders of 400,000 shares of Common
Stock offered hereby. Therefore, as of June 26, 1998, Mr. Stuart owed the
Company an aggregate of $107,596.03, which bears interest at a rate of 6% per
annum, matures on June 26, 1999 and is evidenced by a promissory note.
On April 23, 1998 the Company formed six (6) new Nevada subsidiaries.
These subsidiaries include: On Stage Productions, Inc., On Stage Merchandise,
Inc., On Stage Casino Entertainment, Inc., On Stage Events, Inc., On Stage
Theaters North Myrtle Beach, Inc., and On Stage Theaters Surfside Beach, Inc.
Working Capital Line Increase
On March 23, 1998 First Security agreed to increase the line of
credit from $250,000 to $1,000,000. As of May 15, 1998, the Company has drawn
$1,000,000 on the line of credit.
Capital Equipment Financing Commitment
As of May 29, 1998, the Company has drawn $1,000,000 on the line of
credit.
On June 30, 1998, the Company purchased from Calvin Gilmore
Productions, Inc. ("Calvin Gilmore"), an indirect, wholly-owned subsidiary of
Fox Family Worldwide, Inc. ("Fox Family"), for $1 million in cash and 206,612
shares of Common Stock, certain live entertainment theater assets. The Company
funded the cash portion of the Calvin Gilmore Acquisition using the $20 million
mortgage financing facility that it maintains with ICCMIC. In connection with
the Calvin Gilmore Acquisition, the Company granted to Calvin Gilmore certain
piggyback registration rights commencing on July 1, 1999, certain demand
registration rights commencing on July 1, 2000, and agreed to appoint Mel Woods,
President and Chief Operating Officer of Fox Family, to the Company's Board of
Directors by July 30, 1998. Neil H. Foster resigned from the Company's Board of
Directors on June 26, 1998, to create a vacancy for the appointment of Mr.
Woods.
On June 30, 1998, in a separate transaction, Calvin Gilmore purchased
169,537 shares of Common Stock from Mr. Stuart for $737,485.95, causing Calvin
Gilmore to hold, in the aggregate, approximately 5% of equity in the Company.
F-24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
================================================================================ =================================
No dealer, sales person or any other person has been to give any information or 905,649 Shares authorized
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 ON STAGE ENTERTAINMENT, INC.
having been authorized by the Company. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any security other than the
securities offered by this Prospectus, or an offer to sell or a solicitation of 905,649 Shares
an offer to buy any securities by anyone in any jurisdiction in which such offer of Common Stock
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. PROSPECTUS
_______________
-----------------
TABLE OF CONTENTS
Page
Prospectus Summary........................................ 4
Risk Factors.............................................. 6 ______________, 1998
Use of Proceeds...........................................12
Dividend Policy...........................................12
Price Range of Common Stock...............................12
Capitalization............................................13
Selected Financial Data...................................14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations...........................................15
Business..................................................27
Management................................................39
Principal Stockholders....................................45
Certain Transactions......................................46
Selling Stockholders......................................48
Plan of Distribution......................................50
Description of Securities.................................50
Shares Eligible for Future Sale...........................55
Legal Matters.............................................55
Experts...................................................56
Available Information.....................................56
Index to Financial Statements............................F-1
--------------
Until _________ all dealers effecting transactions in the registered securities,
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.
================================================================================ =================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Subsection 1 of Section 78.751 of Chapter 78 of the Nevada Revised Statutes
(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.
The Registrant's Bylaws provide a right to indemnification to the full
extent permitted by law, for expenses (including attorney's fees), damages,
punitive damages, judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by any director or officer whether or not the
indemnified liability arises or arose from any threatened, pending or completed
proceeding by or in the right of the Registrant (a derivative action) by reason
of the fact that such director or officer is or was serving as a director,
officer, employee or agent of the Registrant or, at the request of the
Registrant, as a director, officer, partner, fiduciary or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, unless the act or failure to act giving rise to the claim for
indemnification is financially determined by a court to have constituted willful
misconduct or recklessness. The Bylaws provide for the advancement of expenses
to an indemnified party upon receipt of an undertaking by the party to repay
those amounts if it is finally determined that the indemnified party is not
entitled to indemnification.
