SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20450
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, 1999 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.
________________________________________________________________________________
(Name of Small Business Issuer in its Charter)
Nevada 88-0214292
_______________________________ _______________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4625 W. Nevso Drive Las Vegas, Nevada 89103
________________________________________________________________________________
(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: None
Name of each exchange on which registered: 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
(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 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' 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 registrant's revenues for the most recent fiscal year ended December 31,
1999 were $28,542,642.
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
April 11, 2000 was $0.50.
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The number of shares of the registrant's common stock outstanding as of April
14, 2000 was 7,226,808.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement relating to the 2000 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, 1999.
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<TABLE>
TABLE OF CONTENTS
Page No.
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PART I.................................................................................................. 2
Item 1. Description of Business........................................................................ 3
Item 2. Description of Property........................................................................ 24
Item 3. Legal Proceedings.............................................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders............................................ 28
PART II................................................................................................. 29
Item 5. Market for Common Equity and Related Stockholder Matters....................................... 29
Item 6. Management's Discussion and Analysis or Plan of Operation...................................... 29
Item 7. Financial Statements........................................................................... 29
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................................ 30
PART III................................................................................................ 30
Item 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance with Section
16(a) of the Exchange Act..................................................................... 30
Item 10. Executive Compensation......................................................................... 33
Item 11. Security Ownership of Certain Beneficial
Owners and Management......................................................................... 34
Item 12. Certain Relationships and Related Transactions................................................. 36
Item 13. Exhibits, and Reports on Form 8-K.............................................................. 37
</TABLE>
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PART I
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
On Stage's productions, the expansion of existing and potential gaming and
tourist markets, our exposure to various trends in the gaming industry, our
acquisition plans and the benefits we anticipate from these acquisitions, our
business strategy, our outstanding litigation matters and the defenses available
to us, the seasonality of our business, and liquidity issues, as well as
information contained elsewhere in this Report, where current statements are
preceded by, followed by or include the words "believes," "expects,"
"anticipates" or similar expressions. For these statements, On Stage 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 the forward-looking statements and the actual results to
differ materially from those expressed in or implied by the statements. The most
important factors that could prevent On Stage from achieving our goals--and
cause the assumptions underlying the forward-looking statements and the actual
results to differ materially from those expressed in or implied by those
forward-looking statements--include, the information provided under the heading
"Description of Business-Risk Factors" in Item 1, as well as the following:
o On Stage's ability to renegotiate its defaulted debt obligations with
its lenders and continue to forebear foreclosure proceedings against
its properties;
o On Stage's dependence on our flagship Legends in Concert production
and our principal production venues;
o The ability to successfully produce and market new productions and to
manage the growth associated with the any new productions;
o Risks associated with our acquisition strategy, including our ability
to successfully identify, complete and integrate strategic
acquisitions;
o The ability to meet our commitments under our credit facilities, which
are currently in default, and to obtain alternative, additional
financing on commercially reasonable terms;
o The ability to continue as an ongoing concern;
o The competitive nature of the leisure and entertainment industry and
the ability to continue to distinguish our services;
o Fluctuations in quarterly operating results and the highly seasonal
nature of our business;
o The ability 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 our ability to protect our
intellectual property rights;
o The ability to successfully manage the litigation pending against us
and to avoid future litigation; and
o The results of operations which depend on numerous factors including,
the commencement and expiration of contracts, the timing and amount of
new business generated by us, our 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. See "Description of Business-Risk
Factors."
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Item 1. Description of Business
General
On Stage produces and markets live theatrical productions and operates live
theaters and dinner theaters worldwide. We market our productions directly to
audiences at theaters in resort and urban tourist locations. During 1999, On
Stage performed shows in the following live theaters and dinner theaters
worldwide.
- ---------------------- ------------------------ ---------------- --------------
Owned/
Tourist Market Production Location Leased/
Contracted
- --------------------- ------------------------ --------------- ---------------
Atlatic City,
New Jersey Legends in Concert Bally's Park Contracted
Place
Various Trump Taj Mahal Contracted
Various Atlantic City
Hilton Contracted
- --------------------- ------------------------- ---------------- --------------
Branson, Missouri Legends in Concert Legends Family
Theater Leased
- --------------------- ------------------------ ---------------- --------------
Berlin, Germany Legends in Concert Estrel Residence
& Congress Center Contracted
- --------------------- ------------------------ ----------------- --------------
Buena Park (Anaheim), Wild Bill's Dinner Wild Bill's
California Extravanganza Dinner Theater Leased
- --------------------- ------------------------ ----------------- --------------
Las Vegas, Nevada Legends in Concert Imperial Palace Contracted
- --------------------- ------------------------ ----------------- --------------
Laughlin, Nevada Spice 'N Ice River Palms
Casino Contracted
- --------------------- ------------------------ ----------------- --------------
Myrtle Beach,
South Carolina Legends in Concert Legends Theater Owned
Eddie Miles Show Eddie Miles Leased
Theater
- --------------------- ------------------------ ----------------- --------------
Orlando, Florida King Henry's Feast King Henry's
Dinner Theater Owned
Wild Bill's Dinner Wild Bill's
Extravaganza Dinner Theater Owned
Fort Liberty
Retail Complex
Blazing Pianos Blazing Pianos Leased
Bar
- --------------------- ------------------------ ------------------- -------------
Toronto, Orlando Legends in Concert Legends Theater
at Sheraton Leased
Centre Hotel
- --------------------- ------------------------ ------------------- -------------
Valley Forge,
Pennsylvania Various Lily Langtry
Dinner Theater Contracted
- --------------------- ------------------------ ------------------ --------------
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On Stage also markets our productions to commercial clients, which include
casinos, corporations, fairs and expositions, theme and amusement parks, and
cruise lines. We have performed in locations such as the Illinois State Fair,
MGM Grand 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, Bank of America, Hewlett Packard, IBM,
Pitney Bowes, Levi Strauss and Texaco.
For the years ended December 31, 1999 and 1998, approximately 59% and 61%,
respectively, of On Stage's net revenue was generated from theaters and dinner
theaters that we operate in resort and urban tourist markets; approximately 28%
and 25%, respectively, of our net revenue was generated from live productions
performed in gaming markets, predominantly Las Vegas and Atlantic City; and
approximately 7% and 9%, respectively, of our net revenue was generated from
sales to commercial clients other than casinos. The remaining 5% of our net
revenue for each respective year was generated from merchandise and souvenir
photography sales.
These percentages reflect the early results of On Stage's strategic
objective to become the leading owner and operator of affordable live theatrical
productions, dinner theaters and other location-based entertainment in North
America. Our primary strategy is to build location-based entertainment clusters
consisting of live theatrical productions and other forms of middle market
entertainment including, for example, musical reviews and magic shows, in major
tourist markets. Given On Stage's current financial condition (as discussed in
the heading "Risk Factors") our ability to pursue our strategic objectives will
be severally limited. Our plan is to achieve this strategy by:
o establishing a significant market presence through the acquisition of
multiple entertainment venues with strong, predictable cash flows;
o pooling our contacts with ticket wholesalers, tour operators and
individual ticket sellers; and
o rolling out a variety of successful entertainment concepts in the
localities in which we established our presence.
Management believes this "clustering" strategy will reduce On Stage's
financial exposure and will enhance our revenue by:
o increasing On Stage's visibility and market acceptance in a greater
number of entertainment venues;
o enabling us to realize cost savings through the consolidation of sales
and marketing and the elimination of duplicative administrative
overhead; and
o enabling us to market productions traditionally performed in a
particular venue in a greater number of venues or an array of markets.
On Stage believes that strong fundamentals for the consolidation of
multiple entertainment venues and the establishment of location-based
entertainment clusters exist, including:
o a large number of North American resort and urban tourist-driven
locations;
o fragmented ownership of location-based entertainment businesses;
o ownership by individuals who lack the ability to capitalize on
economies of scale in sales and marketing, operations, systems and
capital formation;
o ownership by individuals who lack a clear exit strategy;
o acquisitions characterized by predictable cash flows and the ability
to leverage real and personal property;
o numerous cost reduction and revenue enhancement opportunities;
o limited competition for acquisitions; and
o low acquisition multiples (typically 4.0 - 5.0x EBITDA).
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On Stage was incorporated on October 30, 1985 under the laws of the state of
Nevada as Legends in Concert, Inc. Subsequently, on August 7, 1996, On Stage
changed its name to On Stage Entertainment, Inc. Our principal executive offices
are located at 4625 West Nevso Drive, Las Vegas, Nevada 89103, and our telephone
number is (702) 253-1333.
Developments During 1999
On November 5, 1999, we received a formal demand from ICCMIC to pay them
the sum of $16,163,305 as a guarantor under the loan, which represented all of
the indebtedness due the Mortgage Lender as of that date. On November 12, 1999,
the Mortgage Lender filed a complaint against us in the District Court for Clark
County, Nevada, alleging, among other things, that we breached the guaranty. On
December 10, 1999, we agreed to allow the Mortgage Lender to obtain a judgment
against us for the amount of the guaranty, in return for a forbearance on the
collection of this judgment until March 31, 2000. The Mortgage Lender has
extended the date for collection on this judgment until May 1, 2000.
On December 9, 1999, the Mortgage Lender obtained judgment of foreclosure
against our subsidiaries, Fort Liberty, Inc. and King Henry's, Inc., for the
sale of the Fort Liberty Shopping Complex and Wild Bill's Dinner Theater in
Kissimmee, Florida and The King Henry's Feast in Orlando, Florida. While the
foreclosure sales on these properties were originally scheduled for late January
2000, the Mortgage Lender has honored our request to reschedule these
foreclosure sale dates until May 2 and 3, 2000, respectively.
On January 5, 2000, the Mortgage Lender obtained a foreclosure decree for
the judicial sale of our Legends in Concert Family Theater in Surfside Beach,
South Carolina. The foreclosure sale was set for February 7, 2000, but was
extended by the Mortgage Lender to May 2000.
In the event that First Security Bank or the Mortgage Lender initiates
foreclosure action against our assets, all or a portion of our property and
assets securing the credit facilities and mortgage financing extended by those
lenders may be sold to satisfy our commitments under the terms of those
facilities. While we intend to renegotiate the terms of our credit facilities,
to obtain extensions of the terms of those facilities and to seek alternative
additional financing, there can be no assurance that our efforts will be
successful.
Common Stock Purchase Agreement with Whale Securities Co., L.P.
On or about January 28, 1999, On Stage entered into a Stock Purchase
Agreement with its underwriter Whale Securities Co., L.P., under which On Stage
agreed to sell 150,000 shares of its' common stock to certain of Whale's
customers for an aggregate purchase price of $100,000.
Re-Purchase of Common Stock and Resale of Interactive Events, Inc.
On February 23, 1999, On Stage entered into a Common Stock Purchase
Agreement with Richard S. Kanfer, On Stage's former vice president of sales,
under which he parties agreed to rescind the November 1996 acquisition by On
Stage of Interactive Events, Inc., a Georgia corporation owned by Mr. Kanfer.
Under the terms of the Agreement, On Stage reconveyed all of the assets of
Interactive Events, Inc. to Mr. Kanfer, in consideration for the reconveyance by
Mr. Kanfer of 30,304 shares of On Stage's common stock valued at $1.125 per
share, a non-plan option to purchase 15,000 shares of common stock and incentive
stock options to purchase 19,835 shares of common stock at a price of $5.00 per
share. In addition, the parties agreed to release one another from any liability
rising out of the November 1996 acquisition of Interactive Events, Inc. and any
claim relating to Mr. Kanfer's subsequent employment with On Stage. On Stage and
Mr. Kanfer also entered into a exclusive right of representation agreement in
February 1999, under which On Stage granted to Mr. Kanfer the right to represent
our Legends production in designated areas in consideration of a portion of the
gross proceeds generated from those productions.
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Notes Payable to Principal Stockholder
On March 4, 1999, the board of directors authorized a loan in the principal
amount of $100,000 from Mr. Stuart our chairman, chief executive officer and
principal stockholder. This Loan is evidenced by a one year promissory note
bearing an interest rate of twelve percent (12%) per annum, due on March 3,
2000. In consideration for this Loan, the board of directors approved the
issuance of warrants to purchase 100,000 shares of common stock at a price of
$1.00 per share, the market price on the closing date of the Loan. Additionally,
On Stage agreed to pay legal fees incurred by Mr. Stuart in connection with this
transaction, as well as an additional $12,500 for previous legal bills Mr.
Stuart personally incurred for On Stage related matters.
On April 5, 1999, On Stage entered into an agreement with Mr. Stuart, under
which On Stage agreed to accept a bridge loan from Mr. Stuart in an amount of up
to $500,000 in return for a one year promissory note bearing 12% interest, a 5%
origination fee and a warrant to purchase one share of common stock for each
$1.00 loaned, provided that On Stage did not repay Mr. Stuart within thirty (30)
days. As of May 3, 1999, On Stage had accepted $200,000 of the potential
$500,000 from Mr. Stuart.
Note Receivable from Chief Financial Officer
On April 13, 1998, On Stage loaned $63,213 to Kiran Sidhu, On Stage's
senior vice president and chief financial officer, to assist Mr. Sidhu with
satisfying personal income taxes incurred as a result of the issuance of 40,532
shares of common stock in accordance with the terms of Mr. Sidhu's employment
agreement with On Stage. The note, which recently matured on April 12, 1999, was
secured by Mr. Sidhu's 40,532 shares of common stock. Mr. Sidhu subsequently
requested that On Stage extend the maturity date of the note through to December
31, 1999, due primarily to the fact that he does not have sufficient funds to
repay the Sidhu Note, coupled with the fact that the common stock which secures
the repayment of the note is not enough to satisfy the outstanding debt, since
the common stock has declined in value from $5.00 per share when issued, to
approximately $1.00 per share as of the maturity date. On April 13, 1999, On
Stage agreed to extend the maturity date on the note to December 31, 1999.
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On April 16, 1999, Mr. Sidhu sold Mr. Stuart the 40,532 shares of common
stock. In exchange, Mr. Stuart agreed to assume Mr. Sidhu's $60,798 note in
favor of On Stage, with recourse only to the 40,532 shares of common stock
purchased from Mr. Sidhu. Mr. Sidhu executed a new promissory note in the
principal amount of $7,472, which was subsequently forgiven as part of Mr.
Sidhu's employment restructuring.
Chief Financial Officer Employment Restructuring
On April 16, 1999, Mr. Sidhu agreed to restructure his current
employment agreement with On Stage in an attempt to assist On Stage with our
restructuring plan. Under the terms of his employment restructuring, Mr. Sidhu
agreed to forego any rights he had to his employment, option, and
confidentiality agreements, in return for the following:
o a new agreement which he will be an "at-will" consultant at a flat
rate of $50.00 per hour;
o a new option agreement which affords him the right to purchase 140,000
shares of common stock at an exercise price of $1.50 per share;
o a reimbursement of $25,000 for unpaid insurance, car allowances and
expenses;
o $17,887 for all accrued, but unused vacation pay;
o all earned, but unpaid salary under his old employment agreement; and
o forgiveness of a promissory note in the amount of $7,472 held by On
Stage.
Additionally, On Stage agreed to pay Mr. Sidhu $25,000 within ninety (90)
days of the restructuring, in consideration for Mr. Sidhu's execution of a new
confidentiality and non-competition agreement.
Industry Background
On Stage has focused our clustering efforts in North American resort and
tourist markets. In 1999, international and domestic travelers spent over $519.0
billion on travel and tourism within the U.S. The table below outlines the
spending of domestic and international travelers within the U.S. for the past 10
years.
[Bar Graph Representing 10-Year Growth Tourism Expenditures in the U.S. omitted]
According to the Travel Industry Association's National Travel Survey, the
United States hosted over 47 million international visitors and spent over $93.1
billion. Of the 715 million trips taken during 1999, the Travel Industry
Association estimates that 61% of these were pleasure trips. Top destinations in
the United States include California, Florida, New York, Texas, Illinois,
Nevada, Hawaii, New Jersey, Pennsylvania and Georgia. In 1999, On Stage ran
full-time productions in 5 of these 10 states. Below is a chart illustrating the
top ten states by traveler expenditures.
[Bar Graph Representing Travel Expenditures by State omitted]
According to the Travel Industry Association of Americans, theme park and
entertainment attractions are one of the top six types of family vacation
destinations. While the most popular destinations include the top gaming sites,
Las Vegas, Nevada and Atlantic City, New Jersey, and the top theme park sites,
Orlando, Florida and Los Angeles, California, several emerging resort locations
such as Myrtle Beach, South Carolina and Branson, Missouri were also included.
Set forth below, is general information on the key markets in which On
Stage operated in 1999.
Anaheim /Buena Park, California
Anaheim/Buena Park, California, home of Disneyland, hosted 38 million
visitors in 1998, up 4.3% from 1998, according to the Anaheim/Orange County
Visitors & Convention Bureau. Visitors spent approximately $5.95 billion, of
which, 51% was spent on food and entertainment. In Buena Park alone, over $85
million was spent on entertainment in 1998. 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:
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o a 750-room Craftsman-style hotel;
o a second theme park to be named "Disney's Californian Adventure;" and
o a 200,000 square foot entertainment, dining and retail complex joining
the two theme parks.
We believe this new investment will increase tourism to this market with
potentially positive results for other entertainment suppliers. In March 1998,
we acquired Wild Bill's Dinner Extravaganza which performs at the Wild Bill's
Dinner Theater in Buena Park, California. Buena Park is in close proximity to
Anaheim, California.
Atlantic City, New Jersey
In 1999, Atlantic City received approximately 34 million visitors
according to the Atlantic City Convention and Visitors Bureau. On Stage
currently produces Legends at Bally's Park Place in Atlantic City, and various
productions at the Trump Taj Mahal, and we have produced numerous other shows in
this market including the Atlantic City Swing at the Atlantic City Hilton,
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.
Branson, Missouri
Branson is less than a one-day drive for half of the U.S. population
and is a popular vacation destination. The Branson Chamber of Commerce reported
that in 1999, Branson attracted between 6.5 and 7.0 million visitors. Branson is
home to 45 entertainment venues which account for a total of 58,780 theater
seats and has 202 lodging facilities with 17,550 rooms, 339 restaurants and
32,052 seats. The live entertainment industry in Branson is atypical of other
theater districts, with shows beginning as early as 8:00 a.m. and continuing
throughout the day and into the evening. On Stage has presented its Legends show
in Branson since 1995 for limited runs, with successful results to date. Legends
is currently in its third full and consecutive year in Branson at the Legends
Family Theater.
Las Vegas, Nevada
In 1999, Las Vegas had over 33 million visitors, according to Las Vegas
Convention and Visitors Authority, an increase of almost 15% since 1995, and
spent $29 billion. Las Vegas has 120,600 hotel rooms available, with 80 casinos
which host 49 live production shows. Visitors to Las Vegas, according to Las
Vegas Convention and Visitors Authority, spent an average of $33.84 a day on
shows during an average 3.7 day stay per visitor. According to the Las Vegas
Visitor Profile Study, of these 33 million visitors, 48% attended shows during
their stay, up significantly from 40% in 1994.
Of those people that attended shows, almost 78% attended a regularly
scheduled production show. On Stage's Legends production has been playing at the
Imperial Palace in Las Vegas since 1983 and On Stage has produced numerous
limited engagements and other shows in Las Vegas.
Laughlin, Nevada
Laughlin, Nevada is another emerging tourist market in close proximity to
Las Vegas. According to the Laughlin Visitor's Bureau, over 5 million people
visited Laughlin in 1999 and spent an average of $110 per day. In 1998, visitors
to Laughlin spent $20 per day on shows and stayed an average of 3.3 days. During
1999, On Stage presented Spice'N Ice, an ice skating extravaganza, at the River
Palms Hotel & Casino.
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Myrtle Beach, South Carolina
Myrtle Beach, which has 98 golf courses and 11 live theatrical venues,
was named the nation's Hottest Up and Coming Destination this year by American
Bus Association, a trade group representing motor coach operators and tour
companies. The Myrtle Beach Chamber of Commerce reported that 13.5 million
people visit Myrtle Beach each year and spend approximately $2.6 billion.
