SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] Annual report pursuant to section 13 or
15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition report pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934 For the
transition period from ____________ to ___________
Commission File Number 0-92402
ON STAGE ENTERTAINMENT, INC.
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(Exact name of registrant as specified in its charter.)
Nevada 88-0214292
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4625 W. Nevso Drive
Las Vegas, Nevada 89103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 702-253-1333
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Redeemable Warrants to purchase shares of Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days: YES X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's revenues for the most recent fiscal year ended December 31, 1997
were $15,726,074.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock as quoted on
March 20, 1998 was $14,545,745.
The number of shares of the registrant's common stock outstanding as of March
20, 1998 was 7,179,718.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement relating to the 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof. Part
II hereof incorporates information by reference from portions of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1997.
<PAGE>
TABLE OF CONTENTS
Page
PART I....................................................................
Item 1. Description of Business........................................
Item 2. Description of Property........................................
Item 3. Legal Proceedings..............................................
Item 4. Submission of Matters to a Vote of Security Holders............
PART II...................................................................
Item 5. Market for Common Equity and Related Stockholder Matters.......
Item 6. Management's Discussion and Analysis or Plan of Operation......
Item 7. Financial Statements...........................................
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................
PART III..................................................................
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act..............
Item 10. Executive Compensation.........................................
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. Certain Relationships and Related Transactions.................
Item 13. Exhibits, and Reports on Form 8-K..............................
<PAGE>
PART I
The most important factors that could prevent the Company from achieving its
goals--and cause the assumptions underlying the forward-looking statements and
the actual results of the Company to differ materially from those expressed in
or implied by those forward-looking statements--include, but are not limited to,
those identified in pages 9-17 of Amendment No. 5 to the Company's Registration
Statement on Form SB-2 filed with the Commission on August 13, 1997
(Registration No. 333-24681), as well as the following: (i) The Company's
dependence on its flagship Legends in Concert production and its principal
production venues; (ii) The ability of the Company to successfully produce and
market new productions and to manage the growth associated with the any new
productions; (iii) Risks associated with the Company's acquisition strategy,
including the Company's ability to successfully identify, complete and integrate
strategic acquisitions; (iv) The Company's ability to obtain financing on
commercially reasonable terms; (v) The Company's ability to service its
substantial indebtedness; (vi) The competitive nature of the leisure and
entertainment industry and the ability of the Company to continue to distinguish
its services; (vii) Fluctuations in quarterly operating results and the highly
seasonal nature of the Company's business; (viii) The ability of the Company to
reproduce the performance, likeness and voice of various celebrities without
infringing on the publicity rights of such celebrities or their estates as well
as its ability to protect its intellectual property rights; (ix) The ability of
the Company to successfully manage the litigation pending against it and to
avoid future litigation; and (x) The results of operations which depend on
numerous factors including, but not limited to, the commencement and expiration
of contracts, the timing and amount of new business generated by the Company,
the Company's revenue mix, the timing and level of additional selling, general
and administrative expense and the general competitive conditions in the leisure
and entertainment industry as well as the overall economy.
ITEM 1. Description of 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 and at
the Estrel Residence & Congress Hotel in Berlin, Germany. In addition, the
Company plans to have a resident Legends production, beginning in late April
1998 at the Sheraton Centre in Toronto, Canada. 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 another Wild Bill's Dinner Extravaganza in Buena
Park, California.
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This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to potential new show openings, the potential markets for the Company's
productions, the expansion of existing and potential gaming and tourist markets,
the Company's exposure to various trends in the gaming industry, its acquisition
plans and the benefits the Company anticipates from such acquisitions, the
Company's business strategy including its plans to expand its sales network, its
intention to develop the convention market and its plans regarding merchandise
sales, its outstanding litigation matters and the defenses available to the
Company, the seasonality of the Company's business, and liquidity as well as
information contained elsewhere in this Report where statements are preceded by,
followed by or include the words "believes," "expects,""anticipates" or similar
expressions. For such statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The forward-looking statements in this document
are subject to risks and uncertainties that could cause the assumptions
underlying such forward-looking statements and the actual results to differ
materially from those expressed in or implied by the statements.
In addition to Legends, the Company has developed and produced 15 other
theatrical productions since its founding in 1985, including other tribute-type
shows, and a variety of musical reviews, magic, ice and specialty shows. All of
the Company's shows are designed to appeal to a broad spectrum of attendees by
offering affordable, quality entertainment incorporating experienced talent and
state-of-the-art special effects and staging. By offering multiple productions
in addition to Legends, the Company seeks to run more than one show in highly
visited live entertainment markets, thereby generating 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 years ended December 31, 1996 and 1997, approximately 44% and 47%,
respectively, of the Company's net revenue was generated from resort and urban
tourist markets; approximately 40% and 35%, respectively, of the Company's net
revenue was generated in gaming markets, predominantly Las Vegas and Atlantic
City; and approximately 15% 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. 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.
Recent Acquisition
On December 29, 1997, the Company announced the acquisition of certain
assets from Gedco USA, Inc. for $14,000,000, consisting of $11,500,000 in cash
and 595,238 shares of the Company's common stock, par value $0.01 per share (the
"Common Stock") valued at $2,500,000 (the "Gedco Acquisition"). Included in the
Gedco Acquisition are 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 ExtravaganzaTheater, each of which is located
in greater Orlando, Florida and a second Wild Bill's Dinner Extravaganza Theater
located in Buena Park, California. The Gedco Acquisition closed on March 13,
1998. Gerard O'Riordan, President of Gedco USA, Inc., has 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.
For the year ended December 31, 1997, the acquired assets from Gedco USA,
Inc. had unaudited revenues of $13,900,000 and earnings before interest, taxes,
depreciation and amortization of $2,700,000.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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 Company's net revenues over the last three years
(during such period its revenues from gaming markets decreased from 57% to 35%
of its total net revenues and its revenues from resort and urban tourist markets
increased from 41% to 64% 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 16 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 and 1997, revenues attributable to Legends productions
(including both resident and limited-run engagements) and the sale of related
Legends merchandise accounted for approximately 98% and 88%, 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.
<PAGE>
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 1.7% and 9.3% of the Company's net revenue for the years ended
December 31, 1996 and 1997, respectively. The Company's non-Legends productions
include, among others, the following:
"The Heroes Of Rock And Roll -- A Tribute To The Musical Artists Of The
'50s & '60s." -- a salute to the great musical rock and roll artists of
the fifties and sixties such as Richie Valens, Buddy Holly, The Big
Bopper, Chuck Berry, Jerry Lee Lewis, Sonny and Cher, The Beach Boys,
Aretha Franklin, and John Lennon. Heroes performed in the fall of 1995
at the Primadonna Hotel and Casino in Stateline, Nevada.
"Glitz -- A Tribute To The History Of Las Vegas." -- a musical revue
chronicling the development of Las Vegas from Frank Sinatra and his
contemporaries to the rise of modern revue shows, which featured
celebrity hosts Marty Allen and Steve Rossi and Australian singer Greg
Bonham. Glitz completed a five-month engagement in the summer of 1995
at the Sands Hotel and Casino in Las Vegas.
"Magic, Magic, Magic!" -- combines master magicians and illusionists
with special visual effects, comedy, music and dance. Each magician
principal, complemented by a troupe of singers and dancers, performs
several different components of magic: sleight-of-hand, comedy magic
and grand scale illusion. Magic, Magic, Magic! completed an eleven-week
engagement at the Showboat Hotel and Casino in Atlantic City in May
1996 and completed an eight-week engagement at Players Island Casino in
Mesquite, Nevada in September 1996.
"Country Stars On Ice" -- combines performances by World Class skaters
with comedic skits by skating clowns and ensemble skating. Country
Stars On Ice was performed at the Coliseum Theater in Pigeon Forge
during the first 10 months of 1995 and at Trump's Castle (where it was
renamed "Cabaret on Ice") in Atlantic City during the last two months
of 1995.