II-1
<PAGE>
The Registrant's Bylaws authorize the Registrant to take steps to ensure
that all persons entitled to the indemnification are properly indemnified,
including, if the Board of Directors so determines, purchasing and maintaining
insurance.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered are as follows:
Securities and Exchange Commission registration fee........... $ 1,100
Printing and engraving expenses............................... *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Nasdaq listing fees........................................... *
-----
Total.................................................... $ *
- -------------------
* To be provided by amendment.
Item 26. Recent Sales of Unregistered Securities
Within the three years preceding the filing of this Registration Statement,
the Registrant has sold the following securities without registration under the
Securities Act of 1933 (the "Securities Act"). Unless otherwise indicated, all
share numbers set forth below have been updated to reflect the Registrant's
1-for- 1.814967 reverse split of its Common Stock effected on March 18, 1997
reverse stock split (the "Reverse Split"):
(a) On a number of different dates between June and November 1995, the
Registrant sold, through a private placement with 15 investors (the "1995
Private Placement"), 39.78 debenture units (the "Debenture Units"), each
consisting of (i) an 8% convertible subordinated debenture in the principal
amount of $50,000 due on August 31, 1997 (the "Original Debentures") and (ii)
the right, under certain circumstances, to receive one Class A and one Class B
Warrant. The Registrant received net proceeds of $1,989,064 in connection with
the 1995 Private Placement. The Registrant completed the 1995 Private Placement
without the assistance of a placement agent. The rights to reserve such A or B
Warrants were subsequently terminated prior to the issuance of such Warrants.
(b) In September 1995, the Registrant issued, as compensation for services
provided in connection with the 1995 Private Placement, warrants to purchase an
aggregate of (i) 355,378 shares of Common Stock at an exercise price of $3.76
per share to JDK & Associates (for financial consulting services provided ),
(ii) 11,019 shares of Common Stock at an exercise price of $3.76 per share to
Harry Stahl, Esquire (for legal services rendered) and (iii) 27,549 shares of
Common Stock at an exercise price of $3.76 per share to Lance Hall (for
financial consulting services provided).
(c) In February 1996, the Registrant borrowed $1,000,000 from DYDX LP (the
"DYDX Loan"). In connection with the DYDX Loan, the Registrant issued to DYDX LP
a warrant (the "DYDX Warrant") to purchase 550,974 shares of Common Stock at an
exercise price per share equal to the initial public offering price of the
Common Stock, exercisable for a period of 60 months commencing upon the
consummation of an initial public offering. In June 1996, the exercise price of
the DYDX Warrant was changed to the imputed price per share of the Common Stock
as of the closing date, if any, of the next debt or equity financing of the
Registrant. In February 1997, the exercise price of the DYDX warrant was reduced
to $3.99 per share and the Registrant, at the request of DYDX LP, split the DYDX
Warrant into two warrants, one in the name of DYDX LP for the purchase of
440,779 shares of Common Stock and the other in the name of Senna, an affiliate
of DYDX LP, for the purchase of 110,195 shares of Common Stock.
(d) In July 1996, pursuant to an Offer to Exchange or Repurchase, the
holders of $1,714,064 in principal amount of the Original Debentures tendered
their Debenture Units in exchange for new Debentures due January 4, 1999 (the
"New
II-2
<PAGE>
Debentures") and holders of $275,000 in principal amount of the Original
Debentures opted to have such debentures repurchased by the Registrant.
(e) In March 1997, the Registrant exchanged all of its outstanding warrants
for shares of Common Stock (the "Warrant Exchange Shares") on a cashless basis
(the "Warrant Exchange"). Prior to the Warrant Exchange (and the Reverse Split)
there were warrants outstanding to purchase 1,000,000 shares of Common Stock at
$2.20 per share (550,974 shares of Common Stock at $1.21 per share on a
post-reverse split basis) and 715,000 shares of Common Stock at $2.07 per share
(393,947 shares of Common Stock at $1.14 per share on a post-reverse split
basis). As a result of the Warrant Exchange, all of the Registrant's outstanding
warrants as of March 17, 1997 were canceled and exchanged for a total of 799,956
Warrant Exchange Shares which amount was subsequently reduced to 440,755 shares
of Common Stock in connection with the Registrant's Reverse Split.