Visitors, according to the Myrtle Beach Chamber of Commerce, have an average
stay of 5.7 days. On Stage's resident Legends production at the Legends Family
Theater (located just South of Myrtle Beach in beautiful Surfside Beach) opened
in March 1995, and is known as one of the top shows in town.
Orlando, Florida
Orlando is one the most popular destination cities in the United States and
was voted as the number one theme park destination in 1999 (with 6 of the top 10
theme parks in the world), according to the National Tourism Association.
According to Orlando's Visitors Bureau, approximately 38.6 million tourists
visited Orlando in 1998 and spent $15.9 billion. In 1998, the Orlando Visitor's
Bureau reported that visitors spent $3.3 billion on entertainment and stayed for
an average of 3.7 days. Orlando's hotel industry is meeting the demands of
visitors, with over 91,000 hotel rooms available in 1998, a 9.5% growth over the
prior four years. In March 1998, On Stage acquired King Henry's Feast, Wild
Bill's Dinner Extravaganza and Blazing Pianos, all located within the greater
Orlando area.
Other Potential Urban and Resort Markets
We believe that there are numerous other emerging urban and resort tourist
markets, both in the United States and Canada, where the demand exists for
quality, affordable live entertainment. We believe that the following urban and
resort tourist locations may be suitable for the acquisition, production and
marketing of location-based entertainment:
Chicago Niagara Falls
Corpus Christi Orlando
Miami Phoenix
Montreal Pigeon Forge
New Orleans San Diego
New York City San Francisco
South Padre Island Vancouver
Other Commercial Clients
On Stage has also produced limited-run Legends shows in the last five years
for other types of commercial clients, including:
o theme parks--Six Flags-MGM Grand Theme Park, Lotte World in Korea;
o cruise ships--Royal Caribbean Cruise Lines, Singapore Cruise Lines;
and
o major fairs--Dade County Youth Fair, Illinois State Fair.
In addition, in 1998 and 1999, On Stage produced approximately 90 and 85
events, respectively, for corporate clients, such as McDonald's, Bank of
America, Swatch, Bell South, Home Depot, IBM, Norwest Bank, and Anheuser Busch.
Show Offerings
Since our inception, On Stage has developed, produced or acquired many
different productions. These productions include Legends, other tribute shows, a
variety of musical reviews, magic shows, ice skating productions and specialty
shows. The principal productions currently produced by On Stage are as follows:
Blazing Pianos
Blazing Pianos is an interactive piano bar featuring three talented comedic
piano players and vocalists, who simultaneously play song requests from patrons
on separate pianos. The shows runs nightly throughout the year at the Blazing
Pianos Bar in Orlando, Florida.
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King Henry's Feast
King Henry's Feast is 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
our King Henry's Feast Castle located in Orlando, Florida.
Legends in Concert
Our flagship Legends in Concert production is a live theatrical tribute
show featuring impersonators who recreate past and present music and motion
picture superstars. Legends is the longest running independently produced
production in Las Vegas and Atlantic City. Based on our access to approximately
75 different Legends tribute acts, we can tailor each tribute show to suit the
unique demographics of any audience and the size of any venue, and we have been
able to attract significant repeat business by varying regularly the composition
of the acts in our shows. In 1999, full-time resident Legends productions were
performed in Atlantic City, New Jersey; Biloxi, Mississippi; Branson, Missouri;
Las Vegas, Nevada; Myrtle Beach, South Carolina.
Spice `N Ice
Spice `N Ice combines performances by world class skaters with adagio and
comedic skits by skating clowns, dancers and ensemble skating. During 1999, On
Stage presented Spice'N Ice at the River Palms Hotel & Casino.
Wild Bill's Dinner Extravaganza
Wild Bill's Dinner Extravaganza is 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 Wild Bill's Dinner
Theater at our Fort Liberty Complex in Kissimmee, Florida and the Wild Bill's
Dinner Theater in Buena Park, California.
Production Economics
Most financial structures for theatrical productions in theaters in resort
and urban markets and in larger casinos are based on the "four-wall" method of
expense and revenue allocation between the producer and the client, while those
produced for clients, such as smaller casinos, corporations, fairs, cruise lines
and theme parks, are typically "contracted productions" are generally produced
for a fixed or "guaranteed" fee.
The four "walls" of any live theatrical production can be illustrated as
follows:
[Graphic presenting the "four walls" of live theatrical production described in
following paragraph]
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On Stage generally operates our resident productions in resort and urban
tourist markets and in Las Vegas casinos under either a "four-wall" arrangement
or a "two-wall" arrangement. Under the "four-wall" arrangement On Stage assumes
the responsibility for the cost of the theater, whether leased or purchased, and
all other expenses associated with the presentation of the production,
including:
o the artistic aspects of the production of a show;
o the technical requirements associated with producing a show;
o the promotion of a show; and
o ticket sales, concession sales and maintenance.
In return for assuming full responsibility for the cost of presenting the
production under a "four wall" arrangement, On Stage is entitled to 100% of the
revenues, profits and/or losses generated by a show under that arrangement.
Under the "two-wall" arrangement, the client owns or manages the theater. On
Stage and the client are responsible for two of the costing responsibilities, or
"walls," described above. On Stage and our client share revenue generated by a
show under this arrangement; each retains an agreed percentage of the show's
revenues.
Shows produced under either of these two arrangements are referred to as
"at-risk" shows, because our revenues are dependent upon customer attendance
levels. Our resident Legends shows at Myrtle Beach, South Carolina and Branson,
Missouri are examples of "four-wall" arrangements, and our Legends show at the
Imperial Palace in Las Vegas, Nevada is an example of a "two-wall" arrangement.
Although most contracts of this type are by their nature short-term, clients
typically renew their contracts or host a variety of our productions on a
regular basis.
On Stage also operates "low-risk" productions where the client is
responsible for all non-production related expenses and retains all revenue
generated from ticket sales. In these arrangements, On Stage is responsible for
all production related expenses--performers, orchestra, dancers and company
manager--and we typically receive a guaranteed weekly fee, regardless of
attendance levels. This is a typical structure for shows sold to commercial
clients, such as corporations, fairs and theme parks, and to casinos outside the
Las Vegas, Nevada market. Our Legends show at Bally's Park Place in Atlantic
City, New Jersey is an example of a "low-risk" arrangement. Although many of
these contracts are short term, clients typically renew their contracts on a
regular basis.
Corporate Structure
On Stage Casino Entertainment, Inc.
On Stage has been a leading provider of live entertainment to casinos for
over 15 years.
In 1999, On Stage Casino Entertainment had long running productions in the
following locations:
<TABLE>
<S> <C> <C>
- -------------------------- ----------------------------- ----------------------------------
Venue City Type of Structure
- -------------------------- ----------------------------- ----------------------------------
Imperial Palace Las Vegas "Two-Wall"
Imperial Palace Biloxi "Two-Wall"
Bally's Park Place Atlantic City Guaranteed Fee
River Palms Casino Laughlin Guaranteed Fee
Trump's Taj Mahal Atlantic City Guaranteed Fee
Atlantic City Hilton Atlantic City Guaranteed Fee
- -------------------------- ----------------------------- ----------------------------------
- -------------------------- ----------------------------- ----------------------------------
</TABLE>
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On Stage Theaters, Inc.
On Stage Theaters, Inc. is a wholly-owned subsidiary we created to manage
our theaters from our offices in Orlando, Florida. During 1999, On Stage
operated seven live theater productions, managed the sublease of the Eddie Miles
Theater and produced one show under contract in the following locations:
- ----------------- -------------- ----------- ------------- ------------
Venue City # of Seats Own/lease/ Date of
contracted expiration
- ----------------- -------------- ----------- ------------- ------------
"FOUR - WALL"
Productions:
Blazing Pianos Bar Orlando, FL 400 Lease 10/00
King Henry's Dinner
Theater Orlando, FL 620 Own N/A
Legends Family
Theater Myrtle Beach, SC 800 Own N/A
Legends Family
Theater Branson, MO 984 Lease 12/98
Wild Bill's Dinner
Theater Buena Park, CA 820 Lease 6/10
Wild Bill's Dinner
Theater Kissimmee, FL 628 Own N/A
Managed Sub-Lease:
Eddie Miles Theater * N.Myrtle Beach, SC 946 Lease 12/04
Contracted productions:
Lily Langtry
Dinner Theater Valley Forge, PA 500 Contracted 1/00
- ----------------- --------------- ----------- ------------ -------------
On Stage Events, Inc.
On Stage Events creates numerous types of special entertainment events for
corporate clients such as casinos, fairs, theme parks, cruise lines and
corporations. These events utilize On Stage's inventory of props, decorations,
sound, lighting and costumes. In addition to creative custom-designed events,
this business segment has in-stock, unique interactive shows, as well as stage
shows, which have played for long runs at theaters and casinos and are now
available for private events. On Stage Events has typically produced either
interactive dinner shows or theme parties, such as Las Vegas Spectacular, a
theme party in which a casino is created and participants are allowed to gamble
as if they were in a Las Vegas casino. In 1999, the division had sales offices
in Atlantic City, New Jersey and Las Vegas, Nevada. Examples of our corporate
clients are:
<TABLE>
<S> <C> <C> <C>
Illinois State Fair Xerox Hyatt Hotels Worldwide Mall of America
MGM Grand Swatch Six Flags Over Georgia Premier Cruise Lines
Hewlett Packard IBM National Football League McDonald's
Levi Strauss Texaco Dollywood Theme Park Bank of America
</TABLE>
On Stage Merchandise, Inc.
On Stage Merchandise sells merchandise at all of its venues in tourist
locations and, if permitted, in client venues. Merchandise includes logo
clothing, key chains, magnets, pins, canvas tote bags and coffee mugs, plus
specialty licensed merchandise featuring On Stage's more popular Legends acts
such as Elvis, the Blues Brothers and Marilyn Monroe. In addition, this
wholly-owned subsidiary sells autographed photographs of impersonators or other
headline acts posing with audience members, for which it pays nominal royalties
to featured performers.
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On Stage Productions, Inc.
On Stage Productions is located in Las Vegas, Nevada. This division is
capable of simultaneously producing multiple shows of varying complexity. Among
its responsibilities are choreography, costume, talent, lighting and sound. We
intend to produce multiple shows in each locality in which we have established
ourselves through this single, centralized production facility.
Corporate Operations
Sales and Marketing
Since many people plan to attend a specific live performance prior to
leaving for vacation, it is imperative that On Stage market to potential
customers before they arrive at their destination. The development and
maintenance of amicable, professional relationships with individual sales
representatives and individuals working in group sales offices is, therefore,
essential to our clustering strategy. At some point in the future, we may invest
in or acquire receptive operators.
On Stage generally targets mass market audiences with average prices for
our 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 headline acts, singers,
dancers, orchestra, technicians, etc.--and facility and equipment requirements
are adjusted so that each show will generate profits based upon projected
attendance. We distribute, from time to time, show coupons offering discounts of
up to 20% on individual ticket purchases, and offer volume discounts of up to
60% to ticket and tour wholesalers buying large blocks of tickets.
Advertising and Promotion
On Stage provides advertising and publicity support and seeks major ongoing
media coverage for all of our shows through our 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 On Stage's shows both regionally and nationally. Over the last three
years, publicity for On Stage included appearances at the 1996 Miss Universe
Pageant, Jay Leno's Tonight Show from Las Vegas, Nevada, VH1's Route 96, CNN's
Burden of Proof and on Wheel-of-Fortune. In February 1999, our Legends Show in
Branson, Missouri was featured on a winter season special on The Nashville
Network.
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, South
Carolina and Branson, Missouri, 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, whenever
possible, and promotional show videos are broadcast on in-house television
systems. As On Stage begins to control other pieces of the distribution chain,
and forms entertainment clusters, traditional advertising and promotion costs
can be decreased due to economies of scale.
Competition
The leisure and entertainment market, which includes the market for live
theatrical productions, is highly competitive. Many of our markets contain a
large number of competing live theatrical productions. In resort and urban
tourist locations, we compete for ticket sales with other live productions and
headline stars, many of whom have better name recognition and greater financial
and other resources.
The live theatrical entertainment industry is highly fragmented and
contains many small, independent production companies and several major
production companies. On Stage competes with these production companies for the
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<PAGE>
most desirable commercial and tourist venues, and for talent and production
personnel. Major production companies in our markets include Feld Entertainment
Productions, Blair Farrington Productions and Dick Foster Productions in Las
Vegas, and Greg Thompson Productions in Seattle. In addition to competition from
major production companies, which produce other forms of live theatrical shows,
we also compete directly against a large number of smaller independent producers
who sometimes produce tribute or impersonator shows. However, we believe 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
material competition. Spring Time Productions currently produces its American
superstars impersonator show at the Stratosphere Hotel and Casino in Las Vegas,
Nevada and at the Grand Casino in Gulfport, Mississippi.
In Orlando, Florida and Buena Park, California, where On Stage operates
dinner theaters, other major competing dinner theater shows include Medieval
Times, Arabian Nights, and Wizards. The dinner theater market is highly
competitive and we compete with other forms of live entertainment in addition to
the dinner theaters, primarily theme parks.
Talent
On Stage has featured approximately 200 impersonators and numerous variety
acts (magicians, aerial acts, jugglers, clowns, sword fighters, jesters and
comedians), singers, dancers, musicians and musical directors in our
productions, and we regularly receive promotional materials from individuals who
are eager for work. An average of 30 inquiries are received per month, and for
every working performer, we have access to approximately three potential
performers. We periodically hold auditions for new impersonators, singers, and
dancers in Las Vegas, Nevada, Atlantic City, New Jersey, Myrtle Beach, South
Carolina and Los Angeles, California, and we often view acts in outside show
environments and clubs. All performers receive creative and professional support
from On Stage's various in-house personnel. On Stage employs choreographers to
work with new and existing entertainers to develop their skills and improve
their confidence on stage. Utilizing our in-house music library, musical
arrangements are developed for new and existing performers and digital audio
tapes are developed for principal acts. Our in-house wardrobe personnel,
together with several well established costume designers, create new performers'
wardrobes and update the wardrobes of existing talent. We contract with an
independent photographer to provide promotional photographs of the headline acts
and employ a writer to prepare professional biographies and press releases.
On Stage believes we are the premier producer of impersonator shows
worldwide and that we have the ability to offer a variety of consistent work to
our acts by rotating them among our different shows and events. On Stage's
musicians, singers, dancers and production personnel are generally employees of
On Stage, while headline acts, including the impersonators utilized in our
tribute shows, are treated as independent contractors in accordance with
industry practice. Intellectual Property On Stage have filed/obtained the
following intellectual property marks: Name: Class(es) Status Country
<TABLE>
<S> <C> <C> <C>
Legends in Concert 6,16,18,21,25,26,41 Registered United States
Legends in Concert w/ design 6,16,18,21,25,26,41 Registered United States
Legends in Concert 41 Registered Canada
Legends in Concert 41 Registered Europe
Legends in Concert 41 Registered Great Britain
Legends in Concert 41 Registered Japan
Legends in Concert 41 Registered Mexico
Legends in Concert 41 Pending Australia
Legends of Country 41 Registered United States
Atlantic City Experience 41 Registered United States
Camouflage Aux Folles 41 Published United States
</TABLE>
On Stage anticipates filing applications for protection of its Legends
service mark in several other foreign countries, as need be. We believe we
either own or have appropriately licensed all of the intellectual property
rights required to perform our 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
musical licenses with Broadcast Music, Inc. ("BMI") and American Society of
Composers, Authors and Publishers ("ASCAP").
14
<PAGE>
On Stage typically requires its independent contractors, employees,
consultants and advisors to execute appropriate confidentiality and
non-competition agreements in connection with their employment, consulting or
advisory relationship with us.
Government Regulation
Providing entertainment to the casino gaming industry may subject On Stage
to various licensing regulations. We are regulated and required to obtain a
casino industry license from the New Jersey Casino Control Commission pursuant
to the New Jersey Casino Control Act. Our current casino service industry
license from the New Jersey Casino Control Commission was issued on January 17,
1997 and an application for renewal of this license is currently pending. In
connection with the license application, the New Jersey Division of Gaming
Enforcement conducted an investigation of On Stage to determine our suitability
for licensure. Management believes that we are not required to obtain a license
to provide our services to casinos in Nevada, Mississippi or in any other
jurisdictions in which we operate, other than New Jersey. The Nevada and
Mississippi Gaming Control Boards 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. Additionally, many of the casinos mandate that a
production company is either properly licensed in accordance with the local
gaming laws before it will contract for their services.
In addition, On Stage leases or owns certain of the theaters for our new
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 us to
obtain and maintain certain local licenses and permits as we were required to
obtain for the opening of our Myrtle Beach show, a "four-wall" production. These
licenses and permits could include, 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 our expansion plans. In
addition, the suspension of, or inability to renew, a license needed to operate
any of our currently running productions would adversely affect our operations.
Employees
As of April 9, 2000, On Stage employed approximately (i) 236 full-time
employees, including 86 entertainers, 25 theater operations personnel, 27
production personnel, 26 food & beverage personnel, 32 administrative personnel,
22 marketing personnel, 14 box office/concession personnel and its two executive
officers; and (ii) 286 part-time employees. None of our current employees are
covered by a collective bargaining agreement. We believe that our relationship
with our employees is good.
Existing Defaults Under Credit Facilities
Working Capital Line
In May 1997, First Security Bank of Nevada issued a line of credit to us
for up to $250,000. Borrowings under this line of credit 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. John W. Stuart has personally
guaranteed this line of credit.
On March 28, 1998, First Security agreed to increase this line of credit
from $250,000 to $1,000,000 and the expiration date was extended to March 25,
1999. As of December 31, 1998, On Stage had drawn $1,000,000 on the line of
credit. As of March 31, 1999, On Stage had failed to pay off any part of the
line of credit and is in default under its terms. On April 29, 1999, we received
a notice of default under the line of credit from First Security.
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<PAGE>
Capital Equipment Financing Commitment
On September 29, 1997, First Security Leasing Company, a Utah corporation,
approved On Stage for a $1,000,000 lease line of credit. Advances under the
lease line incur interest at a rate of 9.75% per annum. The lease line has been
utilized in the following amounts: $389,290, $442,997 and $167,713, commencing
in April 1998 and May 1998, respectively, and terminating on October 2001,
September 2001 and November 2001. We also received a notice of default under
this lease line on April 29, 1999.
On July 12, 1999, First Security Bank filed a complaint on behalf of First
Security and First Security Leasing against On Stage demanding repayment under
the line of credit and lease lines. We filed an Answer to the complaint and
commenced settlement negotiations with First Security Bank. These settlement
discussions led to the execution of a Litigation Forbearance Agreement on
December 13, 1999. Under this agreement, we agreed to grant First Security Bank
an additional security interest in all of our personal property and pay them the
sum of $50,000 per month toward repayment on the line of credit and lease line,
in exchange for a 120-day forbearance period. On April 7, 2000, we received a
letter from First Security Bank reminding us that the forbearance agreement
expires on April 10, 2000 and requesting that we submit a further settlement
plan, along with other documents, on or before May 1, 2000. While we are
attempting to negotiate an extension of this forbearance agreement and/or a
restructuring of the line of credit and lease line, there can be no assurance
that our attempts will be successful or that First Security Bank will not take
additional action to collect this debt. Mortgage Financing Commitment As of
October 7, 1998, we borrowed an aggregate of $14,150,000 from Imperial Credit
Commercial Mortgage Investment Corp. ("Mortgage Lender"). While we made our
January, February and March 1999 payments under this loan after the due date for
those payments, no other payments under this loan have been made to date. As a
result of these delinquencies, we have incurred late charges and default
interest, which we have not paid.
On November 5, 1999, we received a formal demand from ICCMIC to pay them
the sum of $16,163,305 as a guarantor under the loan, which represented all of
the indebtedness due the Mortgage Lender as of that date. On November 12, 1999,
the Mortgage Lender filed a complaint against us in the District Court for Clark
County, Nevada, alleging, among other things, that we breached the guaranty. On
December 10, 1999, we agreed to allow the Mortgage Lender to obtain a judgment
against us for the amount of the guaranty, in return for a forbearance on the
collection of this judgment until March 31, 2000. The Mortgage Lender has
extended the date for collection on this judgment until May 1, 2000.