"Atlantic City Experience" -- a 30-minute, five-screen multimedia
history chronicling the founding, development and growth of Atlantic
City from the 1600's through the introduction of gaming. Atlantic City
Experience ran through the summer of 1995 at Bally's Park Place and is
an excellent showcase of the Company's multimedia video production
capability.
In addition, as a result of the Gedco Acquisition, the Company will be producing
the following non-Legends 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
and the Wild Bill Dinner Theater in Buena Park, California.
"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.
<PAGE>
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 entitled 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 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 also seek to acquire production companies with show
concepts which it believes have the potential to develop into brand-name shows.
By leveraging its in-house production expertise and infrastructure, the Company
believes it can improve the quality of acquired show concepts, and, by
capitalizing upon its already established Legends name and reputation, the
Company believes it can improve and/or hasten the marketability of new show
concepts.
In keeping with this "roll-up" strategy, on November 1, 1996, the Company
purchased all of the outstanding capital stock of Interactive Events, Inc., a
small Atlanta based corporate events 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.
<PAGE>
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 a
specific live performance prior to leaving for vacation, unless they have
purchased the show as part of a packaged tour or group outing, the Company also
relies on focused show promotion and word-of-mouth to attract additional
"walk-up" traffic to its box office. In addition, the Company aggressively
markets to tour operators and ticket wholesalers, through partnerships with
entities such as Calvin Gilmore Productions in Myrtle Beach, for additional
sales and marketing support.
The Company generally targets mass market audiences with average prices for
its productions ranging from $20.00 to $40.00 per adult ticket. Show pricing is
determined by competition in the local marketplace and is typically neither the
lowest nor the highest in a particular market. Once ticket pricing has been
determined, the composition of the show (number of principals, singers, dancers,
orchestra, technicians, etc.) and facility and equipment requirements are
adjusted so that each show will generate profits based upon projected
attendance. The Company distributes, from time to time, show coupons offering
discounts of up to 20% on individual ticket purchases, and offers volume
discounts of up to 46% to ticket and tour wholesalers buying large blocks of
tickets.
Advertising and Promotion
The Company provides publicity support and seeks major ongoing media
coverage for all of its shows through its network of media contacts. Exposure on
television and radio, and in national periodicals, major metropolitan
newspapers, and local tourist entertainment guides has served to promote the
Company's shows both regionally and nationally. Over the last 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.
<PAGE>
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 and 1997, sales of merchandise accounted for approximately 3% and 5% of
the Company's net revenue, respectively.
Part of the Company's business strategy is to increase its merchandise
sales by introducing new products such as compact discs, audio and video tapes
and a wider variety of clothing items, and by designing more effective point of
sale displays. In addition, the Company intends to implement centralized
purchasing and marketing to achieve economies of scale, ensure consistent
quality of product, and obtain sales data in a timely manner. See "Intellectual
Property."
Talent
The Company has featured 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, Myrtle Beach and Los Angeles, and often
views acts in outside show environments and clubs.
All performers receive creative and professional support from the Company's
various in-house personnel. The Company employs choreographers to work with new
and existing entertainers to develop their skills and improve their confidence
on stage. Utilizing the Company's in-house music library, musical arrangements
are developed for new and existing performers and digital audio tapes are
developed for principal acts. The Company's in-house wardrobe personnel,
together with several well established costume designers, create new performers'
wardrobes and update the wardrobes of existing talent. The Company contracts
with an independent photographer to provide promotional photographs of the
principals and employs a writer to prepare professional biographies and press
releases.
The Company believes it is the premier producer of impersonator shows
worldwide and has the ability to offer a variety of consistent work to its acts
by rotating them among its different shows and events. The Company offers
compensation which is competitive with market standards and, for certain long
production runs, offers housing to principal acts. The Company's musicians,
singers, dancers and production personnel are generally employees of the
Company, while headline acts, including the impersonators utilized in the
Company's tribute shows, are treated as independent contractors in accordance
with industry practice. An in-house attorney handles the negotiation of
contracts with all entertainers, and each impersonator enters into a new
contract for each new show or venue. The contracts provide for the term of the
engagement, the compensation to be paid to the impersonator, the
responsibilities and obligations of the parties, confidentiality and
noncompetition provisions and other general terms.
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.
<PAGE>
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 and production venues would have
access to a central database containing real-time show scheduling, inventory and
revenue information.
Competition
The leisure and entertainment market, which includes the market for live
theatrical productions, is highly competitive and many of the Company's markets
contain a large number of competing live theatrical productions. In resorts and
urban tourists locations, the Company competes for ticket sales with other live
productions and headline stars, many of whom have better name recognition and
greater financial and other resources than the Company. The pricing for the
Company's productions is based upon local market conditions, including the level
of competition, and is typically neither the lowest nor the highest in any given
market.
The live theatrical entertainment industry is highly fragmented and
contains many small, independent production companies and numerous large
production companies. The Company competes with these production companies for
the most desirable commercial and tourist venues, and for talent and production
personnel. Major production companies in the Company's markets include Feld
Entertainment Productions, Blair Farrington Productions and Dick Foster
Productions in Las Vegas, Calvin Gilmore Productions in Myrtle Beach and Greg
Thompson Productions in Seattle. In addition to competition from major
production companies who produce other forms of live theatrical shows, the
Company also competes directly against a large number of smaller independent
producers who sometimes produce 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 presently offers any real competition to the Company. Spring Time
Productions currently produces its American Superstars impersonator shows at the
Stratosphere Hotel and Casino in Las Vegas, at the Flamingo Hilton Hotel and
Casino in Reno, Nevada and at the Grand Casinos in Gulfport, Mississippi.
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.
<PAGE>
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 Economic Community 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 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. In
addition, the Company currently has its Fiesta! Fiesta! production at the Trump
Taj Mahal in Atlantic City, New Jersey. 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.
<PAGE>
Employees
As of March 16, 1998, the Company employed approximately (i) 269 full-time
employees, including 47 singer/dancers, 20 musicians, 53 operational personnel,
27 administrative personnel, 42 marketing personnel, 74 box office/concession
personnel and its 6 executive officers; and (ii) 277 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.
ITEM 2. Description of Property
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.
<TABLE>
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 11/98 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
<FN>
(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.
</FN>
</TABLE>
The Company believes that its existing facilities are suitable and adequate for
its current operations.
<PAGE>
ITEM 3. 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 pre-production costs associated with establishing the Legends
production which was scheduled to take place at the Surfside Theater in Myrtle
Beach. However, since the contingency was not met in a timely manner and the
Company was responsible for the lease of the property, the Company rescinded the
license and funded and operated the production on its own. The plaintiff seeks
for (i) a receiver to manage the Legends show produced by Grand Strand; (ii) an
accounting of all assets and profits of Grand Strand; (iii) the Company to be
prevented from diverting profits to itself or from diminishing the value of
Grand Strand's property or other contractual rights; (iv) the Company to pay to
Grand Strand all sums found to be due from an accounting of the profits and the
losses of Grand Strand caused by the Company's actions; and (v) actual damages
for loss of earnings. The Company filed an answer to the plaintiff's complaint,
as well as a motion to stay and a motion to compel arbitration. On June 2, 1997,
the Court of Common Pleas for Horry County, South Carolina granted such motions.
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. While the Company has been
notified that the American Arbitration Administration has transferred its file
to the Los Angeles office, no further action has been taken. 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.
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.
ITEM 4. Submission of Matters to a Vote of Security-Holders
There were no matters submitted to a vote of security holders during the
year ended December 31, 1997.
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
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) .. $5 5/8 $4 1/2
Fourth Quarter ................................ 6 1/2 3 13/16
As of March 20, 1998 there were 68 holders of record of the Common Stock.