(f) In March 1997, the Registrant sold, through a private placement with 21
investors (the "Bridge Financing"), 20 investment units ("Bridge Units"), each
consisting of (i) a note in the principal amount of $50,000, (ii) 10,000 shares
of Common Stock and (iii) warrants to purchase an aggregate of 12,500 shares of
Common Stock ("Bridge Warrants"). After payment of $125,000 in placement fees to
Whale Securities Co., L.P., the placement agent for the Registrant in connection
with the Bridge Financing, and other offering expenses of approximately $75,000,
the Registrant received net proceeds of approximately $800,000 in connection
with the Bridge Financing. The 21 investors include the following: 1. Avedon
Construction & Design Corp., Peter M. Avedon, President; 2. Kenneth Berg; 3.
Steven H. Brooks; 4. Lance Hall; 5. David Hope; 6. Jim Huntley and Melanie
Huntley, JTWRS; 7. Daniel M. Keenan; 8. Alexander S. Mark, M.D. and Thais R.
Mark, JTWRS; 9. Michael Miller; 10. William J. Reese and Cheryl A. Reese, JTWRS;
11. Kiranjit Sidhu; 12. Edward Weston and Ann Weston, JTWRS; 13. Robert H.
Winnerman; 14. Theodore Winston; 15. Dependable Contractors, Inc.; 16. Baytree
Associates, Inc. Retirement Plan; 17. Delaware Charter Guarantee & Trust Co.
FBO; Ronald I. Heller, IRA; 18. Delaware Charter Guarantee & Trust FBO: David S.
Nagelbert, IRA; 19. Norton Herrick; 20. Westminster Capital, Inc.; and 21. Minor
Metals, Inc. Ramy Y. Weisfisch. 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 IPO Underwriter.
(g) In June 1998, the Company purchased from Calvin Gilmore Productions,
Inc., a subsidiary of Fox Family Worldwide, Inc., for $1 million in cash and
206,612 shares of Common Stock, certain live entertainment assets, including a
fee simple in the Legends in Concert Theater, and a leasehold interest in the
Eddie Miles Theater, both located in Myrtle Beach.
The issuances of the aforementioned securities were made in reliance upon
an exemption from the registration provision of the Securities Act afforded by
Section 4(2) thereof, as transactions by an issuer not involving a public
offering. The purchasers of the securities described above acquired them for
their own account and not with a view to any distribution thereof to the public.
II-3
<PAGE>
Item 27. Exhibits.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Asset Purchase Agreement dated as of December 29, 1997 by and among the Registrant, King Henry's USA, Ltd.,
Fort Liberty, Ltd., Blazing Pianos, Ltd., Wild Bill's Management, Inc. and Gedco USA, Inc. (6)
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (3)
4.1 Specimen stock certificate representing the Common Stock (3)
4.2 Specimen warrant certificate representing the Warrants (3)
4.3 Form of Public Warrant Agreement (3)
4.4 Form of Underwriter's Warrant Agreement (3)
4.5 Warrant Agreement between Imperial Credit Commercial Mortgage Investment Corp., Imperial Capital Group
LLC and the Registrant, dated as of March 13, 1998 (5)
5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered.*
10.1 Employment Agreement between the Registrant and John W. Stuart (1)
10.2 Employment Agreement between the Registrant and David Hope (1)
10.3 Employment Agreement between the Registrant and Kiranjit S. Sidhu (1)
10.4 Confidentiality and Non-Competition Agreement between the Registrant and John W. Stuart (1)
10.5 Confidentiality and Non-Competition Agreement between the Registrant and David Hope (1)
10.6 Confidentiality and Non-Competition Agreement between the Registrant and Kiranjit S. Sidhu (1)
10.7 Amended and Restated 1996 Stock Option Plan (1)
10.8 Contribution Agreement between the Registrant and John W. Stuart (1)
10.9 Security and Pledge Agreement between the Registrant and John W. Stuart relating to contribution of LVHE
shares (1)
10.10 Security and Pledge Agreement between the Registrant and John W. Stuart relating to LVHE litigation
indemnity (1)
10.11 Indemnification Agreement between the Registrant, John W. Stuart and Grand Strand Entertainment, Inc. (1)
10.12 Security and Pledge Agreement between the Registrant and John W. Stuart relating to Grand Strand
Entertainment, Inc. litigation indemnity (1)
10.13 Lease between the Registrant and Great American Entertainment Company (2)
10.14 Entertainment Production Agreement between the Registrant, Imperial Palace, Inc. and John W. Stuart
dated December 8, 1995 (3) (Filed in redacted form pursuant to Rule 406 promulgated under
the Securities Act. Filed separately in unredacted form subject to a request for confidential treatment
pursuant to Rule 406 under the Securities Act.)