On December 9, 1999, the Mortgage Lender obtained judgment of foreclosure
against our subsidiaries, Fort Liberty, Inc. and King Henry's, Inc., for the
sale of the Fort Liberty Shopping Complex and Wild Bill's Dinner Theater in
Kissimmee, Florida and The King Henry's Feast in Orlando, Florida. While the
foreclosure sales on these properties were originally scheduled for late January
2000, the Mortgage Lender has honored our request to reschedule these
foreclosure sale dates until May 2 and 3, 2000, respectively.
On January 5, 2000, the Mortgage Lender obtained a foreclosure decree for
the judicial sale of our Legends in Concert Family Theater in Surfside Beach,
South Carolina. The foreclosure sale was set for February 7, 2000, but was
extended by the Mortgage Lender to May 2000.
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<PAGE>
In the event that First Security Bank or the Mortgage Lender initiates
foreclosure action against us or our assets, all or a portion of our property
and assets securing the credit facilities and mortgage financing extended by
those lenders may be sold to satisfy our commitments under the terms of those
facilities. While we intend to renegotiate the terms of our credit facilities,
to obtain extensions of the terms of those facilities and to seek alternative
additional financing, there can be no assurance that our efforts will be
successful.
Nasdaq Delisting
On October 14, 1999, we attended an oral hearing in Washington, D.C. to
appeal the decision by The Nasdaq SmallCap Market de-list our securities from
their exchange. Our appeal was denied, and on October 26, 1999, our Common Stock
and Warrants were delisted from their exchange. However, because On Stage's
Common Stock and Warrants were previously included in The Nasdaq SmallCap
Market, our Common Stock and Warrants were made available for immediate trading
on the OTC Bulletin Board pursuant to an exemption from Rule 15c2-11. This
exemption allows a broker/dealer, without having the information specified by
Rule 15c2-11, to publish or submit quotations for On Stage's Common Stock and
Warrants, provided the broker/dealer was a registered market maker for On
Stage's Common Stock and Warrants during the previous 30 days.
Risk Factors
Going concern. The Company's auditors have issued a going concern opinion
on the December 31, 1999 financial statements.
Existing Defaults Under Credit Facilities. We are currently in default
under our credit facilities with First Security Bank and with our Mortgage
Lender. Furthermore, each of these lenders has initiated and/or perfected their
security interests against our company. While we are currently attempting to
restructure the terms of these credit facilities with each of our lenders, there
is a significant risk that our real and personal property will be seized on May
3, 2000 if they proceed with collection efforts against us.
Need for Additional Financing. On Stage's cash, cash equivalent balances
and anticipated revenues from operations will not be sufficient to fund our
current operations or to service our substantial indebtedness under our existing
credit facilities. We must restructure our existing indebtedness or obtain
additional sources of financing in order to avoid foreclosure under these credit
facilities. There can be no assurance that we will be able to negotiate a
restructuring or that funds will be available to us. We will not be able to
pursue our growth strategy if we are not able to obtain additional financing
and, as a result of our financing difficulties, we are currently reevaluating
our growth strategy. We have no current arrangements with respect to, or
potential sources of, additional financing, and any inability to obtain
financing could cause us to curtail, delay or eliminate present or anticipated
productions, or to fund those productions through arrangements with third
parties that may require us to relinquish rights to substantial portions of our
revenue, which may result in foreclosure under our existing credit facilities.
Increased Operating Expenses. Increased operating expenses in connection
with our recent acquisitions or our proposed expansion plans, delays in the
introduction of new productions and factors adversely affecting our current
productions, could have a material adverse effect on our future operating
results. There can be no assurance that we will continue to generate significant
net income in the future or that our future operations will be profitable.
Dependence on Legends. To date, our revenue has been limited largely to the
production of Legends. Our future success will depend, to a significant extent,
on our ability to successfully produce and market Legends shows in other venues.
To the extent we are unsuccessful in expanding the production of Legends, or to
the extent the Legends production concept ceases to be successful or profitable
for us, there will be a material adverse effect on us.
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<PAGE>
Reliance on Principal Production Venues . On Stage anticipates that we will
continue to rely upon our six current largest revenue producing show sites,
including our resident Legends productions in Las Vegas, Nevada, Branson,
Missouri and Myrtle Beach, South Carolina, as well as our King Henry's Dinner
Theater in Orlando Florida, Wild Bill's Dinner Theater in Buena Park, California
and Wild Bill's Dinner Theater in Kissimmee, Florida, for the substantial
majority of our revenue. The loss of all or a substantial portion of the
business generated at those venues or the termination or impairment of
contractual relationships that make some of these venues available to us would
have a material adverse effect on us.
Risks Associated with Proposed Acquisition Strategy. If we are able to
pursue our expansion plans, we intend to pursue strategic acquisitions of, or
joint ventures with, independent production companies, and to market our brand
name products to the established customer bases of any acquired companies, in
order to increase revenues and market share. In addition, we intend to acquire
additional established, brand-name shows which we believe have the potential to
be successful in new markets. We have planned to enter into these types of
arrangements on a shared revenue and/or profit basis and to make these
acquisitions through limited equity distributions rather than through cash
payments or investments. In addition, if our stock price is too low, we may not
be able or willing to use our common stock in acquisitions. There may, in the
future, be attractive acquisition candidates for which cash funding is our only
choice, in which case, any acquisitions will likely be contingent upon us
acquiring additional financing. There can be no assurance that we will be able
to acquire financing or, even with additional financing, that we will be able to
acquire acceptable production companies or shows, nor can there be any assurance
that we will be able to enter into beneficial joint ventures on commercially
reasonable terms or in a timely manner. Furthermore, we can provide no assurance
that any acquired customer bases will be receptive to our productions or that we
will be able to successfully develop any acquired shows. To the extent we effect
an acquisition or joint venture, there can be no assurance that we will be able
to successfully integrate into our operations any business or productions which
we may acquire. Any inability to do so, particularly in instances in which we
make significant capital investments, could have a material adverse effect on
us. In addition, there can be no assurance that any acquired business will
increase our revenue and/or market share or otherwise improve our financial
condition.
Competition. The leisure and entertainment market, which includes the
market for live theatrical productions, is highly competitive, and many of On
Stage's markets contain a large number of competing live theatrical productions.
In resort and urban tourist locations, we compete for ticket sales with the
producers of other live productions, many of whom have greater financial and
other resources than we do and/or feature productions and headline stars with
greater name recognition than those we have. In addition, we compete with other
production companies for the most desirable commercial and tourist venues and
for talent and production personnel. Any inability to secure those venues or
personnel could have a material adverse effect on us. In addition, one or more
of the commercial venues in which we currently have, or plan to have, a live
production show could decide to self-produce its live entertainment needs. There
can be no assurance that we will be able to secure alternative venues for
displaced productions or that those alternative venues could be secured under
similar or favorable terms.
Availability of Talent and Lack of Long-Term Contracts. On Stage's future
success will depend largely upon our ability to attract and retain personnel
sufficiently trained in performing arts and theatrical production, including
singers, dancers, musicians, choreographers and technical personnel. We maintain
rigorous standards with respect to the abilities and level of experience of
these personnel in order to ensure consistency, quality and professionalism in
our productions. This may make it more difficult for us to obtain qualified
personnel. Moreover, that difficulty is compounded by the fact that Legends, our
flagship production, features impersonators of past and present superstar
vocalists. Because these headline performers must look, sound and act like
19
<PAGE>
specific celebrities, the pool of performers from which we can choose is
significantly reduced. In addition, while our musicians, singers, dancers and
production personnel are generally employees, our headline acts are independent
contractors who enter into new contracts with us for each new show or venue in
which they perform. We do not maintain any long-term contracts with our
performers. We will need to hire additional performers and production
technicians as we continue to open new productions, as well as to supplement
personnel in our existing productions. Our inability to attract and retain
needed personnel, for either new or existing productions, could have a material
adverse effect on us.
Fluctuations in Quarterly Operating Results; High Seasonality. On Stage has
experienced, and expects to continue to experience, fluctuations in quarterly
results of operations. Our live theatrical production business is highly
seasonal. We expect these seasonal trends to continue. Additionally, we
typically spend significant resources on new resident theatrical productions up
to six months in advance of show openings, and believe that, as we emphasize
pre-opening market research and development as part of our expansion plans, both
the amount of pre-opening expenditures and the lag between the time in which we
incur those expenditures and the receipt of post-opening revenue will increase.
Accordingly, our operating results may also vary significantly from quarter to
quarter or year to year due to the opening and timing of new shows and the
fluctuations associated with the pre-opening and start-up phases of new
productions in new and varying venues. Consequently, revenue as well as profit
and loss may vary significantly from quarter to quarter and the results in any
one period will not necessarily be indicative of results in subsequent periods.
Cyclical and Economy-Sensitive Industry; Changing Trends. The live
entertainment industry is cyclical, with consumer spending tending to decline
during recessionary periods when disposable income is low. Although we believe
our moderate ticket prices may enhance the appeal of our productions to
consumers in a recessionary environment, there can be no assurance that a poor
general economic climate will not have an adverse impact on our ability to
compete for limited consumer resources. The live entertainment industry is also
subject to changing consumer demands and trends and, while the markets for live
entertainment have grown significantly over the past several years, there can be
no assurance that such growth will continue or that these trends will not be
reversed. For instance, the rate of growth in the casino gaming industry has
recently begun to decrease due to consolidation within the industry. Our success
will depend on our ability to anticipate and respond to changing consumer
demands and trends and other factors affecting the live entertainment industry,
including new artists and musicians, as well as general trends affecting the
music industry and its performers. Failure to respond to these factors in a
timely manner could have a material adverse effect on us.
Dependence on the Casino Gaming Industry. Our success has been, and will
continue to be, highly dependent on the casino gaming industry. Consequently, a
change in the laws or regulations governing the casino gaming industry, or a
significant decline in casino gaming in the United States, could have a material
adverse effect on us.
Intellectual Property. On Stage's success depends to a large extent on our
ability to reproduce the performance, likeness and voice of various celebrities
without infringing on the publicity rights of those celebrities or their
estates. Although we believe that our productions do not violate those
intellectual property rights under applicable state and federal laws, in the
event a claim were made against us, litigation, regardless of the outcome, could
be expensive and time consuming for us to defend. Additionally, if we were
determined to be infringing any intellectual property rights in the production
of our performances, we could be required to pay damages--possibly including
treble and/or statutory damages--costs and attorney fees, alter our productions,
obtain licenses or cease certain activities, all of which, individually or
collectively, could have a material adverse effect on us. Furthermore, if we
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were required to obtain licenses from the celebrities we impersonate, there can
be no assurance that we would be able to acquire those licenses on commercially
favorable terms, if at all. In addition, an element of our business strategy is
to expand our merchandising program by introducing a wider variety of clothing
items and new products, such as compact discs, and audio and video tapes. We
have filed trademark applications, as necessary, in order to protect our rights
in the products that we sell. There can be no assurance that we will be able to
obtain any trademarks on terms and conditions acceptable to us. Our inability to
obtain those rights could have a material adverse effect on our ability to
successfully implement our merchandising strategy.
Government Regulation. Providing entertainment to the casino gaming
industry may subject On Stage to various licensing regulations. For instance,
the Casino Control Commission of the State of New Jersey requires that we obtain
a Casino Service Industry License to perform our shows at our Atlantic City
venues. Although we have obtained this license, there may be other licenses or
permits which may be required for us to perform our shows in casinos in other
areas.
In addition, under our expansion program we plan to lease or purchase
theaters for our new Legends or other brand-name resident productions. As a
result, we will be required to absorb all costs and risks associated with
producing the show in order to retain 100% of the show's profits--referred to as
a "four-wall" production. Producing shows on this basis may require us to obtain
and maintain certain business, professional, retail and local licenses and
permits--as we were required to obtain for the opening of our Myrtle Beach show,
a "four-wall" production. Difficulties or failure in obtaining required licenses
or regulatory approvals could delay or prevent the opening of a new show or,
alter, delay or hinder our expansion plans. In addition, the suspension of, or
inability to renew, a license needed to operate any of our currently running
productions would adversely affect our operations.
Our current casino service industry license from the New Jersey Casino
Control Commission was issued on January 17, 1997 and a renewal application for
this license is currently pending. In connection with the license application,
the New Jersey Division of Gaming Enforcement conducted an investigation of On
Stage to determine our suitability for licensure. Management believes that we
are not required to obtain a license to provide our services to casinos in
Nevada, Mississippi or in any other jurisdictions in which we operate, other
than New Jersey. The Nevada and Mississippi Gaming Control Boards 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. Additionally, many of
the casinos mandate that a production company be properly licensed in accordance
with the local gaming laws before it will contract for their services.
Dependence on Key Personnel. On Stage's future success will depend largely
on the efforts and abilities of our existing senior management, particularly Mr.
John W. Stuart, On Stage's chairman and chief executive officer. The loss of the
services of Mr. Stuart or other members of On Stage's management team could have
a material adverse effect on us. Although we currently maintain a key-man life
insurance policy on the life of Mr. Stuart in the amount of $2,500,000, those
proceeds may not be sufficient to compensate us for the loss of his services. In
particular, Mr. Stuart's death would result in the loss of his creative
contribution to On Stage and would give the owner of the Imperial Palace the
right to terminate its contract with us relating to our resident Legends
production in Las Vegas, one of our largest revenue producing venues. In
addition, while Mr. Stuart has entered into a non-competition agreement
restricting his ability to work for a competitor during the term of his
employment agreement--which expires on May 31, 2000--and thereafter for periods
of five years, there can be no assurance that this non-competition agreement
will be enforceable or that On Stage will be in a position to pay Mr. Stuart the
contractual amount required to effectuate his non-competition agreement.
Finally, there can be no assurance that On Stage will be able to renew Mr.
Stuart's employment contract and/or attract and retain the additional qualified
senior management personnel necessary to manage our planned growth.
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Risk of Employment Tax Liability. Consistent with industry standards, On
Stage has, since inception, treated, and expects to continue to treat, the
headline acts of productions as independent contractors rather than as
employees. In making the determination that we are qualified to characterize the
headline acts as independent contractors, On Stage, in addition to following
industry precedent, made an independent review of, and analyzed, the applicable
guidelines issued by the Internal Revenue Service. There can be no assurance,
however, that we are qualified to treat the headline acts as independent
contractors. If we have improperly classified the headline acts as independent
contractors, than we would be liable for the payment of employment taxes for
those periods in which the headline acts were incorrectly characterized as
independent contractors. If imposed, that employment tax liability would have a
material adverse effect on us.
Litigation. On Stage is involved in certain pending and threatened lawsuits
in which the adverse parties are seeking damages. There can be no assurance that
any of the instituted or threatened lawsuits will be settled or decided in our
favor. Moreover, regardless of the outcome of those lawsuits and claims, if we
were to be engaged in protracted litigation, the costs of that litigation could
be substantial. Even in situations where we are fully indemnified by third
parties, the time and effort expended by On Stage personnel in connection with
those matters could be significant, leaving us with less opportunity to pursue
our strategic goals.
Limitations on Liability of Directors and Officers. On Stage's Articles of
Incorporation include provisions to eliminate, to the full extent permitted by
Nevada General Corporation Law, the personal liability of directors for monetary
damages arising from a breach of their fiduciary duties as directors. Our
Articles of Incorporation also include provisions to the effect that On Stage
shall, to the maximum extent permitted under Nevada law, indemnify and, upon
request, advance expenses to any director or officer to the extent that the
indemnification and advancement of expense is permitted under that law.
No Dividends. On Stage has never paid any dividends on our common stock and
we do not anticipate paying cash dividends in the foreseeable future. Our
existing credit facilities also prohibit the payment of dividends. We currently
intend to retain all earnings for use in connection with our business. The
declaration and payment of future dividends, if any, will be at the sole
discretion of our board of directors and will depend upon our profitability,
financial condition, cash requirements, future prospects, credit agreements and
other factors deemed relevant by the board.
Possible Adverse Effects of Authorization of Preferred Stock. On Stage's
Articles of Incorporation authorize the board of directors to issue up to
1,000,000 shares of "blank check" preferred stock, with such designations,
rights and preferences as may be determined from time to time by the board of
directors. Accordingly, the board of directors will be empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting, or other rights, which could adversely affect the voting
power of the holders of common stock and, under certain circumstances, could
make it difficult for a third party to gain control of On Stage, prevent or
substantially delay a change in control, discourage bids for the common stock at
a premium, or otherwise adversely affect the market price of the common stock.
Although we have no current plans to issue any shares of preferred stock, there
can be no assurance that the board will not decide to do so in the future.
Unaffiliated Bankruptcy. A real estate partnership which is not affiliated
with On Stage but of which Mr. John W. Stuart, our chairman and chief executive
officer, was a partner, Maze Stone Canyon Estates Partnership, filed for
bankruptcy under Chapter 11 in December 1991 in the United States Bankruptcy
Court, Central District of California. The partnership's plan of reorganization
was withdrawn before adoption by the bankruptcy court in August 1992. The
partnership Maze Stone Canyon Estates Partnership was subsequently dissolved.
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Risks Relating to Penny Stocks. On Stage's stock is subject to the
requirements of certain rules, promulgated under the Exchange Act, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a "penny stock." Generally, "penny stock" is any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
limited exceptions. Those rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated with it, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors--generally institutions. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
these requirements may discourage broker-dealers from effecting transactions in
the common stock, which could severely limit the market liquidity of the common
stock and the ability of stockholders to sell the common stock in the market.
Current Annual Report on Form 10-KSB and State Registration Required to
Exercise Warrants. Holders of outstanding warrants to acquire On Stage common
stock will be able to exercise their warrants only if a current Annual Report on
Form 10-KSB under the Securities Act relating to the securities underlying the
warrants, is then in effect and those securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the various holders of warrants reside. Although we intend to use our best
efforts to maintain a current Annual Report on Form 10-KSB covering the
securities underlying the warrants at the earliest practicable date, to the
extent required by federal securities laws, there can be no assurance that we
will be able to do so. As a result of the defaults under our credit facilities,
we are not eligible to use the "short-form" registration procedures available to
other issuers under the Securities Act. Therefore, our ability to maintain a
current Annual Report on Form 10-KSB will be impaired until we are again
eligible to use the "short-form" registration procedures, which we do not
anticipate will occur prior to March 31, 2000. The value of the warrants may be
greatly reduced if a Annual Report on Form 10-KSB covering the securities
issuable upon the exercise of the warrants is not kept current or if the
securities are not qualified, or exempt from qualification, in the states in
which the holders of warrants reside. Persons holding warrants who reside in
jurisdictions in which those securities are not qualified and in which there is
no exemption will be unable to exercise their warrants and would either have to
sell their warrants in the open market or allow them to expire unexercised.
Restrictive Debt Covenants. On Stage's various loan agreements contain
covenants that, among other things, restrict the ability of our operating
subsidiaries to dispose of assets, incur additional indebtedness, pay cash
dividends, create liens on assets, make investments or acquisitions, engage in
mergers or consolidations, make capital expenditures, engage in certain
transactions with affiliates or redeem or repurchase the indebtedness of such
subsidiaries. In addition, under our loan agreements, we are required to satisfy
financial ratio tests, including interest expense, fixed charges and total debt
coverage ratios. Our ability to satisfy financial tests and ratios could be
affected by numerous events beyond our control, including economic, weather and
industry conditions. The breach of any financial covenant contained in a loan
agreement could result in the termination of our credit facilities--and the
acceleration of the maturity of all amounts outstanding there under--and, by
virtue of cross default provisions, the acceleration of the maturity of our
other indebtedness. See "Management Discussion and Analysis of Financial
Conditions and Results of Operations."
Prior Losses. For the years ended December 31, 1998 and December 31, 1999,
we had net losses of $4,870,989 and $209,339, respectively. Moreover, increased
operating expenses in connection with our proposed expansion plans, delays in
the introduction of new productions and factors adversely affecting our current
productions could have a material adverse effect on us. There can be no
assurance that we will generate net income in the future or that our future
operations will be profitable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Certain Transactions" and the
financial statements contained elsewhere in this Annual Report on Form 10-KSB.
No Assurance of Continued Public Market; Possible Continued Volatility of
Market Price of Common Stock. There can be no assurance that a regular trading
market for the common stock will be sustained. The market prices of our
securities may continue to be characterized by volatility and low trading
volume. Factors such as our operating results, announcements by us or our
competitors of new production contracts, and various factors affecting the
entertainment industry generally, may have a significant impact on the market
price of our securities.