On March 20, 1998, the closing sale price of the Common Stock as reported by the
Nasdaq Stock Market was $4 5/8.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings to finance future
growth and working capital needs and therefore does not anticipate paying any
cash dividends in the foreseeable future.
In accordance with Item 701(f) of Regulation S-B, the Company has
disclosed, in its quarterly report on Form 10-QSB for the period ended September
30, 1997, the full application of the offering proceeds received in connection
with the initial public offering of its Common Stock and redeemable warrants.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
The information appearing in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" from the portions
o f the Company's 1997 Annual Report to Stockholders filed as Exhibit 13 to this
Form 10-KSB is incorporated herein by reference.
ITEM 7. Financial Statements and Supplementary Data
The information appearing in the section captioned "Financial Statements"
from the portions of the Company's 1997 Annual Report to Stockholders filed as
Exhibit 13 to this Form 10-KSB are incorporated herein by reference.
See "List of Financial Statements" beginning on page F-1.
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information with respect to this Item will be contained in the Registrant's
Proxy Statement for the 1998 Annual Meeting of Stockholders (the "Proxy
Statement"), which is hereby incorporated herein by reference.
ITEM 10. Executive Compensation
Information with respect to this Item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this Item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
ITEM 12. Certain Relationships and Related Transactions
Information with respect to this Item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
ITEM 13. Exhibits & Reports on Form 8-K
(a) Exhibits
The following is a list of exhibits filed as part of this annual report
on Form 10-KSB. Where so indicated by footnote, exhibits which were previously
filed are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically
except for in those situations where the exhibit number was the same as set
forth below.
<PAGE>
<TABLE>
Exhibit
Number Description
------- ------------
<S> <C>
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)
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, 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+
(c) Second Addendum to Show Production Agreement between the Registrant and Kurz
Management+
(d) Third Addendum to Show Production Agreement between the Registrant and Kurz Management+
10.18 Lease between the Registrant and Burgoyne Properties, Limited (3) (Exhibit No. 10.20)
13 Portions of 1997 Annual Report to Stockholders+
21 Subsidiaries of the Registrant+
27 Financial Data Schedule+
<FN>
+ Filed herewith.
(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).
</FN>
</TABLE>
(b) Reports on Form 8-K
The company did not file any reports on Form 8-K during the quarter
ended December 31, 1997.
<PAGE>
ON STAGE ENTERTAINMENT, INC.
List of Financial Statements
The following financial statements of On Stage Entertainment, Inc. (the
"Company") and the report of the Company's independent auditors thereon,
included in the 1997 Annual Report to Stockholders, are incorporated by
reference in Item 7:
Report to BDO Seidman LLP, Independent Auditors
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997 and 1996
Statements of Stockholder's Equity (Deficit) for the years ended December 31,
1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 and 1996
Notes to Financial Statements
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ON STAGE ENTERTAINMENT, INC.
(Registrant)
Dated: March 30, 1998 By: /s/ John W. Stuart
--------------------------------------------
John W. Stuart, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
Signature Title Date
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ John W. Stuart Chairman and Chief Executive Officer and March 30, 1998
- --------------------------- Director (principal executive officer)
John W. Stuart
/s/ David Hope President, Chief Operating Officer and March 30, 1998
- --------------------------- Director
David Hope
/s/ Kiranjit S. Sidhu Chief Financial Officer (principal financial March 30, 1998
- --------------------------- and accounting officer) and Treasurer
Kiranjit S. Sidhu
/s/ Neil H. Foster Executive Vice President, Chief Operating March 30, 1998
- --------------------------- Officer and Director
Neil H. Foster
/s/ Mark S. Karlan Director March 30, 1998
- ---------------------------
Mark S. Karlan
/s/ Jules Haimovitz Director March 30, 1998
- ---------------------------
Jules Haimovitz
/s/ James L. Nederlander Director March 30, 1998
- ---------------------------
James L. Nederlander
/s/ Mark Tratos Director March 30, 1998
- ---------------------------
Mark Tratos
</TABLE>
<PAGE>
<TABLE>
EXHIBIT INDEX
Exhibit
Number Description
------- ------------
<S> <C>
10.17 (b) First Addendum to Show Production Agreement between the Registrant and Kurz Management+
(c) Second Addendum to Show Production Agreement between the Registrant and Kurz
Management+
(d) Third Addendum to Show Production Agreement between the Registrant and Kurz Management+
13 Portions of 1997 Annual Report to Stockholders+
21 Subsidiaries of the Registrant+
27 Financial Data Schedule+
</TABLE>
Exhibit 10.17 (b)
FIRST ADDENDUM TO SHOW PRODUCTION AGREEMENT
THIS ADDENDUM ("ADDENDUM") is made by and between ON STAGE
ENTERTAINMENT, INC., with offices at 4625 West Nevso, Suite 9, Las Vegas, Nevada
89103 (hereinafter referred to as "On Stage") KURZ MANAGEMENT, with offices at
Wilhelmshavenerstrasse 33, 10551, Berlin (hereinafter referred to as "Kurz")
this 31ST day of July, 1997.
RECITALS
WHEREAS, On Stage and Kurz entered into a Show Production Agreement
(the "Show Production Agreement") on May 31, 1997 pursuant to which On Stage is
to present and otherwise stage its federally registered "Legends in Concert"
production (the "Show") for Kurz at the Estrel Residence & Congress Hotel in
Berlin, Germany (the "Venue") commencing on September 12, 1997 and continuing
through and including December 31, 1997; and
WHEREAS, after further negotiations, the parties wish to amend and
augment the terms contained in the Show Production Agreement by entering into
this Addendum which shall be deemed to have been executed contemporaneously
therewith.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
obligations and benefits contained herein, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
MODIFICATION OF EXISTING TERMS
By this Addendum, the parties agree to amend and modify only those terms and
conditions of the Show Production Agreement specifically enumerated. To the
extent that a specific term, provision or condition is not modified or set forth
in this Addendum, the original terms of Show Production Agreement are intended
to remain in full force and effect. To the extent possible, the numbering of the
following provisions shall correspond with the numbering sequence of the
original Show Production Agreement terms, which they replace or to which they
are added.
TERMS AND CONDITIONS
5. ON STAGE'S RESPONSIBILITIES. On Stage shall maintain joint creative
control of the Show including the exclusive right to modify and/or alter any and
all aspects of the same at its reasonable discretion, except as provided for
herein, and shall retain all rights to the Show. However, On Stage shall give
appropriate consideration to any reasonable requests of Kurz, which may be
caused by the different environment for the Show at the Venue. The Show will be
a high-class impersonation show to be presented in a form, style, and format
which meets or exceeds the generally accepted quality and performance standards
for impersonation shows and reviews presented in the United States, in theaters
of similar size with similar equipment. On Stage hereby further agrees that it
will provide the following:
5.1 To provide the following fourteen (14) performers which will
consist of the following: five (5) Principal Acts; two (2) Singer/Dancers (one
of which will act as assistant choreographer); four (4) Dancers; and one (1)
Production Manager (hereinafter collectively referred to as the "Performers").
In addition, On Stage shall provide the services of one (1) Technician and one
(1) Choreographer during the initial set-up of the only. It should be noted that
one of the Principal Acts will be one entertainer impersonating two (2) separate
and distinct Principal Acts, for a total of six (6) Principal Acts.
5.3 To supply all necessary costumes for the Principal Acts,
Singer/Dancers and Dancers.
6. RESPONSIBILITIES OF KURZ. Kurz hereby agrees that it will provide
the following at its sole cost and expense:
6.1 Provide sixteen (16) international round-trip airline tickets on a
regularly scheduled American flight carrier (USA/Berlin/USA) and domestic
transportation to the Venue and back.