10.15 Agreement between the Registrant and Bally's Park Place, Inc. dated September 1, 1994 and subsequent renewal
letters (3) (Filed in redacted form pursuant to Rule 406 promulgated under the Securities Act. Filed
separately in unredacted form subject to a request for confidential treatment pursuant to Rule 406 under the
Securities Act.)
10.16 Common Stock Purchase Agreement between Registrant and Interactive Events, Inc. (2) (Exhibit No. 10.18)
10.17 (a) Show Production Agreement between the Registrant and Kurz Management (3) (Exhibit No. 10.19)
(b) First Addendum to Show Production Agreement between the Registrant and Kurz Management (4) (c)
Second Addendum to Show Production Agreement between the Registrant and Kurz Management
(4) (d) Third Addendum to Show Production Agreement between the Registrant and Kurz Management (4)
10.18 Lease between the Registrant and Burgoyne Properties, Limited (3) (Exhibit No. 10.20)
10.19 Loan Agreement by and between Imperial Credit Commercial Mortgage Investment Corp. and Wild Bills's
California, Inc., King Henry's Inc. and Fort Liberty, Inc. dated as of March 13, 1998 (5)
10.20 Lease between the Registrant and Burgoyne Properties, Limited
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.21 Guaranty Loan Agreement between Imperial Credit Commercial Mortgage Investment Corp. and the Registrant,
dated as of March 13, 1998 (5)
21.1 Subsidiaries of the Registrant ++
23.1 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5.1)*
23.2 Consent of BDO Seidman, LLP +
24.1 Power of Attorney (included on signature page) ++
</TABLE>
- -------------------------
+ Filed herewith.
* To be filed by amendment.
++ Previously filed.
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2 on
April 7, 1997 (Registration No. 333-24681).
(2) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 on June 3, 1997 (Registration No. 333-24681).
(3) Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 on August 6, 1997 (Registration No. 333-24681).
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998, as amended by Form 10-KSB/A filed on April
29, 1998.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1998, filed on May 15, 1998.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K/A on May
19, 1998.
(7) To be filed by amendment.
II-5
<PAGE>
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement;
(iii) include any additional or changed material information on
the plan of distribution;
(2) for determining liability under the Act, treat each such post-effective
amendment as a new registration of the securities offered, and the offering of
such securities at that time to be the initial bona fide offering; and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes (1) that for the purpose of
determining any liability under the Act, treat the information omitted from the
form of prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act; as a part of this Registration
Statement as of the time the Securities and Exchange Commission declares it
effective; and (2) that for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement for the securities offered in the
Registration Statement therein, and treat the offering of the securities at that
time as the initial bona fide offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the city of Las Vegas, State of Nevada on July 2, 1998.
ON STAGE ENTERTAINMENT, INC.