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Risks Relating to Proposed Expansion Plans; Possible Inability to Achieve
or Manage Growth. On Stage's continued growth depends, to a significant degree,
on our ability to produce and market new theatrical productions on a profitable
basis. It will also be highly dependent on our ability to restructure our
existing debt and obtain additional financing. Our expansion plans include
increasing both the number of productions in operation at any given time and the
rate at which such productions open. This expansion strategy contemplates the
opening of up to ten additional resident productions over the next 36 months,
which strategy, if successful, will place significant pressures on our
personnel, as that growth will require development and operation of a
significantly larger business over a broader geographical area. Because of our
current debt position and defaults, we are reevaluating our expansion strategy.
The success of our expansion, if we are able to pursue it, strategy will depend
upon a number of factors, including, among others:
o our ability to restructure our debt and obtain additional financing;
o our ability to hire and retain additional skilled management,
marketing, technical and performing arts and theatrical production
personnel;
o our ability to secure suitable venues for new productions on a timely
basis and on commercially reasonable terms; and
o our ability to successfully manage our growth (which will require us
to develop and improve upon our operational, management and financial
systems and controls).
Our prospects and future growth will also be largely dependent upon the
ability of our Legends productions to achieve significant market share in
targeted tourist and gaming markets and our ability to develop and/or acquire
and commercialize additional productions. There can be no assurance that we will
be able to achieve our expansion goals or that, if we are able to expand our
operations, we will be able to effectively manage our growth, anticipate and
satisfy all of the changing demands and requirements that this growth will
impose upon us or achieve greater operating income or profitability. Moreover,
in light of
(1) the significant up-front capital expenditures and pre-opening
costs--estimated to be approximately $500,000 to $1,000,000 in the
case of a leased theater--associated with the establishment of a new
resident production,
(2) the length of time required to prepare for the opening of a new
resident production (typically three to six months), and
(3) the significant time required before a new resident production can
achieve the market acceptance and name recognition required for local
ticket wholesalers and tour specialists to promote it,
the discontinuation of any new production--whether due to inadequate advance
marketing, inadequate performances, poor site selection or otherwise--would have
a material adverse effect on us. For instance, during 1998, we discontinued our
resident production of Legends in Toronto, Canada, as a result of less than
optimal ticket sales in the start-up phase of the show, which caused an
aggregate estimated loss to us of at least $443,096.
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Control by Principal Stockholder. John W. Stuart, our chairman and chief
executive officer, beneficially owns approximately 54.8% of the outstanding
common stock. Accordingly, Mr. Stuart is able to control On Stage and direct our
affairs, including the election of directors, and cause an increase in our
authorized capital or the dissolution, merger or sale of On Stage or
substantially all of our assets.
Our Facilities. On Stage's corporate headquarters consist of approximately
16,000 square feet of nondescript office and warehouse space located in a
commercial strip mall in Las Vegas, Nevada. This lease is currently set to
expire on August 31, 2002. Leases of other offices in Atlantic City, New Jersey
and Orlando, Florida are scheduled to expire in 2000. Although we intend to let
the leases expire on some of our locations that we do not intend to continue to
occupy, we will need to retain or replace the leases for some of this space.
There can be no assurance that we will be successful in retaining or replacing
the space we want. The termination of the lease of these desired facilities
could have a material adverse effect on our operations.
Many of the properties we presently occupy and use for our productions were
acquired with loans provided by our Mortgage Lender. In the event our Mortgage
Lender executes on the current judgments of foreclosure, these actions may cause
us to lose these properties as venues in which to operate our productions.
Item 2. Description of Property
On Stage corporate headquarters consist of approximately 16,000 square feet
of nondescript office and warehouse space located in a commercial strip mall in
Las Vegas, Nevada. This lease is currently set to expire on August 31, 2002. The
table provided below lists certain information regarding our other facilities
that were in use during 1999.
- --------------------- ------------ ------------- ----------- ----------------
Square Type of Lease Principal
Location Footage Possession Expiration Function
- --------------------- ------------ ------------- ----------- ----------------
Atlantic City, NJ 2,000 Lease 12/00 Office
Atlantic City,NJ (1) N/A Lease 06/00 Residential
Branson, MO 27,500 Lease 12/00 Theater/Office
Buena Park, CA (2) 27,599 Lease 06/10 Theater
Kissimmee, FL (3) 31,350 Own N/A Retail
Kissimmee, FL (4) 18,221 Own N/A Theater
Las Vegas, NV (5) 16,000 Lease 08/02 Corporate
Office
Las Vegas, NV (5) 4,668 Lease 05/01 Warehouse
N. Myrtle Beach, SC (6) 15,000 Lease 12/04 Theater/Office
Myrtle Beach, SC (7) 16,171 Own N/A Theater/Office
Orlando, FL 3,640 Lease 06/02 Warehouse
Orlando, FL (8) 10,000 Lease 10/00 Office/Bar
Orlando, FL (9) 15,500 Own N/A Theater
- --------------------- -------------- ------------ ---------- -----------------
(1) Consists of seven condominium units for use by our performers when they are
performing in our Legends show at Bally's Park Place in Atlantic City, New
Jersey. We lease these units from John W. Stuart, our chief executive
officer, and his wife.
(2) On Stage's wholly-owned subsidiary, On Stage Theaters, Inc., 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.
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(3) 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. Fort Liberty, Inc.'s ownership is subject to a lien in favor
of Imperial Credit securing a loan in the principal amount of $2.7 million.
The terms of this loan provide for monthly interest payments of $21,938,
plus monthly principal amortization of $7,500, commencing April 13, 1999.
The loan matures March 16, 2008, at which time the projected loan balance,
assuming no prepayments, of $2,676,199 million will be due and payable. We
have no present plans for the further development or improvement of the
property, beyond ordinary maintenance. The annual real property taxes on
the property are approximately $33,400. Depreciation with respect to the
building at the property is taken at a rate of $22,630 per year under the
straight-line method over a 30-year estimated life. The occupancy of this
mixed-use retail space is approximately 83% and a restaurant tenant
occupies approximately 17% of the total square footage of the property on a
lease and providing for monthly triple net rent of approximately $7,300.
The following is a schedule of the lease expirations at the property for
each of the next 10 years, with none with terms beyond 2004:
Percent of
Year Square Feet Annual Rent Total Rent
1999 8,500 21.29 $ 100,420
2000 4,840 14.52 $ 68,520
2001 3,750 11.26 $ 53,120
2002 11,658 37.27 $ 175,820
2003 750 3.18 $ 15,000
2004 2,669 7.58 $ 35,750
2005 1,500 4.90 $ 23,140
(4) 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. The lease is for a term of 11 years and provides for monthly
rent of $89,117, plus taxes and utilities. Fort Liberty, Inc.'s ownership
is subject to a lien in favor of Imperial Credit securing a loan in the
principal amount of $3.9 million. The terms of this loan provide for
monthly interest payments of $31,688, plus monthly principal amortization
of $10,833, commencing April 13, 1999. The loan matures March 16, 2008, at
which time the projected loan balance, assuming no prepayments, of
$3,856,620 will be due and payable. We have no present plans for the
further development or improvement of the property, beyond ordinary
maintenance. The annual real property taxes on the property are
approximately $65,800. Depreciation with respect to the building at the
property is taken at a rate of $26,568 per year under the straight-line
method over a 30-year estimated life.
(5) This lease may be terminated at any time after August 31, 1999 by providing
written notice of that intention.
(6) On Stage is currently attempting to sub-lease this theater.
(7) This property is owned by On Stage Theaters, Inc. On Stage Theaters leases
this property from On Stage Theaters Surfside Beach, Inc.
(8) 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.
(9) 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. King Henry's, Inc.'s ownership is subject to a lien in favor
of Imperial Credit securing a loan in the principal amount of $5 million.
The terms of this loan provide for monthly interest payments of $40,625,
plus monthly principal amortization of $13,999, commencing April 13, 1999.
The loan matures March 16, 2008, at which time the projected loan balance,
assuming no prepayments, of $4.33 million will be due and payable. We have
no present plans for the further development or improvement of the
property, beyond ordinary maintenance. The annual real property taxes on
the property are approximately $89,850. Depreciation with respect to the
building at the property is taken at a rate of $44,201 under the straight
line method over a 30-year estimated life. However, as more fully described
elsewhere in this document, our facilities serve as collateral for mortgage
debt for which we are currently in default. The Lender has agreed to
forebear foreclosure proceedings until May 2, 2000. We stand a great risk
that these properties will be repossessed by the Lender.
We believe that our existing facilities are suitable and adequate for our
current operations and are adequately insured.
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Item 3. Legal Proceedings
In May, 1996, a former performer in On Stage's Legends production aboard a
vessel owned and operated by Premier Cruise Lines, Ltd., filed a lawsuit in a
Florida Circuit Court against On Stage 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. On or about July 20,
1999, On Stage successfully negotiated a complete settlement of this lawsuit for
a total remuneration of $60,000.
In July 1996, an impersonator of Hank Williams, Sr. who performed for On
Stage, filed suit against On Stage in the circuit court of Taney County,
Missouri. The plaintiff alleges that On Stage misappropriated his name, image
and likeness for commercial purposes by taking a photograph of him during a
performance, reproducing that photograph and publishing it in an On Stage
brochure. The plaintiff has claimed damages in the amount of $2,000,000. On
Stage filed an answer to this complaint and considered filing a counterclaim
against Mr. Owen. However, before any further action was taken by either side,
and before trial had commenced, the parties were able to reach a settlement of
this dispute on April 26, 1999. While we cannot disclose the terms of the
settlement, as the parties agreed to hold the same in strict confidence, we can
disclose that the matter was resolved in a manner which benefited On Stage.
On April 19, 1999, the owners of the famous work West Side Story, filed a
complaint against On Stage for allegedly infringing upon their intellectual
property rights utilized in connection with On Stage's production America!
America! at the Trump Taj Mahal. On or about July 28, 1999, On Stage
successfully negotiated a settlement to this lawsuit for the sum of $60,000.
On May 28, 1998, Silver State Property Management, a Nevada corporation,
Roger A. Bergmann Enterprises, a Nevada corporation, and R.E. Lyle Corp., a
Nevada corporation filed a complaint in the Second Judicial District Court of
the State of Nevada, County of Washoe, alleging, among other things, that John
W. Stuart, acting as an agent, chairman of the board and chief executive officer
of On Stage, breached an alleged oral agreement to purchase the Plaintiff's
respective interests in the Legends in Concert production in Hawaii for an
aggregate purchase price of $1,000,000. On or about September 14, 1999, the
Company successfully negotiated a settlement in this litigation, pursuant to
which the Plaintiff's agreed to dismiss the lawsuit in exchange for a payment
plan which in the aggregate totals $350,000. The Company paid $50,000 upon
execution of the settlement and agreed to make two (2) additional payments of
$150,000 within the next year. Mr. Stuart personally guaranteed the Company's
payment of the settlement amount, pledged his own real property as security
therefore and agreed to forego any counterclaim he may have personally had
against the Plaintiffs. In consideration for his guaranty, pledge of real
property and agreement to waive his rights against the Plaintiffs, the Company
granted Mr. Stuart 250,000 shares and agreed to grant an additional 250,000
shares to him in the event the guaranty is enforced against him for the
Company's failure to pay the settlement amount. Since On Stage failed to make
the required $150,000 payment to the Plaintiff's in a timely manner, the
Plaintiff's executed on Mr. Stuart's real property in satisfaction of this
$150,000 payment.
On August 20, 1998, a complaint was filed against On Stage by the trustee
of the United States Bankruptcy Court for the District of Nevada, alleging
breach of contract, monies due and owing and turnover of the property to the
estate. The basis of the complaint stems from the purchase of certain furniture
by a third party while purporting to be a representative of On Stage. The matter
proceeded to trial on May 27 and 28, 1999, after which a judgment was rendered
against On Stage in the amount of $14,955. On Stage appealed this decision.
On March 4, 1999, a final judgment was entered against On Stage in the
amount of $79,980.19 for past due rent on the theater it abandoned in Daytona
Beach, Florida. On November 15, 1999, a satisfaction of judgment was filed in
accordance with a settlement agreement On Stage reached with its former
landlord, pursuant to which On Stage paid its prior landlord the sum of $55,000
in exchange for the landlord's agreement to file a satisfaction of judgment and
return certain of On Stage's personal property.
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On May 27, 1999, Hanover Restaurants, Inc. returned 595,238 shares of On
Stage common stock originally issued to Hanover in connection with On Stage's
purchase of substantially all of the income producing assets of Gedco USA, Inc.
The Hanover shares were returned to On Stage under to the terms of a Mutual
Release and Settlement Agreement, which was entered into by and between On Stage
and Gedco as a result of a dispute that arose in connection with the Gedco asset
acquisition. In exchange for the return of the Hanover shares, On Stage: (1)
granted Hanover a warrant to purchase 595,238 shares of common stock at a
purchase price of $1.50; and (2) released its claim to approximately $925,000
which was being held in escrow as security for certain representations and
warranties made by Gedco representatives as part of the Gedco asset acquisition.
On July 12, 1999, First Security Bank of Nevada filed a complaint against
On Stage, its' subsidiaries and John W. Stuart in the District Court of Nevada
in Clark County, Nevada. The complaint alleges that On Stage has breached its'
contract with First Security by refusing to repay loan and lease lines with
First Security that have recently matured. The Complaint prays for repayment of
the matured loan and lease lines in the amount of approximately $1,955,998,
together with interest, attorneys' fees and costs associated therewith.
Additionally, the Complaint seeks to enforce the personal guaranty of John W.
Stuart to repay this outstanding balance and prays for writs of garnishment and
attachments of On Stage's personal property. On Stage filed an Answer to the
complaint and commenced settlement negotiations with First Security Bank. These
settlement discussions led to the execution of a Litigation Forbearance
Agreement on December 13, 1999. Under this Forbearance Agreement, we agreed to
grant First Security Bank an additional security interest in all of our personal
property and pay them the sum of $50,000 per month toward repayment on the line
of credit and lease line, in exchange for a 120-day forbearance period.
On August 2, 1999, Hemisphere Tour & Travel, Inc., n/k/a HT&T, Inc.,
Richard Winokur, Media Corp. of America and Stephen Zadrick filed a complaint
against On Stage and Gedco USA, Inc. in the and for the Ninth Judicial Circuit
Court in and for Orange County, Florida. The complaint alleges that
representatives from On Stage and Gedco breached an oral contract with
plaintiffs to pay them a commission in connection with the Gedco asset
acquisition. More specifically, the plaintiffs allege that if it had not been
for their introduction of Gedco and On Stage, the parties would never have
consummated the Gedco asset acquisition. On Stage is currently involved in
settlement negotiations with the Plaintiff's in this lawsuit and anticipate
reaching a final resolution to this matter by June 30, 2000.
On August 4, 1999, a complaint was filed against On Stage by its former
landlord for its discontinued production in Toronto, Canada. The complaint
prayed, amongst other counts, for past due and prospective rent in an amount
equal to $1,000,000. On November 12, 1999, On Stage successfully negotiated a
settlement with the Plaintiff's in this lawsuit, pursuant to which On Stage paid
the landlord a total of $90,000 in rent arrearage, along with $6,300 in general
sales tax, in return for a dismissal of this $1,000,000 liability.
On November 16, 1999, Wild Bill's California, Inc., a wholly-owned
subsidiary, received a demand letter from the Landlord of its' Ground Lease for
its Wild Bill's Dinner Theater in Buena Park, California for its failure to pay
rent.
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As of October 7, 1998, we borrowed an aggregate of $14,150,000 from
Imperial Credit Commercial Mortgage Investment Corp. ("Mortgage Lender"). While
we made our January, February and March 1999 payments under this loan after the
due date for those payments, no other payments under this loan have been made to
date. As a result of these delinquencies, we have incurred late charges and
default interest, which we have not paid. On November 5, 1999, we received a
formal demand from ICCMIC to pay them the sum of $16,163,305 as a guarantor
under the loan, which represented all of the indebtedness due the Mortgage
Lender as of that date. On November 12, 1999, the Mortgage Lender filed a
complaint against us in the District Court for Clark County, Nevada, alleging,
among other things, that we breached the guaranty. On December 10, 1999, we
agreed to allow the Mortgage Lender to obtain a judgment against us for the
amount of the guaranty, in return for a forbearance on the collection of this
judgment until March 31, 2000. The Mortgage Lender has extended the date for
collection on this judgment until May 1, 2000. On December 9, 1999, the Mortgage
Lender obtained judgment of foreclosure against our subsidiaries, Fort Liberty,
Inc. and King Henry's, Inc., for the sale of the Fort Liberty Shopping Complex
and Wild Bill's Dinner Theater in Kissimmee, Florida and The King Henry's Feast
in Orlando, Florida. While the foreclosure sales on these properties were
originally scheduled for late January 2000, the Mortgage Lender has honored our
request to reschedule these foreclosure sale dates until May 2 and 3, 2000,
respectively.
On December 31, 1999, On Stage obtained a judgment against Mr. Charles Dean
for past due rent on its Celebrity Theater in North Myrtle Beach, South Carolina
in the amount of $185,180. On Stage has scheduled a judgment debtors examination
to determine which assets of Mr. Dean it should enforce its judgment upon and
will continue to vigorously pursue collection efforts on this judgment.
While we are actively attempting to negotiate the resolution of these
matters, there can be no assurance that our attempts will be successful or that
any of these parties will not take additional action to collect upon any
judgments they may obtain.
Item 4. Submission of Matters to a Vote of Security-Holders
The following matters were submitted to a vote of Security Holder's at On
Stage's 1999 Annual Meeting of the Stockholders: (1) to re-elect Mark G. Tratos
as a member of the board of directors; and (2) to ratify BDO Seidman, LLP as On
Stage's independent public accountants for the fiscal year ending December 31,
1999.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock trades on the Over the Counter Bulletin Board under the
symbol "ONST.OB" The following table sets forth, for the periods indicated, the
high and low sales prices as quoted on the OTCBB. The quotation reflect inter
dealer prices without recital mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<S> <C> <C>
Period High Low
------
------------------- ------------------
Fiscal 1999:
First Quarter...................... 1.7500 0.6875
Second Quarter..................... 2.1250 0.6875
Third Quarter...................... 1.5000 0.3750
Fourth Quarter..................... 0.4375 0.0625
Fiscal 1998:
First Quarter...................... 5.4375 3.5000
Second Quarter..................... 5.1250 3.6250
Third Quarter...................... 4.7500 1.7500
Fourth Quarter.................... 2.2500 0.0625
</TABLE>
As of April 10, 2000 there were 700,000 holders of record on our Common
Stock. On April 10, 2000, the closing sale price of the Common Stock as reported
over the counter was $0.50.
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.
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
of the Company's 1999 Annual Report to Stockholders, filed as Exhibit 13.1 to
the 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 1999 Annual Report to Stockholders filed as
Exhibit 13.1 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.
30
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The following sets forth biographical information about each of On Stage's
directors and executive officers who served during 1999 or who are presently
serving in those capacities.
<TABLE>
Name Age Position
<S> <C> <C>
John W. Stuart................. 57 Chairman and Chief Executive Officer
David Hope..................... 41 Former President and Chief Operating Officer
Kiranjit S. Sidhu.............. 35 Former Senior Vice President, Chief
Financial Officer and Treasurer
David Hope..................... 41 Chief Accounting Officer and Treasurer
Christopher R. Grobl........... 31 General Counsel and Secretary
James L. Nederlander........... 38 Director
Mark Tratos ................... 46 Director
Mark Karlan ................... 40 Director
Mel Woods...................... 47 Director
Matthew Gohd................... 43 Director
</TABLE>
John W. Stuart
John W. Stuart has served as the Chairman and Chief Executive Officer of On
Stage since April 1996 and also was the President of On Stage from October 1985
through March 1996. He founded On Stage in 1985. He has been involved in the
theatrical business since age seven and has produced or appeared in over 200
theater productions and several feature films. Mr. Stuart received a Bachelor of
Arts degree in 1967 from California State University at Fullerton.