6.2 Provide nine (9) hotel rooms at the Hotel Estrel and two (2) meals
per day per Performer in the Hotel's restaurant(s) during the Initial Term and
all subsequent terms thereof. Kurz will further provide four (4) additional
hotel rooms and two (2) meals per day for the Executive Producer, the Associate
Producer, as well as any additional technicians and/or choreographer(s) during
load-in (pre-production), maintenance and load-out (closing) periods.
6.7 To provide rehearsal pay for the Performers at one-half the weekly
fee set forth in Section 7, below ($14,500.00). In addition, Kurz agrees to
reimburse On Stage it's actual out-of-pocket costs directly related to
rehearsing the singers and dancers in Las Vegas prior to leaving for Germany
(including rehearsal pay, housing and travel), which amount shall in no event
exceed $4,000.00.
<PAGE>
7. PAYMENT INFORMATION. Kurz shall pay to On Stage TWENTY NINE
THOUSAND DOLLARS ($29,000.00) per week in United States Currency in
consideration for On Stage's services contemplated hereunder. The schedule for
the payment of said monies will be as follows:
$18,500 To be received by On Stage by no later than September 12, 1997
(rehearsal pay); and
$29,000 To be received by On Stage by no later than September 24,
1997, and every Wednesday thereafter for the duration of this
Agreement.
In addition to the above, the parties hereto agree that all gross
receipts derived from the presentation of the Show above $50,000 USD per week
will be split between the parties as follows: 75% to Kurz and 25% to On Stage.
All payments required by Kurz hereunder shall be paid in United States Currency
by automatic wire transfer into an account specified by On Stage. All costs
associated with these automatic wire transfers shall be borne by Kurz. All
payments required hereunder, shall be made via wire transfer directly into an
account specified by On Stage and shall be secured by an irrevocable stand-by
Letter of Credit issued by a German or United States bank approved by On Stage.
On Stage hereby pre-approves the Deutsche Bank for such transaction. Kurz shall
revise the current letter of credit issued by Deutsche Bank in favor of On Stage
in the amount $350,000.00, so as to allow On Stage to draw down the balance of
said letter of credit from September 26, 1997 through and including January 14,
1998.
8. MERCHANDISE. On Stage hereby grants to Kurz the right to
manufacture and sell On Stage's federally registered Show related merchandise at
the Venue. All costs related to the sale of said merchandise including, but not
limited to the cost of manufacturing the merchandise, the shipping and/or
freight charges, the cost of setting up and operating the merchandise booth(s)
and any taxes levied on the sale thereof shall be the exclusive responsibility
of Kurz. All Net Profits generated from the sale of said merchandise shall be
divided between the parties on a 70% to Kurz, 30% to On Stage basis. For
purposes of this Paragraph, Net Profits shall be defined as all gross revenues
generated from the sale of the merchandise, minus the direct cost of
manufacturing the merchandise, freight, labor and taxes. Kurz shall remit On
Stage's portion of the Net Profits derived from the sale of the merchandise on a
monthly basis, in arrears of the previous performance week, along with a
detailed accounting in a format acceptable to On Stage that clearly sets forth
how the Net Profits for that respective week were calculated.
10. MATERIALITY OF TIMELY PAYMENTS. The payments listed in Paragraph 7
and 8, above, are a material term of this Agreement. The failure of Kurz to make
the payments required hereunder in a timely manner shall release On Stage from
its duty to perform its responsibilities and obligations as required hereunder,
but shall in no event release Kurz from its responsibilities and obligations
required of them by this Agreement, including, but not limited to paying On
Stage for services rendered as well as for services contracted for, but not yet
performed.
36. MODIFICATION OF IRREVOCABLE LETTER OF CREDIT. In as much as the
payment
IN WITNESS WHEREOF, the parties hereto have executed this Addendum on
the date and year first above written.
/s/ John W. Stuart /s/ Bernhard Kurz
- ---------------------------- ---------------------------
John W. Stuart Bernhard Kurz
Chief Executive Officer President
On Stage Entertainment, Inc. Kurz Management
Exhibit 10.17 (c)
SECOND ADDENDUM TO SHOW PRODUCTION AGREEMENT
THIS SECOND ADDENDUM ("Second Addendum") is made by and between ON
STAGE ENTERTAINMENT, INC., with offices at 4625 West Nevso, Suite 9, Las Vegas,
Nevada 89103 (hereinafter referred to as "On Stage") KURZ MANAGEMENT, with
offices at Wilhelmshavenerstrasse 33, 10551, Berlin (hereinafter referred to as
"Kurz") this ____ day of August, 1997.
RECITALS
WHEREAS, On Stage and Kurz entered into a Show Production Agreement
(the "Show Production Agreement") on May 31, 1997, which was subsequently
amended on July 31, 1997 (the "First Addendum"), pursuant to which On Stage is
present and otherwise stage its federally registered "Legends in Concert"
production (the "Show") for Kurz at the Estrel Residence & Congress Hotel in
Berlin, Germany (the "Venue") commencing on September 12, 1997 and continuing
through and including December 31, 1997; and
WHEREAS, after further negotiations, the parties wish to amend and
augment the terms contained in the Show Production agreement and the First
Addendum thereto by entering into this Second Addendum which shall be deemed to
have been executed contemporaneously therewith.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
obligations and benefits contained herein, the receipt and sufficiency of which
is hereby acknowledge, the parties hereto agree as follows:
MODIFICATION OF EXISTING TERMS
By this Second Addendum, the parties agree to amend and modify only
those terms and conditions of the Show Production Agreement and the First
Addendum specifically enumerated. To the extent that a specific term, provision
or condition is not modified or set forth in this Second Addendum, the original
terms of Show Production Agreement and First Addendum are intended to remain in
full force and effect. To the extent possible, the numbering of the following
provisions shall correspond with the numbering sequence of the original Show
Production Agreement and/or First Addendum terms, which they replace or to which
they are added.
TERMS AND CONDITIONS
8. MERCHANDISE. On Stage hereby grants to Kurz the right to manufacture
and sell On Stage's federally registered Show related merchandise at the Venue.
All costs related to the sale of said merchandise including, but not limited to
the cost of manufacturing the merchandise, the shipping and/or freight charges,
the cost of setting up and operating the merchandise booth(s) and any taxes
levied on the sale thereof shall be the exclusive responsibility of Kurz. Al Net
Profits generated from the sale of said merchandise shall be divided between the
parties on a 70% to Kurz, 30% to On Stage basis. For purposes of this Paragraph,
Net Profits shall be defined as all gross revenues generated from the sale of
the merchandise, minus the direct cost of manufacturing the merchandise,
freight, labor and taxes. Kurz shall remit On Stage's portion of the Net Profits
derived from the sale of the merchandise on a monthly basis, in arrears of the
previous performance month, along with a detailed accounting in a format
acceptable to On Stage that clearly sets forth how the Net Profits for that
respective month were calculated.
It is anticipated between the parties hereto that a compact disc will
be recorded, produced, manufactured and distributed for sale, which will feature
songs performed by certain of the Performers in the Show (the "Compact
Disc(s)"). If such a Compact Disc(s) is subsequently recorded, Kurz shall be
responsible for the production, manufacture, design, packaging, licensing, and
marketing of the Compact Disc(s), as well as labor and staffing relating to the
sale and distribution of the same, along with all costs and taxes related
thereto. On Stage shall be responsible for obtaining the appropriate clearances
from the performers whose reproductions are contained on the Compact Disc(s) and
negotiating and distributing any and all royalties related thereto. All gross
proceeds generated from the sale and/or distribution of the Compact Disc(s)
shall be divided equally between the parties (50% to On Stage-50% to Kurz). Kurz
shall remit On Stage's respective portion of the gross proceeds from the sale
and/or distribution of the Compact Disc(s) on a monthly basis in accordance with
the terms of this Paragraph that relate to the distribution of proceeds from the
sale and/or distribution of proceeds from the sale of merchandise. It should be
noted, however, that On Stage shall have final approval of the content of the
Compact Disc(s) before any sale or distribution thereof, and all rights to the
Compact Disc(s) shall at all times remain the exclusive property of On Stage,
with On Stage retaining the master copy of the completed Compact Disc(s).