By: _______________________________________________
David Hope
President, Chief Operating Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer and Chairman July 2, 1998
- -----------------------
John W. Stuart
President, Chief Operating Officer and July 2, 1998
- ----------------------- Director
David Hope
* Senior Vice President, Chief Financial July 2, 1998
- ----------------------- Officer (principal financial and
Kiranjit S. Sidhu accounting officer) and Treasurer
Director July 2, 1998
- -----------------------
Mark S. Karlan
Director July 2, 1998
- -----------------------
Jules Haimovitz
Director July 2, 1998
- -----------------------
James L. Nederlander
* Director July 2, 1998
- -----------------------
Mark Tratos
* By _____________________
David Hope
as Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Asset Purchase Agreement dated as of December 29, 1997 by and among the Registrant, King Henry's USA, Ltd.,
Fort Liberty, Ltd., Blazing Pianos, Ltd., Wild Bill's Management, Inc. and Gedco USA, Inc. (6)
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (3)
4.1 Specimen stock certificate representing the Common Stock (3)
4.2 Specimen warrant certificate representing the Warrants (3)
4.3 Form of Public Warrant Agreement (3)
4.4 Form of Underwriter's Warrant Agreement (3)
4.5 Warrant Agreement between Imperial Credit Commercial Mortgage Investment Corp., Imperial Capital Group
LLC and the Registrant, dated as of March 13, 1998 (5)
5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered.*
10.1 Employment Agreement between the Registrant and John W. Stuart (1)
10.2 Employment Agreement between the Registrant and David Hope (1)
10.3 Employment Agreement between the Registrant and Kiranjit S. Sidhu (1)
10.4 Confidentiality and Non-Competition Agreement between the Registrant and John W. Stuart (1)
10.5 Confidentiality and Non-Competition Agreement between the Registrant and David Hope (1)
10.6 Confidentiality and Non-Competition Agreement between the Registrant and Kiranjit S. Sidhu (1)
10.7 Amended and Restated 1996 Stock Option Plan (1)
10.8 Contribution Agreement between the Registrant and John W. Stuart (1)
10.9 Security and Pledge Agreement between the Registrant and John W. Stuart relating to contribution of LVHE
shares (1)
10.10 Security and Pledge Agreement between the Registrant and John W. Stuart relating to LVHE litigation
indemnity (1)
10.11 Indemnification Agreement between the Registrant, John W. Stuart and Grand Strand Entertainment, Inc. (1)
10.12 Security and Pledge Agreement between the Registrant and John W. Stuart relating to Grand Strand
Entertainment, Inc. litigation indemnity (1)
10.13 Lease between the Registrant and Great American Entertainment Company (2)
10.14 Entertainment Production Agreement between the Registrant, Imperial Palace, Inc. and John W. Stuart
dated December 8, 1995 (3) (Filed in redacted form pursuant to Rule 406 promulgated under
the Securities Act. Filed separately in unredacted form subject to a request for confidential treatment
pursuant to Rule 406 under the Securities Act.)
10.15 Agreement between the Registrant and Bally's Park Place, Inc. dated September 1, 1994 and subsequent renewal
letters (3) (Filed in redacted form pursuant to Rule 406 promulgated under the Securities Act. Filed
separately in unredacted form subject to a request for confidential treatment pursuant to Rule 406 under the
Securities Act.)
10.16 Common Stock Purchase Agreement between Registrant and Interactive Events, Inc. (2) (Exhibit No. 10.18)
10.17 (a) Show Production Agreement between the Registrant and Kurz Management (3) (Exhibit No. 10.19)
(b) First Addendum to Show Production Agreement between the Registrant and Kurz Management (4) (c)
Second Addendum to Show Production Agreement between the Registrant and Kurz Management
(4) (d) Third Addendum to Show Production Agreement between the Registrant and Kurz Management (4)
10.18 Lease between the Registrant and Burgoyne Properties, Limited (3) (Exhibit No. 10.20)
10.19 Loan Agreement by and between Imperial Credit Commercial Mortgage Investment Corp. and Wild Bills's
California, Inc., King Henry's Inc. and Fort Liberty, Inc. dated as of March 13, 1998 (5)
10.20 Lease between the Registrant and Burgoyne Properties, Limited
10.21 Guaranty Loan Agreement between Imperial Credit Commercial Mortgage Investment Corp. and the Registrant,
dated as of March 13, 1998 (5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
21.1 Subsidiaries of the Registrant ++
23.1 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5.1)*
23.2 Consent of BDO Seidman, LLP +
24.1 Power of Attorney (included on signature page) ++
</TABLE>
- -------------------------
+ Filed herewith.
* To be filed by amendment.
++ Previously filed.
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2 on
April 7, 1997 (Registration No. 333-24681).
(2) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 on June 3, 1997 (Registration No. 333-24681).
(3) Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 on August 6, 1997 (Registration No. 333-24681).
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998, as amended by Form 10-KSB/A filed on April
29, 1998.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1998, filed on May 15, 1998.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K/A on May
19, 1998.
(7) To be filed by amendment.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
On Stage Entertainment, Inc.
Las Vegas, Nevada
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 14, 1998, except for Note
12, which is as of March 20, 1998, relating to the consolidated financial
statements of On Stage Entertainment, Inc., which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
-----------------------
BDO Seidman, LLP
Los Angeles, California
July 2, 1998