David Hope
David Hope served as the President, Chief Operating Officer and as a
director of On Stage from April 1996 through June 1999. For ten years prior to
that time, Mr. Hope served in various capacities, including most recently as
Executive Vice President and Chief Operating Officer, for ITC Entertainment
Group ("ITC"), a major independent producer and worldwide distributor of feature
films, television movies and mini-series and a subsidiary of Polygram N.V.,
where, as Chief Operating Officer, he was responsible for day-to-day operations,
as well as strategic and corporate development and acquisitions. Prior to that
time, Mr. Hope was a production manager with Hinchcliffe Productions, a United
Kingdom-based producer and distributor of documentaries and motor sport events.
Mr. Hope received a degree in Management Science in 1981 from the Loughborough
University in England.
Kiranjit S. Sidhu
Kiranjit S. Sidhu was On Stage's Senior Vice President, Chief Financial
Officer and Treasurer from August 1995 to April 1999. Prior to joining On Stage,
Mr. Sidhu served as Chief Financial Officer and Corporate Secretary for Aspen
Technologies, a computer peripheral manufacturer, from July 1994 to July 1995.
From January 1993 to June 1994, Mr. Sidhu served as President and a director for
Aspen Peripherals, a computer peripheral reseller. From February 1992 to June
1993, Mr. Sidhu served as a financial consultant to ITC. From January 1992 to
July 1993, Mr. Sidhu served as Vice President of Finance and a director for Nuvo
Holdings of America, a computer peripheral manufacturer. Mr. Sidhu holds a
Masters of Business Administration from the Wharton School of Business and a
Bachelor of Arts in Computer Science from Brown University.
Pedro Perez
Mr. Perez has been the Chief Accounting Officer of On Stage since April
1999 and is a Certified Public Accountant. Mr. Perez joined On Stage in July
1996. Before joining On Stage, Mr. Perez served as Corporate Controller of
Mednet, Inc., a publicly traded company from 1993 through 1996. Mr. Perez holds
a Bachelor of Arts degree from the University of Puerto Rico.
31
<PAGE>
Christopher R. Grobl
Christopher R. Grobl has been the General Counsel and Secretary of On Stage
since November 1994. Mr. Grobl received a Bachelor of Arts in 1990 from the
University of Illinois and a Juris Doctor in 1994 from the John Marshall Law
School in Chicago, Illinois.
James L. Nederlander
James L. Nederlander was a director of On Stage August 1996 to July of
1999. He has also been the Chairman of the Nederlander Production Company of
America, a producer of live entertainment shows, since August 1996 and prior to
such time, commencing in 1980, he was Executive Vice President of that
organization.
Mark Tratos
Mark Tratos has been a director of On Stage since March 1997. Mr. Tratos
has been the managing partner of the law firm Quirk & Tratos of Las Vegas,
Nevada since 1983. He received his Juris Doctor degree from Lewis and Clark Law
School in 1979. Since 1982, Mr. Tratos has also served as a member of the
adjunct faculty of the University of Nevada Las Vegas, teaching a variety of
subjects in the areas of fine and performing arts and entertainment and business
law.
Mark Karlan
Mr. Karlan was a member of the board of directors from March 13, 1998
through April 16, 1999. While serving in this capacity, Mr. Karlan was the
President, Chief Executive Officer and a director of Imperial Credit Commercial
Mortgage Investment Corp., a publicly traded real estate investment trust, since
July 1997.
Mel Woods
Mel Woods has been a director of On Stage since July 1998. Mr. Woods is the
President and Chief Operating Officer of Fox Family Worldwide, Inc., Saban
Entertainment's parent company since 1997. Previously, Mr. Woods was the Chief
Financial Officer and Senior Vice President of DIC Enterprises.
Matthew Gohd
Matthew Gohd has been a director of On Stage since September 1998. Mr. Gohd
is currently a Senior Managing director at Whale Securities Co., LP., the
underwriter for On Stage's initial public offering. Mr. Gohd has over 20 years
in the securities field working in various companies in industries such as
retail, technology, healthcare and consumer finance.
Directors Resigning During 1999 and 2000
Four directors resigned during 1999 and 2000, Mark S. Karlan, David Hope,
James Nederlander and Mark G. Tratos. Mr. Karlan resigned on April 16, 1999, Mr.
Hope resigned on July 6, 1999, Mr. Nederlander resigned on July 9, 1999 and Mr.
Tratos resigned on January 31, 2000. Mr. Karlan resigned from the board
following On Stage's default in its loans from its Mortgage Lender. Mr. Hope,
Mr. Nederlander and Mr. Tratos all resigned to pursue other interests.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely on our review of the copies of Forms 3, 4 and 5 received by On
Stage or of written representations from officers, directors and other persons
required to report under Section 16(a) of the Securities Exchange Act of 1934
initial or changes in beneficial ownership of On Stage's common stock, we
believe that all the reporting persons complied with the applicable filing
requirements of Section 16(a) for 1998.
32
<PAGE>
Executive Bonus Plan
In March 1997, On Stage implemented a three-year executive bonus plan,
which is administered by the compensation committee of the board. Under the
executive bonus plan, an annual bonus pool of up to 5% of On Stage's audited
pre-tax earnings, after non-recurring charges, such as original issue discount,
compensation and interest expense charges and excluding extraordinary items, may
be established for distribution at the discretion of the board of directors, to
our executive officers (other than Mr. Stuart, who is not eligible for bonuses
under the plan) in 1999 and 2000, provided that On Stage achieves at least
minimum pre-tax earnings as calculated under the for the respective preceding
fiscal year as follows:
Year Minimum Pre-Tax Earnings
------- -----------------------------------
1998 $5,000,000
1999 $8,700,000
The terms of the executive bonus plan, including the minimum pre-tax
earnings requirements set forth above, were determined by negotiations between
On Stage and the underwriter of our initial public offering, and should not be
construed to imply or predict any future earnings. No bonuses have been paid
under the executive bonus plan.
Compensation of Directors
Directors currently are not paid a fee for their services, but are
reimbursed for all reasonable expenses incurred in attending board meetings. In
addition, each non-employee director will receive options to purchase an
aggregate of 10,000 shares of common stock each year that the director serves as
a director, partially contingent upon the director's attendance at the four
scheduled board of directors meetings during the year of grant. One-quarter of
the annual option grant will vest as of each of the grant year's scheduled
meetings. In 1999, On Stage granted Mr. Gohd, Mr. Tratos and Mr. Fred Ordower (a
board advisee) 75,000 stock options at $1.00 strike price as consideration for
the excessive time and energy the board spent on company issues during 1999.
33
<PAGE>
Item 10. Executive Compensation.
<TABLE>
<CAPTION> Executive Compensation
<S> <C> <C> <C> <C> <C> <C>
Annual Long Term
Compensation Compensation
------------ ------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/SAR Compensation
- --------------------------- ---- ------- ------ ------------- ---------- ------------
John W. Stuart............. 1999 $250,000 - 35,869(1) 300,000 -
Chairman and Chief 1998 $250,000 - 35,869(1) 75,000 -
Executive Officer
David Hope................. 1999 $104,784 - 9,513(2) - -
President and Chief 1998 $207,308 - 19,578(3) 50,000 -
Operating Officer
Kiran Sidhu................ 1999 $ 55,659 - 50,359(4) 140,000(5) -
Senior Vice President 1998 $157,385 - 14,993(6) 30,000 -
Chief Finanical Officer
and Treasurer
Gerard O' Riordan.......... 1999 - - - - -
President-On Stage Theaters 1998 $106,664 - 14,424(7) - -
Richard Kanfer............. 1999 - - - - -
Vice President- Sales 1998 $109,154 - 14,791(8) 15,165 -
Gary Panter................ 1999 $ 95,920 - - - -
Senior Vice President 1998 $102,370 - 13,627(9) 21,439 10,595(10)
Operations
</TABLE>
(1) Represents $11,971 in unused vacation time accrued but not paid and $23,898
of car and health allowances accrued, of which $14,895 was paid in 1999.
Does not include $149,686 of rent accrued for the leases to On Stage of
which $76,028 was paid in 1999.
(2) Represents $9,519 payments made to Mr. Hope as a consultant for On Stage in
connection with the restructuring of his employment agreement.
(3) Represents $6,346 in unused vacation time accrued but not paid and $13,232
of car and health allowances accrued, of which $9,732 was paid in 1999.
(4) Includes $25,000 for unpaid insurance, car allowances and expenses; $17,887
for all accrued, but unused vacation pay; and a forgiveness of a promissory
note in the amount of $7,472, all of which were paid in connection with the
restructuring of Mr. Sidhu's employment agreement.
(5) Represents 140,000 incentive stock options, which were issued to Mr. Sidhu
in exchange for his previously issued stock options in connection with the
restructuring of Mr. Sidhu's employment agreement.
(6) Represents $5,393 in unused vacation time accrued but not paid and $9,600
of car and health allowances accrued, of which $6,100 was paid in 1999.
(7) Represents $14,424 of car and health allowances paid in 1999.
(8) Represents $4,231 in unused vacation time accrued but not paid and $10,560
of car and health allowances accrued, of which $7,560 was paid in 1999.
(9) Represents $3,238 in unused vacation time accrued but not paid and $10,389
of car and health allowances accrued, of which $8,639 was paid in 1999 and
$11,050 of housing allowance payments.
(10) Represents $10,595 non-recurring relocation-related expenses.
34
<PAGE>
Option Grants.
The table below sets forth the grants of stock options to the persons
named in the Summary Compensation Table during the year ended December 31, 1999:
<TABLE>
Option Grant in Last Fiscal Year
<S> <C> <C> <C> <C> <C> <C>
Value at
Assumed
Percent of Annual Rates
Options/SARS of Stock
Granted to Price
Name and Principal Option Employees in Exercise Expire Potential Application
Position Granted Fiscal Year Price Date 5% Value 10%
- --------------------- ------------ --------------- ------------ --------- --------- --------------
John W.
Stuart.................. 300,000(1) 68% $1.00 4/04 $0.00 $0.00
Chairman and Chief
Executive Officer
Kiran
Sidhu................... 140,000(2) 32% $1.50 4/09 $0.00 $0.00
Senior Vice President
Chief Financial Officer
and Treasurer
___________
</TABLE>
(1) These warrants were granted as partial consideration for a $300,000 loan
Mr. Stuart made to On Stage.
(2) These options were issued to Mr. Sidhu in April of 1999 in exchange for Mr.
Sidhu's previously issued 139,794 options in connection with the
restructuring of his employment agreement.
Option Exercise and Fiscal Year-End Option Values
The following table summarizes the value of vested and unvested
in-the-money options for the persons named in the Summary Compensation Table at
December 31, 1999. Year-end values are based upon a price of $0.4375 per share,
which was the closing market price of a share of common stock on December 31,
1999. No options were exercised by the named executive officers in 1999.
<TABLE>
Aggregated Option Exercise in Last Year and Year-End Option Values
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at December 31, 1999 at December 31, 1999
---------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- -------------- --------------- ------------- ---------------
John W. Stuart................... 325,000 50,000 $ - $ -
David Hope....................... 361,300 - $ - $ -
Kiran Sidhu...................... 139,794 - $ - $ -
Gerard O'Riordan................. - - $ - $ -
Richard S. Kanfer................ - - $ - $ -
Gary Panter...................... 35,000 - $ - $ -
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of April 14, 2000
(except as otherwise noted) regarding the ownership of On Stage common stock (1)
by each person known by us to be the beneficial owner of more than five percent
of the outstanding common stock, (2) by each director, (3) by each executive
officer named in the Summary Compensation Table and (4) by all current executive
officers and directors as a group.
35
<PAGE>
<TABLE>
Number of Shares Percentage of
Name and Address (1) Beneficially Owned (2) Class (2)
- ------------------------------------- --------------------------- --------------------
<S> <C> <C>
John W. Stuart (3)................................ 3,961,155 54.8%
David Hope (4).................................... 372,550 5.2%
Kiranjit S. Sidhu (5)............................. 145,625 2.0%
James L. Nederlander (6).......................... 40,000 *
Mark Tratos (7)................................... 112,500 1.6%
Mel Woods (8)..................................... 27,500 *
Matt Gohd (9)..................................... 123,438 1.7%
Hanover Restaurants, Inc. (10).................... 595,238 8.2%
Imperial Credit Industries, Inc (11).............. 575,000 8.0%
All executive officers and directors
as a group (9 persons/entities) (12)............ 5,953,006 82.2%
- -------------------------
</TABLE>
*Less than one percent
(1) Unless otherwise indicated, the address for each named individual or group
is in care of On Stage at 4625 West Nevso, Las Vegas, NV 89103.
(2) Unless otherwise indicated, On Stage believes that all persons named in the
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community
property laws where applicable. In accordance with the rules of the
Securities and Exchange Commission, a person is deemed to be the beneficial
owner of common stock that can be acquired by that person within 60 days,
upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options and warrants
that are held by that person (but not those held by any other person) and
which are exercisable within 60 days have been exercised. Percentages
herein assume a base of 7,226,808 shares of common stock outstanding as of
April 14, 2000.
(3) Includes: (a) 782,400 shares pledged by Mr. Stuart as security for
repayment of a margin loan; (b) 40,532 shares pledged to On Stage as
security for the repayment of promissory note; (c) 100,000 shares which
have been optioned to an unrelated third party; (d) 75,000 incentive stock
options, of which 25,000 are currently exercisable; and (e) 300,000 shares
of common stock issuable upon the exercise of immediately exercisable
warrants.
(4) Includes 372,550 shares of common stock issuable upon the exercise of
options or warrants.
(5) Includes 145,625 shares of common stock issuable upon the exercise of
options or warrants.
(6) Includes 40,000 shares of common stock issuable upon the exercise of
options.
(7) Includes 112,500 shares of common stock issuable upon the exercise of
options.
(8) Includes 27,500 shares of common stock issuable upon the exercise of
options.
(9) Includes 100,000 shares of common stock issuable upon the exercise of
options.
(10) Includes 595,238 shares of common stock issuable upon the exercise of
warrants.
36
<PAGE>
(11) Includes 325,000 shares of common stock issuable upon the exercise of an a
warrant granted to Imperial Credit Commercial Mortgage Investment
Corporation. Imperial Credit is managed by Imperial Credit Commercial Asset
Management Corporation, which is a wholly owned subsidiary of Imperial
Credit Industries, Inc., which recently merged with Imperial Credit.
Imperial Credit Industries, Inc. also beneficially owns approximately 8.9%
of the outstanding common stock of Imperial Credit. Also includes 250,000
shares of common stock issuable upon the exercise of a warrant granted to
Imperial Capital Group, LLC. Imperial Credit Industries, Inc. has a 60%
interest in Imperial Capital Group. Imperial Credit Industries, Inc.
disclaims the beneficial ownership of the shares of common stock held by
Imperial Capital Group. All information provided in this footnote 10 was
derived from a Schedule 13G filed by Imperial Credit Industries, Inc. with
the Securities and Exchange Commission on April 3, 1998.
(12) Includes 856,300 and 834,375 shares of common stock issuable upon the
exercise of options and warrants, respectively.
Item 12. Certain Relationships and Related Transactions
See related party transactions in Note 7 to the financial statements.
Subsequent Events
Wild Bill's California Ground Lease
On February 18, 2000, Spiegel Enterprises, the ground lessor of the Wild
Bill's Dinner Theater in Buena Park, California, filed a complaint against On
Stage and its wholly-owned subsidiary, Wild Bill's California, Inc., in the
Superior Court of the State of California for the County of Los Angeles
alleging, among other counts, that Wild Bill's breached its Ground Lease with
Speigel Enterprises. On March 15, 2000, this complaint was dismissed without
prejudice, pursuant to the terms of a settlement agreement reached by and
between Wild Bill's California, Inc. and Speigel Enterprises on February 23,
2000.
Status of Foreclosure Sale for King Henry's Feast Theater in Orlando,
Florida
On January 24, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the foreclosure sale date on the King Henry's Feast Theater in
Orlando, Florida from January 26, 2000 until March 8, 2000. On March 7, 2000, On
Stage reached an agreement with its Mortgage Lender to extend the foreclosure
sale date on the King Henry's Feast Theater from March 7, 2000 until April 5,
2000. On March 30, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the foreclosure sale date on the King Henry's Feast Theater from April
4, 2000 until May 3, 2000.
Status of Foreclosure Sale for Fort Liberty Shopping Complex/Wild Bill's
Dinner Theater Extravaganza in Kissimmee, Florida
On January 25, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the foreclosure sale date on the Fort Liberty Shopping Complex/Wild
Bill's Dinner Theater Extravaganza in Kissimmee, Florida from January 25, 2000
until March 7, 2000. On March 7, 2000, On Stage reached an agreement with its
Mortgage Lender to extend the foreclosure sale date on the Fort Liberty property
from March 7, 2000 until April 4, 2000. On March 30, 2000, On Stage reached an
agreement with its Mortgage Lender to extend the foreclosure sale date on the
Fort Liberty property from April 4, 2000 until May 2, 2000.
Status of Foreclosure Sale for Legends Family Theater in Surfside Beach,
South Carolina
On February 1, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the foreclosure sale date on the Legends Family Theater in Surfside
Beach, South Carolina from February 7, 2000 until March 6, 2000. On March 3,
2000, On Stage reached an agreement with its Mortgage Lender to extend the
foreclosure sale date on the Legends Family Theater from March 6, 2000 until
April 3, 2000. On March 30, 2000, On Stage reached an agreement with its
Mortgage Lender to extend the foreclosure sale date on the Legends Family
Theater from April 3, 2000 until May, 2000.
Appeal of Judgment
On February 24, 2000, oral arguments were heard on the appeal of the
$14,955 judgment awarded against On Stage in the United States Bankruptcy Court
for the District of Nevada. No decision has been rendered to date on this
appeal.
37
<PAGE>
Status of Execution of Nevada Judgment
On March 30, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the date which the Mortgage Lender had previously agreed to forego
collection efforts on the Nevada judgment, which was set to expire on March 31,
2000, until May 1, 2000.
Status of First Security Bank Forbearance Agreement
The Forbearance Agreement with First Security Bank expired on April 10,
2000 by its own terms. On April 7, 2000, we received a letter from First
Security Bank requesting that we submit a further settlement plan, along with
other documents, on or before May 1, 2000. On Stage is currently preparing a
settlement plan for First Security Bank.
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 in those situations where the exhibit
number Was the same as set forth below.
<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 Promissory Note to John Stuart dated March 4, 1999 (5)
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.)
38
<PAGE>
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)
10.17 (a) Show Production Agreement between the Registrant and Kurz Management (3)
10.18 Portions of 1998 Annual Report to Stockholders+
10.19 Promissory Note to John Stuart dated April 5, 1999
10.20 First Security Bank Agreement(5)
10.21 Common Stock Purchase Agreement with Whale Securities dated December 1998(5)
10.22 Common Stock Purchase Agreement between On Stage Entertainment, Inc. and Richard S. Kanfer(5)
13 Management's Discussion and Analysis of Financial Condition and Results of Operations; Report on Audited
Consolidated Financial Statements For the Years Ended December 31, 1997 and 1998
21 Subsidiaries of the Registrant(5)
27 Financial Data Schedule(5)
- ------------------
</TABLE>
+ 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) (4)
Reports on Form 8-K (5) Filed as an exhibit to On Stage's Form of 10-KSB
filed on April 15, 1999.
Reports on Form 8-K were filed by the Company on May 24, 1999, July 9, 1999
and November 4, 1999, 1998. The reports contained information regarding the
default notice On Stage received from its Mortgage Lender, the resignation of
David Hope, its former President and Chief Operating Officer and its delisting
from the Nasdaq SmallCap Exchange, respectively.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ON STAGE ENTERTAINMENT, INC.