<PAGE>
9. SOUVENIR PHOTO LOCATIONS. On Stage hereby grants to Kurz the right
to set up, operate and manage up to two (2) "legends talent/guest souvenir photo
locations" in the Hotel ("Souvenir Photo Locations") for the limited purpose of
selling souvenir photo's thereat (the "Souvenir Photo's"). All costs related to
the Souvenir Photo Locations, including, but not limited to the construction,
implementation and daily operation of the same, as well as any taxes levied on
the sale and/or distribution of the Souvenir Photo's thereat, shall be the
exclusive responsibility of Kurz. All Net Profits generated form the sale of the
Souvenir Photo's shall be divided between the parties on a 70% to Kurz, 30% to
On Stage basis. However, in the event that the Show is performed in excess of
eight (8) performances in any given week, the Net Profits generated from the
sale of the Souvenir Photo's shall be divided on an equal (50%-50%) for any and
all such weeks. For purposes of this Paragraph, Net Profits shall be defined as
all gross revenues generated from the sale of the Souvenir Photo's, minus the
direct cost of producing and developing the Souvenir Photo's, any related labor
and taxes levied thereon. Kurz shall remit On Stage's portion of the Net Profits
derived from the sale of the Souvenir Photo's on a monthly basis, in arrears of
the previous performance month, along with a detailed accounting in a format
acceptable to On Stage that clearly sets forth how the Net Profits for that
respective month were calculated.
36. AUDIT RIGHTS. Kurz shall keep accurate accounting books and records
of all costs and revenues related to the Show and the sale and distribution of
Merchandise, Compact Disc(s) and Souvenir Photo's contemplated hereunder
throughout the duration of this Agreement and for one (1) year thereafter. Kurz
hereby grants to On Stage the right to inspect its books and records provided
that On Stage provides Kurz with no less than thirty (30) days written notice of
such intention. If any such audit reveals an underpayment from Kurz to On Stage
as required hereunder, Kurz shall immediately remit to On Stage all amounts so
due, together with interest thereon at the rate of ten percent (10%) per annum,
from the date said amounts were due through to the date the amounts were
actually received.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Addendum on the date and year first above written.
/s/ John W. Stuart Bernhard Kurz
- ---------------------------- -----------------------------
John W. Stuart Bernhard Kurz
Chief Executive Officer President
On Stage Entertainment, Inc. Kurz Management
Exhibit 10.17 (d)
THIRD ADDENDUM TO SHOW PRODUCTION AGREEMENT
THIS THIRD ADDENDUM (the "Third Addendum") is made by and between ON
STAGE ENTERTAINMENT, INC., with offices at 4625 West Nevso, Suite 9, Las Vegas,
Nevada 89103 (hereinafter referred to as "On Stage") KURZ MANAGEMENT, with
offices at Wilhelmshavenerstrasse 33, 10551, Berlin (hereinafter referred to as
"Kurz") this 18TH day of December, 1997.
RECITALS
WHEREAS, On Stage and Kurz entered into a Show Production Agreement
(the "Show Production Agreement") on May 31, 1997, which was subsequently
amended on July 31, 1997 (the "First Addendum") and again on August 8, 1997
(together with the First Addendum, the "Addenda"), pursuant to which On Stage is
to present and otherwise stage its federally registered "Legends in Concert"
production (the "Show") for Kurz at the Estrel Residence & Congress Hotel in
Berlin, Germany (the "Venue"); and
WHEREAS, after further negotiations, the parties wish to amend and
augment the terms contained in the Show Production Agreement and the Addenda by
entering into this Third Addendum.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
obligations and benefits contained herein, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
MODIFICATION OF EXISTING TERMS
By this Third Addendum, the parties agree to amend and modify only
those terms and conditions of the Show Production Agreement and the Addenda
specifically enumerated. To the extent that a specific term, provision or
condition is not modified or set forth in this Third Addendum, the original
terms of Show Production Agreement and the Addenda are intended to remain in
full force and effect. To the extent possible, the numbering of the following
provisions shall correspond with the numbering sequence of the original Show
Production Agreement Addenda terms, which they replace or to which they are
added.
TERMS AND CONDITIONS
3. TERM. The Show will be performed at the Venue in accordance with
the terms contained herein from January 18, 1997 through and including December
31, 1998 (the "Second Term").
5. ON STAGE'S RESPONSIBILITIES. On Stage shall maintain joint creative
control of the Show including the exclusive right to modify and/or alter any and
all aspects of the same at its reasonable discretion, except as provided for
herein, and shall retain all rights to the Show. However, On Stage shall give
appropriate consideration to any reasonable requests of Kurz, which may be
caused by the different environment for the Show at the Venue. The Show will be
a high-class impersonation show to be presented in a form, style, and format
which meets or exceeds the generally accepted quality and performance standards
for impersonation shows and reviews presented in the United States, in theaters
of similar size with similar equipment. On Stage hereby further agrees that it
will provide the following:
5.6 All Performers shall arrive in Berlin and be prepared to rehearse
the Show from January 17, 1997 through January 18, 1997 so as to be prepared to
commence performances of the Show on January 18, 1997. Kurz shall remain
responsible for those same amenities provided to On Stage's Performers as is to
be provided to them during the run of the Show (i.e. housing, meals, etc.).
5.10 On Stage hereby agrees to change out the Principal Acts on March
15, 1998. Kurz hereby requests that the Principal Acts be replaced with
impersonators of Buddy Holly, Bette Midler, Tom Jones, Michael Jackson and Elvis
and On Stage hereby agrees to use its good faith efforts to provide said
requested acts. Kurz will be responsible for all costs related to the change out
of the Principal Acts, including, but not limited to: rehearsal pay, airfare,
housing accommodations, food or a per diem, costs of cartage and shipping of all
necessary props and costumes, if necessary, etc.
5.11 On Stage hereby agrees to change out the Principal Acts again on
September 11, 1998, so long as Kurz assumes all financial responsibility related
to the change out.
<PAGE>
6. RESPONSIBILITIES OF KURZ. Kurz hereby agrees that it will provide
the following at its sole cost and expense:
6.1 Provide sixteen (16) international round-trip airline tickets on a
regularly scheduled American flight carrier (USA/Berlin/USA) and domestic
transportation to the Venue and back. In addition, Kurz shall provide
international round-trip airline tickets for all Principal Acts during any and
all change out periods (i.e. March 15, 1998 and possible July 1998).
7. PAYMENT INFORMATION. Kurz shall pay to On Stage TWENTY NINE
THOUSAND DOLLARS ($29,000.00) per week in United States Currency in
consideration for On Stage's services contemplated hereunder. The first payment
shall be due by no later than January 14, 1997. In addition to the above, the
parties hereto agree that all gross receipts derived from the presentation of
the Show above $54,000 USD per week will be split between the parties as
follows: 75% to Kurz and 25% to On Stage. All payments required by Kurz
hereunder shall be paid in United States Currency by automatic wire transfer
into an account specified by On Stage. All costs associated with these automatic
wire transfers shall be borne by Kurz. All payments required hereunder, shall be
made via wire transfer directly into an account specified by On Stage and shall
be secured by a $200,000 non-reducing irrevocable stand-by Letter of Credit
issued by a German or United States bank approved by On Stage. On Stage hereby
pre-approves Berliner Bank for such transaction.
8. MERCHANDISE. On Stage hereby grants to Kurz the right to sell On
Stage's federally registered Show related merchandise at the Venue ("Show
Merchandise"). A catalogue containing the available Show Merchandise and the
cost associated thereto will be provided to Kurz upon request. All costs related
to the sale of the Show Merchandise including, but not limited to the cost of
shipping the merchandise, any freight charges, the cost of setting up and
operating the merchandise booth(s) and any taxes levied on the sale thereof
shall be the exclusive responsibility of Kurz.
36. SPECIAL EVENT. On Stage hereby agrees to perform the Show at a
special event in Cologne for one performance on January 16, 1998. On Stage will
ensure that the Performers arrive in Cologne by no later than January 15, 1998
so as to be prepared to perform on January 16, 1998. Kurz hereby agrees to pay
On Stage an all inclusive one-time fee of $5,600 USD in consideration of On
Stage's services of providing its Performers for this special event and further
agrees to provide the Performers with all housing, food, travel and other
accommodations that Kurz would normally be responsible for if the Show was being
performed in Berlin.
IN WITNESS WHEREOF, the parties hereto have executed this Third
Addendum on the date and year first above written.
/s/ John W. Stuart /s/ Bernhard Kurz
- ---------------------------- ---------------------------
John W. Stuart Bernhard Kurz
Chief Executive Officer President
On Stage Entertainment, Inc. Kurz Management
EXHIBIT 13
ON STAGE ENTERTAINMENT, INC.
Portions of 1997 Annual Report to Stockholders
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 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:
Years Ended December 31,
------------------------
1996 1997
----- ------
Theatrical productions:
Legends ............................... 93.4% 83.7%
Other ................................. 0.8 9.0
----- -----
Total .......................... 94.2 92.7
Merchandise (all Legends) .................... 4.9 4.3
Other ........................................ 0.9 3.0
----- -----
Total .......................... 100.0% 100.0%
===== =====
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 in 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), and Berlin, Germany (since September 1997).
The Company classifies its productions (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.
The Company has opened three 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 Theater for a six month run in 1996 and at the
Osmond Family Theater for a three month run in 1997; and (3) Legends at the
Coliseum Theater in Daytona Beach, Florida in June 1997. The Company's Legends
production in Myrtle Beach generated approximately 44% and 34% gross profit
margins in fiscal 1996 in fiscal 1997, respectively. The Company's Legends
production in Branson generated approximately 41% and 11% gross profit margins
in fiscal 1996 and 1997, 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.
<PAGE>
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, the Company opened five 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; (2) a Legends show at
the Fireside Theater, Fort Atkinson, Wisconsin, for an eleven week run, which
opened in January; (3) a Legends show at the Empress Casino in Joliet, Illinois,
for a sixteen week run which opened in March; (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; (5) A full-scale Legends
production at the Estrel Residence & Congress Hotel in Berlin, Germany which
opened in September. These five 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 the end of 1997, the Company maintained
five administrative offices, including its corporate headquarters in Las Vegas
and branch offices in Atlantic City, Atlanta, Palm Springs and Myrtle Beach.
On December 29, 1997, the Company announced an acquisition to purchase
certain assets from Gedco USA, Inc. for $14,000,000, consisting of $11,500,000
in cash and 595,238 shares of the Company's common stock valued at $2,500,000
(the "Gedco Acquisition"). Included in the Gedco Acquisition are 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(R)
bar and the Fort Liberty shopping complex, which includes a Wild Bill's Dinner
Theater located in greater Orlando, Florida and a second Wild Bill's Dinner
Theater located in Buena Park, California. The Gedco Acquisition was completed
on March 13, 1998. Gerard O'Riordan, President of Gedco USA, Inc., has 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. For the year ended December 31, 1997, the acquired
assets from Gedco USA, Inc. had unaudited revenues of $13,900,000 and earnings
before interest, taxes, depreciation and amortization of $2,700,000.
<PAGE>
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:
Years Ended December 31,
------------------------
1996 1997
----- -----
Net revenue .................................. 100.0% 100.0%
Direct production costs ...................... 42.6 49.2
Indirect production costs .................... 16.6 23.3
----- -----
Gross profit ................................. 40.8 27.5
Selling, general and administrative .......... 28.6 31.5
Depreciation and amortization ................ 4.7 6.2
Loss on discontinued location ................ 0.0 3.1
----- -----
Operating profit (loss) ...................... 7.5 (13.3)
Interest expense, net ........................ 1.1 (5.3)
----- -----
Pre-tax income (loss) ........................ 6.4 (18.6)
Income taxes ................................. 0.1 0.1
----- -----
Net income (loss) ............................ 6.3% (18.7)%
===== =====
Net income for the year ended December 31, 1996, was $900,998, as
compared to a net loss of $2,946,056 for the year ended December 31, 1997.
Year Ended December 31, 1996 versus Year Ended December 31, 1997
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.
<PAGE>
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. 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 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
Whale Securities Co., LP (the "Underwriter") not to loan or advance any further
sums to Mr. Stuart, without the prior consent of the 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 $59,000 earned from the Company's investment of approximately
49% of the net proceeds generated from the initial public offering of the
Company's common stock and redeemable warrants.
Income Taxes. Income taxes for the years ended December 31, 1997 and December
31, 1996 relate to income taxes in those states other than Nevada in which the
Company conducts business.
Seasonality and Quarterly Results
The Company's business has been, and is expected to remain, highly
seasonal, with the majority of its revenue being generated during the months of
April through October. Part of the Company's business strategy is to increase
sales in tourist markets that experience their peak seasons from November
through March so as to offset seasonality in revenues. The Gedco Acquisition
should also help to decrease the seasonality of the Company's business. The
Company is exploring opportunities to open shows in markets such as Florida and
Arizona, domestically, and Australia, South Africa, Singapore and New Zealand,
abroad, which the Company believes could also help mitigate this seasonality.
<PAGE>
The following table sets forth the Company's net revenue for each of
the last eight quarters ended December 31, 1997:
Net Revenues ($ in thousands)
----------------------------------------------------
March 30, June 30, September 30, December 31,
----------------------------------------------------
Fiscal 1996 .......... $2,347 $4,266 $4,591 $3,074
Fiscal 1997 .......... $2,719 $3,979 $5,071 $3,957
Tax Net Operating Losses
At December 31, 1996 and 1997, the Company had federal net operating
loss carryforwards of approximately $657,214 and $2,495,371, 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 cannot determine if it is more likely
than not that the deferred tax assets will 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 internal expansion strategy and contemplated
capital requirements over the next 36 months. However, the Company's acquisition
strategy 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 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 "IPO").
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").
<PAGE>
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 $1,800,000 of
principal amount under the 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 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 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. The line of credit is scheduled to
expire on May 19, 1998. John W. Stuart has personally guaranteed the line of
credit. On August 19, 1997, the Company paid off, in full, all the outstanding
principal and accrued interest, $223,000, owed by the Company under the line of
credit facility.
Capital Equipment Financing Commitment
On September 29, 1997, First Security Leasing Company, a Utah
corporation, approved the Company for 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.
Mortgage Financing Commitment
On March 13, 1998, Imperial Credit Commercial Mortgage Investment
Corporation ("ICCMIC") signed an agreement with the Company to fund 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. Under the terms of their agreement, ICCMIC may also provide
the Company with up to an additional $30,000,000 of mortgage related financing.
Concurrent with the initial $12,500,000 funding, the Company elected Mark
Karlan, the President of ICCMIC, to the Company's board of directors, filling
the 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.
<PAGE>
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. The Company does not expect adoption of
SFAS 130 to have a material effect, if any, on its financial position or results
of operations.
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.
Subsequent Events
Note Receivable from Principal Stockholder
In connection with the IPO, the Company agreed with its 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 from December 31, 1996 through the
date of the IPO, without the Underwriter's prior written consent. The Company
also received the authorization from the Underwriter, to advance John Stuart up
to another $150,000 for settlement of certain litigation pending against Mr.
Stuart for his involvement in the Legends in Concert, Hawaii show.
Working Capital Line Increase
As of March 10, 1998, the Company has drawn $250,000 on the line of
credit. On March 23, 1998 First Security agreed to increase the line of credit
from $250,000 to $1,000,000 and the expiration date will be extended to March
25, 1998. (See "Liquidity and Capital Resources- General".)