(Registrant)
Dated: April 14, 2000 /s/ John W. Stuart
________________________________
John W. Stuart, Chairman of the Board
and Chief Executive Officer
Dated: April 14, 2000 /s/ Pedro Perez
________________________________
Pedro Perez, Chief Accounting 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>
<S> <C> <C>
Signature Title Date
/s/ John W. Stuart Chairman and Chief Executive April 14, 2000
_______________________ Officer and Director
John W. Stuart (principal executive officer)
/s/ Pedro Perez
_______________________ Chief Accounting Officer April 14, 2000
Pedro Perez
/s/ Matt Gohd
_______________________ Director April 14, 2000
Matt Gohd
_______________________ Director April 14, 2000
Mel Woods
</TABLE>
40
<PAGE>
Overview
The financial statements included in this report include the accounts of On
Stage Entertainment, Inc., a publicly traded Nevada corporation and its
subsidiaries: Legends in Concert, Inc., a Nevada corporation; On Stage
Marketing, Inc., a Nevada corporation; On Stage Theaters, Inc., a Nevada
corporation; Wild Bill's California, Inc., a Nevada corporation; Blazing Pianos,
Inc., a Nevada corporation; King Henry's Inc., a Nevada corporation; On Stage
Merchandise, Inc., a Nevada corporation; On Stage Events, Inc., a Nevada
corporation; On Stage Casino Entertainment, Inc., a Nevada corporation; On Stage
Productions, Inc., a Nevada corporation; On Stage Theaters North Myrtle Beach,
Inc., a Nevada corporation; On Stage Theaters Surfside Beach, Inc., a Nevada
corporation; and Interactive Events, Inc., a Georgia corporation.
On Stage derives net revenues from five reportable segments:
o Casinos. The Casinos segment primarily sells live theatrical
productions to casinos worldwide for a fixed fee. In addition, this
Casinos segment also operates our Legends show at the Imperial Palace
in Las Vegas, Nevada and Biloxi, Mississippi and at Bally's Park Place
in Atlantic City, New Jersey.
o Theaters. The Theaters segment owns and/or rents live theaters and
dinner theaters in urban and resort tourist locations primarily in the
United States. This Theaters segment derives revenues from the sale of
tickets, along with food and beverages to patrons who attend our live
theatrical productions.
o Events. The Events segment sells live theatrical productions to
commercial clients, which include corporations, theme and amusement
parks and cruise lines for a fixed fee. Revenues generated from the
Events segment are included in the Casinos segment.
o Merchandise. The Merchandise segment sells merchandise and souvenir
photography products to patrons who attend our Casinos, Theaters, and
Events segment productions. Revenues generated from the Merchandise
segment are included in the Theaters segment.
o Production Services. The Production Services segment sells technical
equipment and services to commercial clients. However, the Productions
Services segment's primary focus is to provide technical support for
all of the Casinos, Theaters, Events and Merchandise segments.
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
On Stage's productions, the expansion of existing and potential gaming and
tourist markets, our exposure to various trends in the gaming industry, our
restructuring plans and the benefits we anticipate from restructuring, our
business strategy, our outstanding litigation matters and the defenses available
to us, the seasonality of our business, and liquidity issues, as well as
information contained elsewhere in this report where current statements are
preceded by, followed by or include the words "believes," "expects,"
"anticipates" or similar expressions. For these statements, On Stage 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 the forward-looking statements and the actual results to
differ materially from those expressed in or implied by the statements.
<PAGE>
The most important factors that could prevent On Stage from achieving our
goals--and cause the assumptions underlying the forward-looking statements and
the actual results to differ materially from those expressed in or implied by
those forward-looking statements include the information provided under the
heading "Description of Business-Risk Factors" in Item 1 of our Annual Report on
Form 10-KSB for the year ended December 31, 1998, as well as the following:
o On Stage's ability to renegotiate its defaulted debt obligations with
its Lenders and continue to forebear foreclosure proceedings against
its properties;
o The dependence on our flagship Legends in Concert production and our
principal production venues;
o The ability to successfully produce and market new productions and to
manage the growth associated with any new productions;
o Risks associated with our acquisition strategy, including our ability
to successfully identify, complete and integrate strategic
acquisitions;
o The ability to meet our commitments under our credit facilities, which
are currently in default, and to obtain alternative, additional
financing on commercially reasonable terms;
o The ability to continue as an ongoing concern;
o The competitive nature of the leisure and entertainment industry and
the ability to continue to distinguish our services;
o Fluctuations in quarterly operating results and the highly seasonal
nature of our business;
o The ability to reproduce the performance, likeness and voice of
various celebrities without infringing on the publicity rights of
those celebrities or their estates, as well as our ability to protect
our intellectual property rights;
o The ability to successfully manage the litigation pending against us
and to avoid future litigation; and
o The results of operations which depend on numerous factors, including
the commencement and expiration of contracts, the timing and amount of
new business generated by us, our 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.
The accounting policies of the reportable operating segments are the same
as those described in the Summary of Accounting Policies. The Company's
management evaluates the performance of its operating segments based upon the
profit and loss from operations.
The Company's reportable segments are strategic business units because each
unit services a different market or performs a specialized function in support
of a given market.
Results of Operations
The following table sets forth the various components of the Company's net
revenue as a percentage of the total net revenue for the periods indicated:
2
<PAGE>
<TABLE>
<S> <C> <C>
Year Ended December 31,
---------------------------------------
1998 1999
----------------- ---------------
Net revenues................................ 100.0% 100.0%
Costs of Revenues........................... 79.8 77.7
----------------- ---------------
Gross profit................................ 20.2 22.3
Selling, general and administrative......... 22.5 15.2
Depreciation and amoritziation.............. 6.5 4.4
Expenses at discounted location............. 1.6 0.0
Asset impairment loss....................... 1.5 0.0
Restructuring charges....................... 0.0 1.5
----------------- ---------------
Operating Income (loss)..................... (11.9) 1.2
Interest expenses, net...................... 5.6 10.1
Other income................................ 0.0 (1.8)
Loss on disposal of fixed assets............ 0.0 0.2
----------------- ---------------
Pre-tax loss................................ (17.5) (7.3)
Income taxes................................ 0.0 0.0
Net loss.................................... (17.5)% (7.3)%
================= ===============
</TABLE>
Net loss for the year ended December 31, 1998, was $4,870,989, as compared
to a net loss of $2,090,339 for the year ended December 31, 1999.
The following tables sets forth the results of operations by the Company
for reportable segment indicated:
Year ended December 31, 1998
Casino Production Theaters Operations
Services Sub-Total
---------- ------------ ------------- ------------
Net revenues............... $9,522,738 $ 71,589 $ 18,253,148 $ 27,847,476
Cost of revenues.......... 6,453,955 521,493 15,253,077 22,228,524
----------- ------------ ------------- ------------
Gross profit............... 3,068,784 (449,903) 3,000,072 5,618,952
Selling, general &
administrative............. 1,156,533 - 1,704,326 2,860,860
Depreciation & amortization 409,235 44,704 1,086,824 1,540,762
Discontinued operations.... - - 443,096 443,096
Asset impairment loss...... - - 409,116 409,116
Restructuring Charges...... - - - -
----------- ------------ ------------- ------------
Operating income (loss).... 1,503,015 (494,607) (643,291) 365,117
Interest expense, net...... 3,522 - 1,412,116 1,415,639
Gain (loss) on sale of
fixed assets........... - - - -
----------- ------------ ------------- ------------
Net income (loss) before
Income taxes........... 1,499,493 (494,607) (2,055,408) (1,050,522)
Income taxes............... 0 0 0 0
=========== ============ ============= ============
Net income (loss).......... $1,499,493 $ (494,607) $(2,055,408) $(1,050,522)
=========== ============ ============= ============
3
<PAGE>
Year ended December 31, 1998
(continued)
Operating Corporate Total
Sub-Total Office Consolidated
------------ ---------- -------------
Net revenues.............. $27,847,476 $ - $27,847,476
Cost of revenues.......... 22,228,524 - 22,228,524
------------ ---------- -------------
Gross profit.............. 5,618,952 - 5,618,952
Selling, general &
administrative............ 2,860,860 3,415,465 6,276,325
Depreciation & amortization 1,540,762 265,764 1,806,526
Discontinued operations.... 443,096 - 443,096
Asset impairment loss...... 409,116 - 409,116
---------- ------------ ------------
Operating income (loss).... 365,117 (3,681,229) (3,316,112)
Interest expense, net...... 1,415,639 139,239 1,554,877
----------- ---------- ------------
Net income (loss) before
income taxes........... (1,050,522) 139,239 (4,870,989)
Income taxes............... 0 0 0
=========== ========== ============
Net income (loss)..........$(1,050,522) $(3,820,467) $(4,870,989)
=========== ========== ============
Year ended December 31, 1999
Casino Production Theaters Operations
Services Sub-Total
---------- ------------ ------------- ------------
Net revenues............... $10,006,642 $ 103,896 $ 18,438,104 $ 28,548,642
Cost of revenues.......... 6,565,776 679,128 14,931,965 22,176,869
----------- ------------ ------------- ------------
Gross profit............... 3,440,866 (575,232) 3,506,139 6,371,773
Selling, general &
administrative............. 766,964 - 1,747,966 2,514,930
Depreciation & amortization 401,664 90,239 559,335 1,051,238
Discontinued operations.... - - - -
Asset impairment loss...... - - - -
Restructuring Charges...... 41,494 - 111,880 153,374
----------- ------------ ------------- ------------
Operating income (loss).... 2,230,744 (665,471) 1,086,958 2,652,231
Interest expense, net...... 84 1,123 2,648,061 2,649,268
Gain (loss) on sale of
fixed assets........... - - 61,237 61,237
Other income--discounted
invoices............... - - - -
Other income............... (97,490) - - (97,490)
----------- ------------ ------------- ------------
Net income (loss) before
Income taxes........... 2,328,150 (666,594) (1,622,340) 39,216
Income taxes............... 0 0 0 0
=========== ============ ============= ============
Net income (loss).......... $2,328,150 $ (666,594) $(1,622,340) $ 39,216
=========== ============ ============= ============
4
<PAGE>
Year ended December 31, 1999
(continued)
Corporate Total
Office Consolidated
---------- ------------
Net revenues............... $ - $28,548,642
Cost of revenues.......... - 22,176,869
---------- ------------
Gross profit............... - 6,371,773
Selling, general &
administrative............. 1,836,871 4,351,801
Depreciation & amortization 192,910 1,244,148
Discontinued operations.... - -
Asset impairment loss...... - -
Restructuring Charges...... 273,580 426,954
---------- ------------
Operating income (loss).... (2,303,361) 348,870
Interest expense, net...... 230,359 2,879,627
Gain (loss) on sale of
fixed assets........ 1,819 63,056
Other income--discounted
invoices............ (405,984) (405,984)
Other income............... - (97,490)
---------- ------------
Net income (loss) before
income taxes........... (2,129,555) (2,090,339)
Income taxes............... 0 0
========== ============
Net income (loss).......... $(2,129,555) $ (2,090,339)
========== ============
Year Ended December 31, 1998 versus Year Ended December 31, 1999
Net Revenues
Revenues were $28,549,000 for the year ended December 31, 1999 compared to
$27,847,000 for the year ended December 31, 1998, an increase of $702,000, or
2.5%. The Company's revenue is derived from four principal segments: Casino,
Production Services, Merchandise, and Theaters. Merchandise revenues are
accounted for in the Theaters reports.
Casinos revenues were approximately $10,007,000 for the year ended December
31, 1999 compared to $9,523,000 for the year ended December 31, 1998, an
increase of $484,000, or 5.1%. This increase was primarily attributable to new
Legends shows on Premier Cruise Line, new Legends shows at the Imperial Palace,
in Biloxi. The increase was partially offset attributable to the Legends show at
the Imperial Palace.
Production Services revenues were approximately $104,000 for the year ended
December 31, 1999 compared to 72,000 for the year ended December 31, 1998. The
increase was primarily attributable to equipment rental.
5
<PAGE>
Theaters revenues were approximately $18,438,000 for the year ended
December 31, 1999 compared to $18,253,000 for the year ended December 31, 1999,
an increase of $185,000, or 1.1%. This increase in revenues was primarily
attributable to the fact that the dinner theaters acquired as a result of the
Gedco acquisition were given a full 12 months of results of operations in 1999,
compared to only 9.5 months results of operations in 1998. The increase was
partially offset by the discontinuation of the Legends show in Toronto, Canada.
Costs of Revenues
The total costs of revenues were $22,177,000 for the year ended December
31, 1999 compared to $22,229,000 for the year ended December 31, 1998, a
decrease of $52,000, or 2.3%. Costs of revenues decreased to 77.7% of net
revenues for the year ended December 31, 1999, as compared to 79.8% for the year
ended December 31, 1998. This decrease in cost of revenues as a percent of net
revenues was primarily attributable to a change in the mix of our revenues.
Selling, General and Administrative
Selling, general and administrative costs were approximately $4,352,000 for
the year ended December 31, 1999 compared to $6,276,000 for the year ended
December 31, 1998, a decrease of $1,924,000, or 30.7%. Selling, general and
administrative costs decreased to 15.2% of net revenues for the year ended
December 31, 1999, as compared to 22.5% for the year ended December 31, 1998,
which was primarily attributable to the downsizing and restructuring plan
adopted on April 30, 1999.
Depreciation and Amortization
Depreciation and amortization was $1,244,000 for year ended December 31,
1999 compared to $1,807,000 for the year ended December 31, 1998, a decrease of
$563,000, or 31.1%. The decrease was primarily due to the write-off at December
31, 1998 of start-up costs, goodwill, and impairment of net assets.
Expenses to Discontinued Location
On Stage decided to discontinue operations at its Legends production in
Toronto, Canada in November of 1998. As part of the closing, we incurred
additional expenses of $443,096 during 1998. Additionally, in 1999 the Company
wrote-off $559,335 of Net Assets.
Restructuring Charges
Restructuring charges represents expenses related to the closing of the
Legends show in Toronto, Canada, payment of employment-related severance and
termination benefits, legal expenses, and relocation expenses of key executive.
6
<PAGE>
Operating Income
Our operating income was approximately $349,000 for the year ended December
31, 1999 compared to an operating loss of $3,316,000 for the year ended December
31, 1998.
Interest Expense, Net
Interest expense was approximately $2,880,000 for year ended December 31,
1999 compared to $1,555,000 for the year ended December 31, 1998, an increase of
$1,325,000 or 85.2%. The increase was primarily due to additional debt incurred
for the Gedco and Fox Family Acquisitions.
Seasonality and Quarterly Results
Our has been, and is expected to remain, highly seasonal, with the majority
of its revenue being generated during the months of April through October. Part
of the Company's business strategy is to increase sales in tourist markets that
experience their peak seasons from November through March so as to offset
seasonality in revenues. The Gedco Acquisition has helped to mitigate the
Company's seasonality.
The following table sets forth the Company's net revenue for each of the
last eight quarters ended December 31, 1999:
<TABLE>
Net Revenues
($ in thousands)
<S> <C> <C> <C> <C>
March 30, June 30, September 30, December 31,
-------------- ---------------- ----------------- ------------------
Fiscal 1998.................. $3,724 $8,245 $8,059 $7,819
Fiscal 1999.................. $6,272 $7,403 $7,793 $7,081
</TABLE>
Tax Net Operating Losses
At December 31, the Company had federal net operating loss carry forwards
of approximately $6,315,193 in 1998, and $8,405,532 in 1999, respectively. Under
Section 382 of the Internal Revenue Code, certain significant changes in
ownership contemplated by the Company may restrict the future utilization of
these tax loss carry forwards. 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
We have historically met our working capital requirements through a
combination of cash flow from operations, equity and debt offerings and
traditional bank financing. We anticipate, based on our proposed plans and
assumptions relating to our operations, that our current cash, cash equivalent
balances, anticipated revenue from operations and our working capital line are
insufficient to fund our ongoing operations.
On Stage intends to manage short-term liquidity concerns through the
renegotiations of our expired working capital line, capital leases and mortgage
facilities. We have either closed down, have or restructured or intend to
restructure any business units that are not generating positive cash flow. In
addition, we have lowered selling, general and administrative expenses as a
percentage of net revenues from 22.5% for the twelve months ended December 31,
1998 to 15.2% for the twelve months ended in December 31, 1999 and continues to
downsize and restructure our selling, general and administrative functions.
In addition, we are continuing our efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that we will be
able to secure additional capital or that if such capital is available, whether
the terms or conditions would be acceptable to us.
7
<PAGE>
For the year ended December 31, 1998, the On Stage had a net cash deficit
from operations of $1,534,000. The net cash deficit provided from operations was
primarily attributable to legal fees, vacation accrual, asset impairment
expenses, and due diligence expenses written off related with prospective
acquisitions, operational losses at the Legends show in Toronto, Canada, Wild
Bill's Dinner Extravaganza in Buena Park, California, and the debt service on
our mortgage and credit line. For the year ended December 31,1999, On Stage had
net cash used by operations of approximately $10,000. The cash used by
operations was primarily attributable the Company's loss to an increase in
revenue, decrease in cost of revenue and forgiveness of debts.
The net cash used in investing activities for the year ended December 31,
1998 of $14,548,000, was primarily attributable to advances on notes receivable
from officers, capital expenditures and direct acquisition costs related to
acquisitions. The net cash used in investing activities for the year ended
December 31, 1999 of $78,000, was primarily attributable to direct acquisition
costs, and capital expenditures offset by asset disposals.
Net cash provided by financing activities for the year ended December 31,
1998 of $14,701,000 was primarily attributable to ICCMIC's funding of
$12,500,000 for the Gedco Acquisition and $1,650,000 million for the Fox Family
Acquisition. Net cash used by financing for the year ended December 31, 1999 of
$480,000 was primarily attributable to repayment of working capital line and
long-term borrowing offset by proceeds from stock sales.
Working Capital
At December 31, 1998, On stage had a working deficit of approximately
$16,791,000, which resulted, primarily, from increase in: working capital line
of credit, accounts payable, accrued expenses, and accrued payroll and other
liabilities. At December 31, 1999, On Stage had a working capital deficit of
approximately $18,826,769, which resulted primarily from an increase in accrued
interest expense and late charges, partially offset by decreases in the working
capital line of credit and accounts payable. Due to recurring losses and the
working capital deficit and the loan defaults our auditors have issued a going
concern opinion.
Working Capital Line
In May 1997, First Security Bank of Nevada ("First Security") issued a line
of credit to the Company for up to $250,000. Borrowings under such facility bear
variable interest at 1.5% over the First Security Bank of Idaho's index (10% per
year as of the facility's inception) and are due on demand. John W. Stuart has
personally guaranteed the line of credit.
On March 28, 1998, First Security agreed to increase the line of credit
from $250,000 to $1,000,000 and the expiration date was extended to March 25,
1999. As of December 31, 1998, the Company had drawn $1,000,000 on the line of
credit. As of March 31, 1999, the Company had failed to pay off any part of the
line of credit and, is in default under its terms. On April 29, 1999, we
received a notice of default under the line of credit from First Security.
Capital Equipment Financing Commitment
On September 29, 1997, First Security Leasing Company ("First Security
Leasing"), a Utah corporation, approved the Company for a $1,000,000 lease line.
Advances under the lease line incur interest at a rate of 9.75% per annum. The
lease line has been utilized in the following amounts: $389,290, $442,997 and
$167,713, commencing in April, 1998, April 1998 and May, 1998, respectively, and
terminating on October, 2001, September, 2001 and November, 2001. We also
received a notice of default under this line on April 29, 1999.
Mortgage Financing Commitment
As of October 7, 1998, we borrowed an aggregate of $14,150,000 from
Imperial Credit Commercial Mortgage Investment Corp. ("Mortgage Lender"). While
we made our January, February and March 1999 payments under this loan after the
due date for those payments, no other payments under this loan have been made to
date. As a result of these delinquencies, we have incurred late charges and
default interest, which we have not paid.
8
<PAGE>
On November 5, 1999, we received a formal demand from ICCMIC to pay them
the sum of $16,163,305 as a guarantor under the loan, which represented all of
the indebtedness due the Mortgage Lender as of that date. On November 12, 1999,
the Mortgage Lender filed a complaint against us in the District Court for Clark
County, Nevada, alleging, among other things, that we breached the guaranty. On
December 10, 1999, we agreed to allow the Mortgage Lender to obtain a judgment
against us for the amount of the guaranty, in return for a forbearance on the
collection of this judgment until March 31, 2000. The Mortgage Lender has
extended the date for collection on this judgment until May 1, 2000.
On December 9, 1999, the Mortgage Lender obtained judgment of foreclosure
against our subsidiaries, Fort Liberty, Inc. and King Henry's, Inc., for the
sale of the Fort Liberty Shopping Complex and Wild Bill's Dinner Theater in
Kissimmee, Florida and The King Henry's Feast in Orlando, Florida. While the
foreclosure sales on these properties were originally scheduled for late January
2000, the Mortgage Lender has honored our request to reschedule these
foreclosure sale dates until May 2 and 3, 2000, respectively.