Capital Equipment Financing Commitment
As of March 13, 1998, the Company has drawn $443,000 on the line of
credit. The Companies remaining availability is $537,000. (See "Liquidity and
Capital Resources- General").
Gedco USA, Inc. Acquisition
As of December 31, 1997, the Company incurred approximately $258,000 in
direct acquisition costs, which consisted primarily of audit fees, legal costs,
and real estate appraisals in connection with the acquisition of certain assets
from Gedco USA, Inc. (the "Gedco Acquisition"), which was subsequently added to
the agreed price to arrive at the total price paid for the said assets.
On March 13, 1998, the Company completed the Gedco Acquisition for
$14,000,000 million by using $12,500,000 of a $20,000,000 credit facility
provided to the Company by ICCMIC and by issuing 595,238 shares of the Company's
common stock valued at $2,500,000. Under the terms of this agreement, ICCMIC may
also provide the Company with up to an additional $30,000,000 of mortgage
related financing.
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Table of Contents
Item Page Number
Report of Independent Certified Public Accountants..........
Consolidated Financial statements
Balance sheets.......................................
Statements of operations.............................
Statements of stockholders' equity (deficit).........
Statements of cash flows ............................
Summary of accounting policies.......................
Notes to financial statements........................
<PAGE>
Independent Certified Public Accountants' Report
Board of Directors and Stockholders of
On Stage Entertainment, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of On Stage
Entertainment, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
related statements of operations, stockholders' 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of On Stage
Entertainment, Inc. and Subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their 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
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
Years ended December 31,
Assets (Note 2) ------------------------------
1996 1997
------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents .............................................................. $ 290,751 $ 2,323,559
Accounts receivable .................................................................... 490,465 455,340
Inventory .............................................................................. 67,853 118,700
Deposits ............................................................................... 231,601 342,096
Prepaid and other assets ............................................................... 236,295 271,338
Pre-opening costs, net ................................................................. 129,180 - -
Notes receivable from stockholder (Note 6) ............................................... - - 136,194
----------- -----------
Total current assets .......................................................... 1,446,145 3,647,227
----------- -----------
Property, equipment and leasehold improvements (Notes 1 and 2) ............................... 3,725,941 5,008,835
Less: Accumulated depreciation and amortization ............................................. (1,937,718) (2,553,347)
----------- -----------
Property, equipment and leasehold improvements, net .......................................... 1,788,223 2,455,488
----------- -----------
Cost in excess of net assets acquired, net of accumulated amortization
of $1,053 and $7,370 (Note 4) ............................................................ 62,123 116,415
Direct acquisition costs (Note 12) ........................................................... - - 258,133
Offering costs ............................................................................... 657,801 - -
----------- -----------
$ 3,954,292 $ 6,477,263
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses .................................................... $ 599,045 $ 880,286
Accrued payroll and other liabilities .................................................... 621,986 698,499
Litigation settlement accrual ............................................................ 100,000 - -
Current maturities of long-term debt (Note 2) ............................................ 228,510 271,918
----------- -----------
Total current liabilities
1,549,541 1,850,703
----------- -----------
DYDX LP Loan (Notes 2 and 4) ................................................................. 750,000 - -
Long-term debt, less current maturities (Note 2) ............................................. 1,877,391 550,332
----------- -----------
Total liabilities ................................................................. 4,176,932 2,401,035
----------- -----------
Commitments and contingencies (Note 3)
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 and 6,595,500 shares issued and outstanding ...................... 40,020 65,955
Additional paid-in-capital .............................................................. 121,024 7,340,013
Accumulated deficit ..................................................................... (383,684) (3,329,740)
----------- -----------
Total stockholders' equity (deficit) ............................................. (222,640) 4,076,228
----------- -----------
$ 3,954,292 $ 6,477,263
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
Years ended December 31,
--------------------------------------
1996 1997
--------------------------------------
<S> <C> <C>
Net revenues ................................................................... $ 14,278,082 $ 15,726,074
Direct production costs ........................................................ 6,070,361 7,741,739
Indirect production costs ...................................................... 2,376,006 3,671,785
------------ ------------
Gross profit ................................................................... 5,831,715 4,312,550
------------ ------------
Operating expenses
Selling, general and administrative (Note 7) ........................... 4,085,624 4,946,135
Depreciation and amortization (Note 8) ................................. 676,306 982,180
Expenses at discontinued location (Note 9) ............................. - - 489,285
------------ ------------
Total operating expenses .................................... 4,761,930 6,417,600
------------ ------------
Operating income (loss) ....................................................... 1,069,785 (2,105,050)
Interest expense, net (See Note 10) ............................................ 152,998 834,333
------------ ------------
Income (loss) before income taxes .............................................. 916,787 (2,939,383)
Income taxes (Note 11) ......................................................... 15,789 6,673
------------ ------------
Net Income (loss) (See Note 11) ................................................ $ 900,998 $ (2,946,056)
============ ============
Basic income (loss) per share .................................................. $ 0.23 $ (0.55)
============ ============
Diluted net income (loss) per share ............................................ $ 0.22 $ (0.55)
============ ============
Basic average number of common shares outstanding .............................. 4,002,044 5,365,851
============ ============
Diluted average number of common shares outstanding ............................ 4,064,927 5,365,851
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
<TABLE>
Additional
Common Stock Paid-In
----------------------- Additional 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
=========== =========== =========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
Years ended December 31,
------------------------------
1996 1997
------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ..................................................................... $ 900,998 $(2,946,056)
---------- -----------
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization ....................................................... 676,306 676,306
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
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
Inventory ......................................................... (67,853) (50,847)
Offering costs .................................................... (344,522) 657,801
Deposits .......................................................... (86,816) (110,495)
Pre-opening costs ................................................. (61,483) 129,180
Prepaid and other assets .......................................... (125,988) (35,043)
Accounts payable and accrued expenses ............................. 56,302 281,243
Accrued payroll and other liabilities ............................. 415,651 76,513
Litigation settlement accrual ..................................... -- (75,000)
----------- ------------
Total adjustments ................................................................... 253,239 2,504,725
----------- -----------
Net cash provided by (used in) operating activities .......................................... 1,154,237 (441,331)
----------- ------------
Cash flows from investing activities
Advances on note receivable from stockholder ................................................ - - (357,715)
Capital expenditures .................................................................. (987,355) (625,612)
Acquisition of Interactive Events Inc., net of cash acquired ........................... 45,272 --
Direct acquisition costs ............................................................... -- (258,133)
----------- -----------
Net cash used in investing activities ........................................................ (942,083) (1,241,460)
----------- -----------
Cash flows from financing activities
Repayments under line of credit ........................................................ (200,000) --
Proceeds from short-term borrowing ..................................................... 1,000,000 --
Repayments on long-term borrowing ...................................................... (649,099) (1,140,376)
Repayments on short-term borrowing ..................................................... (92,402) --
Proceeds from bridge notes ............................................................. -- 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
----------- ------------
Net increase in cash and cash equivalents ................................................... 270,653 2,032,808
Cash and cash equivalents at beginning of year .............................................. 20,098 290,751
----------- -----------
Cash and cash equivalents at end of year .................................................... $ 290,751 $ 2,323,559
=========== ===========
Supplemental disclosure of cash flow information Cash paid during the year for:
Interest ............................................................................. $ 287,047 $ 278,059
Taxes ................................................................................ $ 15,789 $ 6,673
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Supplemental schedule of non-cash 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.
See accompanying summary of accounting policies and notes to
consolidated financial statements.
<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
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.
<PAGE>
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.
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.
<PAGE>
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, the Company had $2,600,788 on deposit at one
bank. Account balances at an individual bank are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000.
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. The Company does not expect adoption of
SFAS No. 130 to have an 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.