On January 5, 2000, the Mortgage Lender obtained a foreclosure decree for
the judicial sale of our Legends in Concert Family Theater in Surfside Beach,
South Carolina. The foreclosure sale was set for February 7, 2000, but was
extended by the Mortgage Lender to May 2000.
In the event that First Security Bank or the Mortgage Lender initiates
foreclosure action against our assets, all or us or a portion of our property
and assets securing the credit facilities and mortgage financing extended by
those lenders may be sold to satisfy our commitments under the terms of those
facilities. While we intend to renegotiate the terms of our credit facilities,
to obtain extensions of the terms of those facilities and to seek alternative
additional financing, there can be no assurance that our efforts will be
successful.
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.
New Accounting Pronouncements
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 adopted SFAS No. 131 on January 1, 1998 and it had no
effect on its financial position or results of operations; however, disclosures
on certain of these items were expanded.
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities," ("SOP 98-5") issued by the American Institute of Certified Public
Accountants is effective for financial statements beginning after December 15,
1998. SOP 98-5 requires that the costs of start-up activities, including
organization costs, be expensed as incurred. Start-up activities are defined
broadly as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customers (excluding ongoing customer
acquisition costs, such as policy acquisition costs and loan origination costs)
or beneficiary, initiating a new process in an existing facility, or commencing
some new operation. The Company does not expect the adoption of SOP 98-5 to have
a material impact, if any, on its financial position or results of operations.
9
<PAGE>
Subsequent Events
Wild Bill's California Ground Lease
On February 18, 2000, Spiegel Enterprises, the ground lessor of the Wild
Bill's Dinner Theater in Buena Park, California, filed a complaint against On
Stage and its wholly-owned subsidiary, Wild Bill's California, Inc., in the
Superior Court of the State of California for the County of Los Angeles
alleging, among other counts, that Wild Bill's breached its Ground Lease with
Speigel Enterprises. On March 15, 2000, this complaint was dismissed without
prejudice, pursuant to the terms of a settlement agreement reached by and
between Wild Bill's California, Inc. and Speigel Enterprises on February 23,
2000.
Status of Foreclosure Sale for King Henry's Feast Theater in Orlando,
Florida
On January 24, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the foreclosure sale date on the King Henry's Feast Theater in
Orlando, Florida from January 26, 2000 until March 8, 2000. On March 7, 2000, On
Stage reached an agreement with its Mortgage Lender to extend the foreclosure
sale date on the King Henry's Feast Theater from March 7, 2000 until April 5,
2000. On March 30, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the foreclosure sale date on the King Henry's Feast Theater from April
4, 2000 until May 3, 2000.
Status of Foreclosure Sale for Fort Liberty Shopping Complex/Wild Bill's
Dinner Theater Extravaganza in Kissimmee, Florida
On January 25, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the foreclosure sale date on the Fort Liberty Shopping Complex/Wild
Bill's Dinner Theater Extravaganza in Kissimmee, Florida from January 25, 2000
until March 7, 2000. On March 7, 2000, On Stage reached an agreement with its
Mortgage Lender to extend the foreclosure sale date on the Fort Liberty property
from March 7, 2000 until April 4, 2000. On March 30, 2000, On Stage reached an
agreement with its Mortgage Lender to extend the foreclosure sale date on the
Fort Liberty property from April 4, 2000 until May 2, 2000.
Status of Foreclosure Sale for Legends Family Theater in Surfside Beach,
South Carolina
On February 1, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the foreclosure sale date on the Legends Family Theater in Surfside
Beach, South Carolina from February 7, 2000 until March 6, 2000. On March 3,
2000, On Stage reached an agreement with its Mortgage Lender to extend the
foreclosure sale date on the Legends Family Theater from March 6, 2000 until
April 3, 2000. On March 30, 2000, On Stage reached an agreement with its
Mortgage Lender to extend the foreclosure sale date on the Legends Family
Theater from April 3, 2000 until May 2000.
Appeal of Judgment
On February 24, 2000, oral arguments were heard on the appeal of the
$14,955 judgment awarded against On Stage in the United States Bankruptcy Court
for the District of Nevada. No decision has been rendered to date on this
appeal.
Status of Execution of Nevada Judgment
On March 30, 2000, On Stage reached an agreement with its Mortgage Lender
to extend the date, which the Mortgage Lender had previously agreed to forego
collection efforts on the Nevada judgment, which was set to expire on March 31,
2000, until May 1, 2000.
Status of First Security Bank Forbearance Agreement.
The Forbearance Agreement with First Security Bank expired on April 10,
2000 by its own terms. On April 7, 2000, we received a letter from First
Security Bank requesting that we submit a further settlement plan, along with
other documents, on or before May 1, 2000. On Stage is currently preparing a
settlement plan for First Security Bank.
10
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
_______________________
Report on Audited Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1999
_______________________
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page Number
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity (Deficit) F-5
Statements of Cash Flows F-6
Summary of Accounting Policies F-9
Notes to Financial Statements F-13
<PAGE>
Report of Independent Certified Public Accountants
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, 1998 and 1999, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for each of the 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
operating losses and, at December 31, 1999, has a working capital deficiency of
$18,826,769 and has defaulted on its' long term debt which raise substantial
doubt about its ability to continue as a going concern. On December 9, 1999, the
mortgage lender obtained judgment of foreclosure against the Company's
subsidiaries, while the foreclosure sales on these properties were originally
scheduled for late January 2000, the mortgage lender has honored the Company's
request to reschedule these foreclosure sales until May 2, 2000. While the
Company is attempting to negotiate an extension, there is no assurance that the
Company will be successful.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
April 13, 2000
F-2
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
Years ended December 31,
--------------------------------
1998 1999
-------------- --------------
Assets
Current assets
Cash and cash equivalents $ 1,009,768 $ 374,587
Accounts receivable, net 1,264,526 1,249,619
Inventory 243,413 234,579
Deposits 125,784 198,523
Prepaid and other assets 594,777 238,274
Notes receivable from officers (Note 7) 77,330 117,906
-------------- --------------
Total current assets 3,315,598 2,413,488
-------------- --------------
Property, equipment and leasehold improvements (Notes 1 and 3) 24,130,663 23,720,804
Less: Accumulated depreciation and amortization (4,396,229) (5,176,244)
-------------- --------------
Property, equipment and leasehold improvements, net 19,734,434 18,544,560
-------------- --------------
Direct acquisition costs (Note 12) - 597,328
Deferred financing costs, net of amortization of $80,813 and
$111,997 (Note 12) 1,039,187 927,190
-------------- --------------
$ 24,089,219 $ 22,482,566
-------------- --------------
Liabilities and Stockholders' Equity
Current liabilities
Working capital line (Note 3) $ 999,679 $ 459,162
Accounts payable and accrued expenses 2,533,232 1,444,878
Accrued payroll and other liabilities 1,891,924 3,937,951
Current maturities of long-term debt (Note 3) 14,682,246 15,398,282
-------------- --------------
Total current liabilities 20,107,081 21,240,257
-------------- --------------
Long-term debt, less current maturities (Note 3) 786,468 30,773
-------------- --------------
Total liabilities 20,893,549 21,271,046
-------------- --------------
Commitments and contingencies (Note 4)
Stockholders' equity (deficit) (Notes 3 and 5)
Common stock; par value $0.01 per share; authorized 25,000,000
shares 7,452,350 and 7,226,808 shares issued and outstanding 74,523 72,268
Additional paid-in capital 11,254,587 11,430,336
Accumulated other comprehensive loss 67,289 -
Accumulated deficit (8,200,729) (10,291,068)
-------------- --------------
Total stockholders' equity 3,195,670 1,211,520
-------------- --------------
$ 24,089,219 $ 22,482,566
-------------- --------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Years Ended December 31,
-------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Net revenues $ 27,847,476 $ 28,548,642
Cost of revenues 22,228,524 22,176,869
------------- -------------
Gross profit 5,618,952 6,371,773
------------- -------------
Operating expenses
Selling, general and administrative 6,276,325 4,351,801
Depreciation and amortization 1,806,526 1,244,148
Impairment loss (Note 13) 409,117 -
Expenses at discontinued location (Note 8) 443,096 426,954
------------- -------------
Total operating expenses 8,935,064 6,022,903
------------- -------------
Operating (loss) income (3,316,112) 348,870
Other income (Note 10) - 440,418
Interest expense, net (See Note 9) 1,554,877 2,879,627
------------- -------------
Loss before income taxes (4,870,989) (2,090,339)
Income taxes (Note 11) - -
------------- -------------
Net loss $ (4,870,989) $ (2,090,339)
============= ==============
Basic loss per share $ (0.68) $ (.29)
------------- -------------
Diluted loss per share $ (0.68) $ (.29)
------------- -------------
Basic average number of common shares outstanding 7,191,276 7,293,815
------------- -------------
Diluted average number of common shares outstanding 7,191,276 7,293,815
------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
Accumulated
Common Stock Other
----------------------- Comprehensive
Shares Amount Capital Income
----------- --------- ------------ -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $6,595,500 $ 65,955 $ 7,340,013 $ -
Issuance of common stock in connection
with Gedco acquisition (Note 12) 595,238 5,952 2,494,048 -
Issuance of common stock in connection
with Fox Kids acquisition (Note 12) 206,612 2,066 721,076 -
Issuance of common stock in connection
with private placement (Note 5) 55,000 550 54,450 -
Issuance of warrants in connection with
financing (Note 12) - - 645,000 -
Comprehensive loss:
Net loss for the year - - - -
Currency exchange adjustment - - - 67,289
Comprehensive loss - - - -
----------- --------- ------------ -----------------
Balance, December 31, 1998 7,452,350 74,523 11,254,587 67,289
Issuance of common stock in connection
with Whale Securities Co. 150,000 1,500 98,550 -
Issuance of common stock in connection
with litigation settlement 8,471 85 8,915 -
Issuance of common stock in connection
with Hawaii settlement 250,000 2,500 107,000 -
Cancellation of shares in connection
with Interactive Events (Note 12) (30,304) (303) (29,817) -
Cancellation of shares in connection
with Gedco acquisition (Note 12) (595,238) (5,952) - -
Cancellation of shares in connection
with litigation settlement (8,471) (85) (8,915) -
Comprehensive loss:
Net loss for the year - - - -
Currency exchange adjustment - - - (67,289)
Comprehensive loss - - - -
----------- --------- ------------ ----------------
Balance, December 31, 1999 7,226,808 $ 72,268 $ 11,430,336 $ -
============ ========== ============= ===============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - Continued
<TABLE>
Accumulated Comprehensive
Deficit Loss Total
----------- ------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1997 $(3,329,740) $ - $ 4,076,228
Issuance of common stock in connection
with Gedco acquisition (Note 12) - - 2,500,000
Issuance of common stock in connection
with Fox Kids acquisition (Note 12) - - 723,142
Issuance of common stock in connection
with private placement (Note 5) - - 55,000
Issuance of warrants in connection with
financing (Note 12) - - 645,000
Comprehensive loss:
Net loss for the year (4,870,989) (4,870,989) (4,870,989)
Currency exchange adjustment - 67,289 67,289
-----------
Comprehensive loss - (4,803,700) -
----------- ----------- ------------
Balance, December 31, 1998 (8,200,729) 3,195,670
Issuance of common stock in connection
with Whale Securities Co. - - 100,050
Issuance of common stock in connection
with litigation settlement - - 9,000
Issuance of common stock in connection
with Hawaii settlement - - 109,500
Cancellation of shares in connection
with Interactive Events (Note 12) - - (30,120)
Cancellation of shares in connection
with Gedco acquisition (Note 12) - - (5,936)
Cancellation of shares in connection
with litigation settlement - - (9,000)
Comprehensive loss:
Net loss for the year (2,090,339) (2,090,339) (2,090,339)
Currency exchange adjustment - (67,289) (67,289)
-----------
Comprehensive loss - $(2,157,628) -
----------- =========== ------------
Balance, December 31, 1999 $(10,291,068) $ 1,211,536
============ ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
Years ended December 31,
--------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (4,870,989) $ (2,090,339)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,085,766 893,318
Write off of cost in excess of net assets acquired 102,131
Write off of deferred financing costs 275,000
Impairment loss 852,213
Loss on disposal of property and equipment - (63,056)
Forgiveness of note receivable from stockholder - (503,474)
Increase (decrease) from changes in operating assets and liabilities
Accounts receivable (809,187) 3,594
Inventory (4,629) 8,834
Deposits 216,312 (76,180)
Prepaid and other assets (165,923) 356,503
Accounts payable and accrued expenses 591,900 (584,896)
Accrued payroll and other liabilities 1,193,426 2,046,027
Litigation settlement accrual -
-------------- --------------
Total adjustments 3,337,009 2,080,670
-------------- --------------
Net cash used in operating activities (1,533,980) (9,669)
-------------- --------------
Cash flows from investing activities
Advances on notes receivable from officers (69,024) (40,576)
Pay down on note receivable from officers 127,888 -
Capital expenditures (947,165) (254,952)
Capital dispositions 705,257
Payment for acquisitions, net of cash acquired (14,602,005) (487,828)
Direct acquisition costs 942,063 -
-------------- --------------
Net cash used in investing activities (14,548,243) (78,099)
-------------- --------------
Cash flows from financing activities:
Borrowing under working capital line 1,000,000 -
Repayment on working capital line (540,517)
Proceeds from long-term borrowing 13,860,007 -
Repayment on long-term borrowing (213,864) (39,657)
Net proceeds from sale of common stock and warrants 55,000 100,050
Offering costs -
-------------- --------------
Net cash provided by (used in) financing activities 14,701,143 (480,124)
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents 67,289 (67,289)
-------------- --------------
Net (decrease) in cash and cash equivalents (1,313,791) (635,181)
Cash and cash equivalents at beginning of year 2,323,559 1,009,768
-------------- --------------
</TABLE>
F-7
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
Years ended December 31,
--------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Cash and cash equivalents at end of year $ 1,009,768 $ 374,587
-------------- --------------
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest $ 1,551,574 $ 502,942
-------------- --------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Supplemental Schedule of Non-Cash Investing and Financing Activities
During 1998, $1,000,000 of leased assets and obligations were capitalized,
respectively.
During 1998, in connection with mortgage financing related to the Gedco
Acquisition, the Company issued 575,000 warrants to purchase the Company's
Common Stock to the lender and an affiliate of the lender, which were originally
valued at $500,000 and accounted for as an original issue discount. Of the
575,000 warrants originally issued, 325,000 were subsequently repriced (see Note
3) and were valued at $145,000 and accounted for as an original issue discount.
The Company wrote off the remaining unamortized value of the 325,000 warrants of
$275,000.
On February 23, 1999, On Stage entered into a Common Stock Purchase Agreement
with Richard S. Kanfer, effectively unwinding the November 1996 acquisition of
Interactive Events, Inc. Under the Interactive re-conveyance, On Stage
re-conveyed all of the assets of Interactive to Kanfer in consideration for
Kanfer's re-conveyance of the 30,304 shares of On Stage's common stock valued at
$1.125 per share, issued to Kanfer during On Stage's original acquisition of
Interactive, along with the cancellation of a non-plan option to purchase 15,000
shares of common stock and incentive stock options to purchase 19,835 shares of
common stock at a price of $5.00 per share. In addition, the parties agreed to
release one another from any liability arising out of the acquisition of
Interactive by On Stage and any claim relating to Kanfe's subsequent employment
with the Company. Kanfer also entered into an exclusive right of representation
agreement with the Company in February 1999, under which the Company granted to
Kanfer the right to represent its Legends production in designated areas in
consideration for a portion of the gross proceeds generated by that
representation.
On April 23, 1999, On Stage granted it's securities counsel, Nida & Maloney,
P.C. an option to purchase 40,000 shares of common stock at a purchase price of
$1.00 per share as payment for $38,469 in legal services performed for On Stage
by Nida & Maloney, P.C. The securities were issued under the exception from
registration provided by Section 4(2) of the Securities Act.
F-8
<PAGE>
Supplemental Schedule of Non-Cash Investing and Financing Activities (Continued)
On May 7, 1999, On Stage issued 8,471 shares of common stock valued at $1.06 per
share to a former performer with On Stage. These shares were issued in
connection with the resolution of litigation. The securities were issued under
the exception from registration provided by Section 4(2) of the Securities Act.
On December 8, 1999, the 8,471 shares were returned to the Company in full
settlement of $6,000.
On May 27, 1999, Hanover Restaurants, Inc. returned 595,238 shares of On Stage
common stock originally issued to Hanover in connection with the Gedco asset
acquisition. The Hanover shares were returned to On Stage under the terms of a
Mutual Release and Settlement Agreement, which was entered into with Gedco as a
result of a dispute that arose in connection with Gedco asset acquisition. In
exchange for the return of the Hanover shares, On Stage: (1) granted Hanover a
warrant to purchase 595,238 shares of common stock at a purchase price of $1.50;
and (2) released its claim to approximately $925,000 which was being held in
escrow as security for those representations and warranties made by Gedco
representatives in connection with Gedco asset acquisition.
On September 14, 1999, 250,000 shares were issued to John Stuart in
consideration for his personal guaranty to fulfil the settlement terms in the
Hawaiian Litigation.
F-9
<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 financial statements include the amounts of On Stage Entertainment, Inc., a
publicly traded Nevada corporation (the "Company" or "OSE") and its
subsidiaries, Legends in Concert, Inc., a Nevada corporation ("LIC"); On Stage
Marketing, Inc., a Nevada corporation ("Marketing"); On Stage Theaters, Inc., a
Nevada corporation ("Theaters"); Wild Bill's California, Inc., a Nevada
corporation ("Wild Bills"); Fort Liberty, Inc., a Nevada corporation ("Ft.
Liberty"); Blazing Pianos, Inc., a Nevada corporation ("Blazing"); King Henry's
Inc., a Nevada corporation ("King Henry's"); On Stage Merchandise, Inc., a
Nevada corporation ("Merchandise"); On Stage Events, Inc., a Nevada corporation
("Events"); On Stage Casino Entertainment, Inc. a Nevada corporation ("Casino");
On Stage Productions, Inc., a Nevada corporation ("Productions"); On Stage
Theaters North Myrtle Beach, Inc., a Nevada corporation ("North Myrtle"); On
Stage Theaters Surfside Beach, Inc., a Nevada corporation ("Surfside"); and
Interactive Events, Inc., a Georgia corporation (collectively, the
"Subsidiaries"). 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.
F-10
<PAGE>
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
--------------------
Buildings 20-30
Stage equipment 3-7
Scenery and wardrobe 3-7
Furniture and fixtures 3-7
Vehicles 3-5
Leasehold improvements 5-10
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") 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") 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 applies the
concepts to intangibles and productive assets periodically (see Note 12).
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. SFAS No. 123 also encourages, but does not require companies to
record compensation cost for stock-based employee compensation. The Company has
chosen 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.
LOSS PER SHARE
Statement of Financial Accounting Standard No. 128 ("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.
F-11
<PAGE>
For the years ended December 31, 1998 and 1999, potential diluted securities
representing 896,344 and 1,225,600 outstanding options and 2,724,917 and
3,660,155 outstanding warrants are not included since their effect would be
anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Statements", ("SFAS No. 107") 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, and 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, 1999.
The Company has notes receivable from officers of the Company. Due to the
related-party nature of these receivables the fair value cannot be determined.
INCOME TAXES
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes," 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.
CASH EQUIVALENTS
The Company considers all liquid assets with an initial maturity of three months
or less to be cash and/or cash equivalents.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign affiliates are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the year. Translation adjustments are reported as a
component of other comprehensive income in stockholders' equity.
CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash investments with banking
institutions. At December 31, 1998 and 1999, the Company had $252,910 and
$176,000 on deposit at one bank. Account balances at an individual bank are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000.
F-12
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for financial statements with
fiscal years beginning after June 15, 2000. SFAS No. 133 provides a
comprehensive and consistent standards for the recognition and measurement of
derivatives and hedging activities and requires all derivatives to be recorded
on the balance sheet at fair value. The Company does not expect the adoption of
SFAS No. 133 to have a material impact, if any, on its results of operations,
financial position or cash flows.