Reclassifications
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of the following:
<TABLE>
December 31,
-----------------------
1996 1997
-----------------------
<S> <C> <C>
Stage equipment ......................................... $1,997,340 $2,267,456
Scenery and wardrobe .................................... 854,976 1,047,750
Furniture and fixtures .................................. 678,912 1,002,674
Vehicles ................................................ 6,434 12,757
Leasehold improvements .................................. 188,279 678,198
---------- ----------
3,725,941 5,008,835
Less accumulated depreciation and amortization .......... 1,937,718 2,553,347
---------- ----------
Total property, equipment and leasehold improvements, net $1,788,223 $2,455,488
========== ==========
</TABLE>
The cost of assets held under capital leases was $308,072 and $1,008,432 at
December 31, 1996 and 1997, respectively.
2. Notes Payable and Long-Term Debt
Long-term debt consists of the following:
<TABLE>
December 31,
1996 1997
----------------------
<S> <C> <C>
8% convertible subordinated debentures payable ("Deben-
tures"), 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 --
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
---------- ----------
Total long-term debt .......................................................... 2,855,901 822,250
Less current maturities ........................................................ 228,510 271,918
---------- ----------
$2,627,391 $ 550,332
========== ==========
</TABLE>
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
=========
<PAGE>
(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 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. 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.
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.
<PAGE>
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.
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.
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.
<PAGE>
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 share 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.
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
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.
<PAGE>
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.
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.
<PAGE>
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).
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.
<PAGE>
The option and warrant activity during the years ended December 31, 1996 and
1997 is as follows:
Weighted
Number of Average
Options Exercise
and Warrants Price
-------------------------
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
========= ========
Options exercisable at December 31, 1997 ........... 1,282,822 5.29
========= ========
Options exercisable at December 31, 1996 ........... 228,128 $ 3.99
========= ========
Information relating to stock options and warrants at December 31, 1997
summarized by exercise price are as follows:
<TABLE>
Outstanding Exercisable
----------------------------------------------------- ----------------------------------
Exercise Price Weighted Average Weighted Average
----------------------------------------------------- ----------------------------------
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>
<PAGE>
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 would have been reduced to the pro forma amounts
presented below:
1996 1997
----------- --------------
Net Income (loss)
As reported .......................... $ 900,998 $ (2,946,056)
Pro forma ............................ $ 555,773 $ (3,335,419)
Basic Income (loss) per share
As reported .......................... $ 0.23 $ (0.55)
Pro forma ............................ $ 0.14 $ (0.62)
Diluted income (loss) per share
As reported .......................... $ 0.22 $ (0.55)
Pro forma ............................ $ 0.14 $ (0.62)
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.
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.
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.
Years ended December 31,
------------------------
1996 1997
------------------------
Venue A................................................ 29% 25%
Venue B................................................ 11 -
Venue C................................................ 32 28
Venue D................................................ 12 10
-- --
84% 63%
== ==
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.
<PAGE>
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.
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 and
the Bridge Financing resulted $366,000 original issue discount and interest
expense.
11. Income Taxes
Income taxes in the statement of operations consists of the following:
Years ended December 31, 1996 1997
- ------------------------ ------- -------
Current
Federal ............................ $ - - $ - -
State .............................. 15,789 6,673
------- -------
$15,789 $ 6,673
======= =======
Deferred taxes are as follows:
Years ended December 31, 1996 1997
- ------------------------ --------- ---------
Deferred tax assets:
Litigation accrual ....................... $ 34,000 $ 21,080
Net operating loss carryforward .......... 223,453 848,426
--------- ---------
Total deferred tax assets ...................... 257,453 869,506
Deferred tax liability:
Pre-opening costs .............................. (43,921) - -
--------- ---------
Net deferred tax assets ........................ 213,532 869,506
Less: Valuation allowance ...................... (213,532) (869,506)
--------- ---------
$ - - $ - -
========= =========
<PAGE>
The net deferred tax assets have a 100% valuation allowance as management
cannot determine if it is more likely than not that the deferred tax assets will
be realized.
Income taxes in the statement of operations differs from the amount
computed by applying the U.S. Federal income tax rate (34%) because of the
effect of the following items:
Years ended December 31, 1996 1997
- ------------------------ --------- ----------
U.S. Federal statutory rate
applied to pretax income (loss) ............ $ 306,339 $(999,390)
Permanent differences ........................ 510 5,663
State income taxes, net
of Federal benefit ......................... 15,789 2,269
Benefit of net operating
loss carryforward .......................... $(306,849) - -
Tax effect of unrecognized net
operating loss carryforward ................ - - 998,131
--------- ---------
$ 15,789 $ 6,673
========= =========
At December 31, 1996 and 1997 the Company had Federal net operating loss
carryforwards of approximately $657,214 and $2,495,371 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. Subsequent Events
Note Receivable from Principal Stockholder
In March 1997, the Company agreed with its Underwriter, that it would
neither loan nor advance any sums to or on behalf of Mr. Stuart other than those
sums to or on behalf of Mr. Stuart other than those sums advanced to Mr. Stuart
from December 31, 1996 through the date of the IPO, without the Underwriter's
prior written consent. The Company also received the authorization from the
Underwriter, to advance John Stuart up to another $150,000 for settlement of
certain litigation pending against Mr. Stuart for his involvement in the Legends
in Concert, Hawaii show.
Working Capital Line Increase
As of March 10, 1998, the Company has drawn $250,000 on the line of
credit. On March 23, 1998 First Security agreed to increase the line of credit
from $250,000 to $1,000,000. (See "Liquidity and Capital Resources- General".)
Capital Equipment Financing Commitment
As of March 13, 1998, the Company has drawn $443,000 on the line of
credit. The Companies remaining availability is $537,000. (See "Liquidity and
Capital Resources- General").
Gedco USA, Inc. Acquisition
As of December 31, 1997, the Company incurred approximately $258,000 in
direct acquisition costs, which consisted primarily of audit fees, legal costs,
and real estate appraisals in connection with the acquisition of certain assets
from Gedco USA, Inc. (the "Gedco Acquisition"), which was subsequently added to
the agreed price to arrive at the total price paid for the said assets.
On March 13, 1998, the Company completed the Gedco Acquisition for $14
million by using $12.5 million of a $20 million credit facility provided to the
Company by ICCMIC under the terms of this agreement, ICCMIC may also provide the
Company with up to an additional $30 million of mortgage related financing.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Legends in Concert, Inc., a Nevada corporation
2. On Stage Marketing, Inc., a Nevada corporation
3. Interactive Events, Inc., a Georgia corporation
4. Fort Liberty, Inc., a Nevada corporation
5. Wild Bill's California, Inc., a Nevada corporation
6. Blazing Pianos, Inc., a Nevada corporation
7. King Henry's, Inc., a Nevada corporation
8. On Stage Theaters, Inc., a Nevada corporation*
9. On Stage Theatres Canada, Inc., an Ontario, Canada corporation
* On Stage Theaters, Inc. does business as On Stage Dinner Theaters, Inc.
in California.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FORM 10-KSB OF ON STAGE ENTERTAINMENT, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,323
<SECURITIES> 0
<RECEIVABLES> 455
<ALLOWANCES> 0
<INVENTORY> 119
<CURRENT-ASSETS> 3,647
<PP&E> 5,009
<DEPRECIATION> 2,553
<TOTAL-ASSETS> 6,477
<CURRENT-LIABILITIES> 1,851
<BONDS> 550
0
0
<COMMON> 66
<OTHER-SE> 4,010
<TOTAL-LIABILITY-AND-EQUITY> 6,477
<SALES> 15,726
<TOTAL-REVENUES> 15,726
<CGS> 7,742
<TOTAL-COSTS> 11,414
<OTHER-EXPENSES> 6,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 834
<INCOME-PRETAX> (2,939)
<INCOME-TAX> 7
<INCOME-CONTINUING> (2,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,946)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