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.
F-13
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
December 31,
--------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Land $ 11,329,376 $ 11,878,594
Buildings 4,389,287 4,335,632
Stage equipment 3,743,769 3,737,433
Scenery and wardrobe 1,286,957 1,469,733
Furniture and fixtures 1,134,555 938,582
Vehicles 12,757 14,557
Leasehold improvements 2,233,962 1,346,273
----------------- -----------------
24,130,663 23,720,804
Less accumulated depreciation and amortization (4,396,229) (5,176,244)
----------------- -----------------
Total property, equipment and leasehold improvements, net $ 19,734,434 $ 18,544,560
----------------- -----------------
</TABLE>
The cost of assets held under capital leases was $2,008,432 at December 31, 1998
and 1999, respectively.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. However, the Company has suffered recurring operating losses, has a
working capital deficit of $18,826,769, and has defaulted on its long term debt.
These factors raise substantial doubt about the Compan's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of those uncertainties.
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 that the Company's current cash, cash
equivalent balances, anticipated revenue from operations are insufficient to
fund the Company's ongoing operations.
Management plans to manage short-term liquidity concerns through the
renegotiations of its expired working capital line, capital leases and mortgage
facilities. The Company has either closed down or restructured any business
units that are not generating positive cash flow. In addition, the Company has
lowered selling, general and administrative costs as a percent of net revenues
from 22% in 1998 to 15% in 1999 and continues to downsize and restructure its
selling, general and administrative functions.
In addition, the Company is continuing its efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that the Company
will be able to secure additional capital or that if such capital is available,
whether the terms or conditions would be acceptable to the Company.
F-14
<PAGE>
NOTE 2 - GOING CONCERN (Continued)
The Company is also negotiating an extension of the forbearance agreement with
the mortgage lender and First Security Bank, there can be no assurance that this
will be successful. (See Note 3).
NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT
WORKING CAPITAL LINE
In May 1997, First Security Bank of Nevada ("First Security") issued a line of
credit to the Company for up to $250,000. Borrowings under such facility bear
variable interest at 1.5% over the First Security Bank of Idaho's index (9.25%
at December 31, 1999). On September 28, 1998, First Security increased the line
of credit from $250,000 to $1,000,000 and extended the expiration date of the
line to March 25, 1999. As of December 31, 1999, this line of credit was in
default. As of December 31, 1998, the Company had drawn $1,000,000 on the line
of credit and the balance outstanding at December 31, 1998 is $999,679. The
balance at December 31, 1999 is $459,162. The Chief Executive Officer has
personally guaranteed the line of credit.
Long-term debt consists of the following:
<TABLE>
December 31,
-------------------------------------
1998 1999
----------------- ----------------
<S> <C> <C>
ICCMIC Mortgage Loan (a) $ 14,150,000 $ 14,150,000
Capital lease obligations with interest ranging from 9.7% to 30.7% due
in monthly installments ranging from $265 to $18,202, including
interest various maturities dates through November 2001, secured by
office communication equipment, and production equipment 1,318,714 1,279,055
----------------- ----------------
Total long-term debt 15,468,714 15,429,055
Less current maturities 14,682,246 15,398,282
----------------- ----------------
$ 786,468 $ 30,773
----------------- ----------------
</TABLE>
F-15
<PAGE>
NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT (Continued)
As of December 31, 1999 the future minimum principal debt payments and lease
payments under capital leases are as follows:
ICCMIC Capital
Year ending December 31, Loan(a) Leases
- ------------------------- -------------- --------------
2000 $ 14,150,000 $ 890,532
2001 - 502,591
-------------- --------------
$ 14,150,000
--------------
Total 1,393,123
Less: Amounts representing interest costs 114,068
--------------
Net present values 1,279,055
Less: Capital lease obligations included in short-term debt 1,248,282
--------------
Long-term capital lease obligations $ 30,773
==============
(a) The Company funded the cash portion of the Gedco Acquisition purchase
price and transaction fees and expenses with $12.5 million of mortgage
financing from Imperial Credit Commercial Mortgage Investment Corp
("ICCMIC") (see Note 12). This note is due March 13, 2029 paid monthly
at an interest rate of 9.75%. In connection with the financing, the
Company issued ICCMIC and Imperial Capital Group LLC (an affiliate of
ICCMIC), an aggregate of 575,000 warrants immediately exercisable into
shares of Common Stock at an exercise price of $4.44. These warrants
were valued at $500,000 and accounted for as an original issue
discount. Additionally, the Company funded the cash portion of the
"Fox Acquisition" (see Note 12) with $1,000,000 of mortgage financing
from "ICCMIC." The note is due June 30, 2029 paid monthly at a rate of
10.28%.
On October 7, 1998, ICCMIC loaned the Company an additional $550,000, secured by
a first deed of trust on the Company's Legends in Concert Theater in Surfside
Beach, South Carolina. In connection with this additional financing, the Company
modified the Common Stock purchase warrant that the Company issued to ICCMIC on
March 13, 1998 (and the corresponding warrant agreement) by reducing the
exercise price of ICCMIC's 325,000 warrants to purchase shares of the Company's
Common Stock from $4.44 per share to $1.25 per share. The re-priced warrants
were valued at $145,000 and accounted for as an original issue discount. The
Company wrote off the remaining unamortized original value of the 325,000
warrants of $275,000.
F-16
<PAGE>
NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT (Continued)
During 1995, the Company conducted a private placement of debentures originally
due on August 31, 1997, (the "Original Debentures") with aggregate proceeds of
$1,989,064 (the "1995 Private Placement"). 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 (the "Exchange or Repurchase Offer"). 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).
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 credit 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.
F-17
<PAGE>
NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT (Continued)
Defaults Under Credit Facilities
As of October 7, 1998, the Company borrowed an aggregate of $14,150,000 from
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC"). While the
Company made its January, February and March 1999 payments under this loan after
the due date for those payments, no other payments under this loan have been
made to date. As a result of these delinquencies, the Company has incurred late
charges and default interest, which has not been paid. On November 5, 1999, we
received a formal demand from ICCMIC to pay them the sum of $16,163,305 , which
represented all of the indebtedness due ICCMIC as of that date. On November 12,
1999, ICCMIC filed a complaint against us in the District Court for Clark
County, Nevada, alleging, among other things, that we breached the guaranty. On
December 10, 1999, the Company agreed to allow the ICCMIC to obtain a judgment
against us for the amount of the guaranty, in return for a forbearance on the
collection of this judgment until March 31, 2000. The ICCMIC has extended the
date for collection on this judgment until May 1, 2000. On December 9, 1999,
ICCMIC obtained judgment of foreclosure against our subsidiaries, Fort Liberty,
Inc. and King Henry's, Inc., for the sale of the Fort Liberty Shopping Complex
and Wild Bill's Dinner Theater in Kissimmee, Florida and The King Henry's Feast
in Orlando, Florida. While the foreclosure sales on these properties were
originally scheduled for late January 2000, the ICCMIC has honored our request
to reschedule these foreclosure sale dates until May 2 and 3, 2000,
respectively.
As of March 31, 1999, On Stage had failed to pay off any part of the line of
credit with First Security and is in default under its terms. On April 29, 1999,
the Company received a notice of default under the line of credit from First
Security. Our default on the line of credit with First Security caused an
automatic default on our lease line with First Security Leasing due to a
cross-default provision contained in the line of credit. While the Company is
negotiating with First Security and First Security Leasing to convert the line
of credit and lease line into term loan facilities, there can be no assurance
that we will be successful in accomplishing this task. Additionally, on July 12,
1999, First Security Bank filed a complaint on behalf of First Security and
First Security Leasing against On Stage demanding repayment under the line of
credit and lease lines. While the Company is currently in settlement
negotiations with First Security Bank, this litigation will continue forward
until a formal agreement is reached.
On August 8, 1999, Wild Bill's California, Inc., On Stage's wholly-owned
subsidiary, received a Notice of Default and Election to Sell Under Deed of
Trust from ICCMIC on its Ground Lease for its Wild Bill's Wild West Extravaganza
production in Buena Park, California.
On May 28, 1999, we issued a press release announcing that we had received
notice of default from Imperial Credit. The notice of default was received
May 24, 1999. We are currently negotiating with Imperial Credit to cure the
default through a continuation of our restructuring to improve cash flow and a
restructuring of our debt. There can be no assurance that we will be able to
cure the default, effect an appropriate restructuring or develop an alternative
financing strategy.
On September 29, 1997, First Security Leasing Company, a Utah corporation,
approved On Stage for $1,000,000 lease line of credit. Advances under the lease
line incur interest at a rate of 9.75% per annum. The lease line has been
utilized in the following amounts: $389,290, $442,997 and $167,713 commencing in
April 1998 and May 1998, respectively, and terminating on October 2001,
September 2001 and November 2001. We also received a notice of default under
this lease line on April 29, 1999.
On July 12, 1999, First Security Bank filed a complaint on behalf of First
Security and first Security Leasing against On Stage demanding repayment under
the line of credit and lease lines. We filed an Answer to the complaint and
commenced settlement negotiations with First Security Bank. These settlement
discussions led to the execution of a Litigation Forbearance Agreement on
December 13, 1999. Under this agreement, we agreed to grant First Security Bank
an additional security interest in all of our personal property and pay them the
sum of $50,000 per month toward repayment on the line of credit and lease line,
in exchange for a 120-day forbearance period. On April 7, 2000, we received a
letter from First Security Bank reminding us that the forbearance agreement
expires on April 10, 2000 and requesting that we submit a further settlement
plan, along with other documents, on or before May 1, 2000. While we are
attempting to negotiate an extension of this forbearance agreement and/or
restructuring on the line of credit and lease line, there can be no assurance
that our attempts will be successful or that First Security Bank will not take
additional action to collect this debt.
F-18
<PAGE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases various offices, condominiums, warehouses and theaters under
operating leases ranging in monthly payments from $1,026 to $37,495. Rent and
lease expense included in cost of revenues for the years ended December 31, 1998
and 1999 was $1,301,771 and $1,248,961, respectively. Rent and lease expense
included in selling, general and administrative expense for the years ended
December 31, 1998 and 1999 was $323,048 and $268,870, respectively.
The total minimum rental commitment at December 31, 1999 is as follows:
Year ending December 31, Amount
-------------------------------- -------------
2000 $ 1,166,987
2001 1,048,471
2002 1,017,408
2003 547,420
2004 548,000
Thereafter 3,464,576
-------------
$ 7,792,862
==============
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.
The Company has employment agreements with certain executive officers and
employees, the terms of which originally expired at various dates through May,
2000 were cancelled in 1999 with the exception of John Stuart's contract. Such
agreements provide for minimum salary levels and incentive bonuses based on
prescribed formulas over their terms.
F-19
<PAGE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Aggregate commitments related to employment contracts are as follows:
Year ending December 31, Amount
- --------------------------------- -------------
2000 $ 140,000
=============
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 ending December 31, 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.
NOTE 5 - STOCKHOLDER'S EQUITY
On May 28, 1998, Silver State Property Management, a Nevada corporation, Roger
A. Bergmann Enterprises, a Nevada corporation, and R.E. Lyle Corp., a Nevada
corporation filed a complaint in the Second Judicial District Court of the State
of Nevada, County of Washoe, alleging, among other things, that John W. Stuart,
acting as an agent, chairman of the board and chief executive officer of On
Stage, breached an alleged oral agreement in this litigation, pursuant to which
the Plaintiff's agreed to dismiss the lawsuit in exchange for a payment plan
which in the aggregate totals $350,000. The Company paid $50,000 upon execution
of the settlement and agreed to make two (2) additional payments of $150,000
within the next year. Mr. Stuart personally guaranteed the Company's payment of
the settlement amount, pledged his own real property as security therefore and
agreed to forego any counterclaim he may have personally had against the
Plaintiffs. In consideration for his guaranty, pledge of real property and
agreement to waive his rights against the Plaintiffs, the Company granted Mr.
Stuart 250,000 shares and agreed to grant an additional amount. Since On Stage
failed to make required $150,000 payment to the Plaintiff's in a timely manner,
the Plaintiff's executed on Mr. Stuart's real property in satisfaction of this
$150,000 payment.
F-20
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
Stock Split
On March 18, 1997, the Company effectuated a 1 for 1.814967 reverse stock split
of the Compan'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.
DY/DX Corp. Common Stock Purchase Agreement
On October 2, 1998, the Company entered into a stock purchase agreement with
DY/DX Corp., an Illinois corporation, to sell up to 500,000 shares of the
Company's common stock at an aggregate purchase price of $500,000. As of
December 31, 1998, DY/DX Corp. had purchased 55,000 shares of the Company's
common stock pursuant to this agreement.
Warrants Converted to Common Stock
In connection with the closing of the DYDX Loan and subsequent extensions (see
Note 3), 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.
F-21
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
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.
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.
F-22
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
Except as the Committee may determine with respect to NQSOs, if the holder of an
option granted under the Option Plan ceases to be an employee, options granted
to such holder shall terminate three months (12 months if the termination is a
result of the death or disability of the employee) from the date of termination
of employment and shall be exercisable as to only those options exercisable as
of the date of termination.
In March 1996, the Company hired a new President and Chief Operating Officer
(the "President"). As part of the new President's employment agreement, the
Company granted him options to purchase 311,300 shares of the Company's common
stock. The President has elected to classify 75,132 of the options as ISOs which
vest in three equal annual installments commencing on the date of the grant. The
remaining 236,168 are to be classified as NQSOs, of which one-half vest
immediately, one-quarter vest on the first anniversary of the grant date, and
the balance vest on the second anniversary of such grant. The exercise price of
all of the President's stock options is $3.99 per share, which 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 April 1999, the CFO was granted 140,000 new stock options by canceling his
old options.
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.
In June 1998, the Company increased its number of shares of common stock
reserved for issuance pursuant to the exercise of options under the option Plan
from 765,000 to 1,400,000 options.
In 1999, John Stuart loaned the Company $300,000. In consideration for this
loan, the Company issued warrants to purchase 300,000 shares of common stock at
a price of $1.00 per share.
F-23
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
The option and warrant activity during the years ended December 31, 1998 and
1999 is as follows:
<TABLE>
Weighted
Number of Average
Options and Exercise
Warrants Price
-------------- ------------
<S> <C> <C>
Options and warrants outstanding at December 31, 1997 $ 2,797,938 $ 5.52
Granted 1,399,511 2.33
Canceled (576,188) (4.31)
-------------- ------------
Options and warrants outstanding at December 31, 1998 3,621,261 3.90
Granted 1,431,488 1.31
Canceled (166,994) (2.07)
-------------- ------------
Options and warrants outstanding at December 31, 1999 $ 4,885,755 $ 3.14
============== ============
Options and warrants exercisable at December 31, 1999 $ 4,802,755 $ 3.20
============== ============
</TABLE>
Information relating to stock options and warrants at December 31, 1999
summarized by exercise price are as follows:
<TABLE>
Exercise Outstanding Exercisable
----------------------------------- -----------------------------------
Price Weighed Average Weighted Average
--------------------------------------------------- -----------------------------------
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
--------------- ------------ ----------------- ----------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
1.00 602,500 6.0 $ 1.00 602,500 $ 1.00
1.25 325,000 3.2 1.25 325,000 1.25
1.50 1,335,788 6.0 1.50 1,315,788 1.50
4.38 75,000 8.5 4.38 25,000 4.38
4.44 250,000 3.2 4.44 250,000 4.44
5.00 220,467 6.3 5.00 207,467 5.00
5.50 1,822,500 2.6 5.50 1,822,500 5.50
8.25 114,500 2.7 8.25 114,500 8.25
9.08 140,000 2.7 9.08 140,000 9.08
-------------- --------------- ----------------- ------------- ------------------
Total 4,885,755 4.3 $ 3.14 4,802,755 $ 3.20
-------------- --------------- ------------------- ------------- -----------------
</TABLE>
F-24
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
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 loss and loss per share for the years ended December 31,
1998 and 1999 would have been reduced to the pro forma amounts presented below:
1998 1999
------------- -------------
Net loss
As reported $ (4,870,989) $ (2,090,339)
Pro forma $ (5,374,773) $ (2,530,546)
Basic and diluted loss per share
As reported $ (0.68) $ (.29)
Pro forma $ (0.75) $ (.35)
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 1997, expected life of 10 years: expected volatility of 38.06%, risk-free
interest rates of 6.0%, and a 0% dividend yield. The fair value was calculated
in 1999 using the following assumptions: expected life of 10 years, expected
volatility of 16.34%, risk-free interest rates of 6%, and a 0% dividend yield.
The weighted average fair value at date of grant for options granted during 1998
and 1999 approximated $0.87 and $.69 per option, respectively.
Due to the fact that the Compan'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.
NOTE 6 - SIGNIFICANT VENUES AND CONCENTRATION OF CREDIT RISK
Revenues from certain venues comprised 10% or more of total revenues. The
following table shows the percentage of revenues of these venues to total
revenues.
Years ended December 31,
----------------------------
1998 1999
------------ ----------
Venue A 12% 13%
Venue B 15 13
Venue C 6 10
Venue D 11 12
------------ ----------
44% 48%
============ ==========
F-25
<PAGE>
NOTE 7 - NOTES RECEIVABLE FROM OFFICERS
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. As of
December 31, 1998, the amount due from the Chief Executive Officer was $8,306.
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.
During 1998, the Company advanced $63,213 to an officer of the Company. This
advance is payable April 12, 1999 and bears interest at 8%. For the year ended
December 31, 1998, $3,803 of interest was accrued and added to the balance of
the advance. The note is secured by the officer's 40,532 shares of common stock.
In April 1999, the Company extended the maturity date of the note to
December 31, 1999.
On April 16, 1999, Mr. Sidhu sold Mr. Stuart 40,532 shares of common stock. In
exchange, Mr. Stuart agreed to assume Mr. Sidhu's $60,798 note in favor of
On Stage, with recourse only to the 40,532 shares of common stock purchased from
Mr. Sidhu. Mr. Sidhu executed a new promissory note in favor of On Stage in the
principal amount of $7,472, which was subsequently forgiven as part of Mr.
Sidhu's employment restructuring.
NOTE 8 - EXPENSES AT DISCONTINUED LOCATION
The Company decided to close its Legends production in Daytona Beach on December
31, 1997. In 1998 the Company wrote off $443,096 in net assets. The Company has
plans to transfer all the remaining furniture and equipment at the Daytona Beach
facility to other locations which have performances in 1999.
The Company's Legends in Concert production opened at the Sheraton Centre
Toronto Hotel in May 1997. This Legends production did not prove to be
successful and was discontinued in April 1999 after generating an operating loss
of $717,000 for the year ended December 31, 1998 and $264,000 for the four
months ended April 1999. At December 31, 1998, On Stage had an impairment of net
assets associated with the Toronto show and wrote off net assets of $409,000.
The Company also expensed $426,954 in 1999 related to the closing of this
location.
F-26
<PAGE>
NOTE 9 - INTEREST EXPENSE
Interest expense was approximately $2,880,000 for year ended December 31, 1999
compared to $1,555,000 for the year ended December 31, 1998, an increase of
$1,325,000 or 85.2%. The increase was primarily due to additional debt incurred
for the Gedco and Fox Family Acquisitions.
NOTE 10 - OTHER INCOME
In 1999, certain invoices related to consulting and legal services were
discounted. This forgiveness of debt amounted to a net of $440,418 for the
period ended December 31, 1999.
NOTE 11 - INCOME TAXES
Income taxes in the statement of operations consists of the following:
1998 1999
------------ -----------
Current
Federal $ - $ -
State - -
------------ -----------
$ - $ -
============ ===========
Deferred taxes are as follows:
Years ended December 31,
----------------------------
1998 1999
------------- ------------
Deferred tax assets
Litigation accrual $ 74,480 $ -
Allowance for doubtful accounts 94,872 97,912
Impairment loss 155,464 -
Start-up costs 222,938 -
Net operating loss carryforward 2,399,773 3,764,806
------------- ------------
Total deferred tax assets 2,947,527 3,862,718
Less: valuation allowance (2,947,527) (3,862,718)
------------- ------------
$ - $ -
============= ============
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,
-----------------------------
1998 1999
------------ ------------
U.S. Federal statutory rate applied
to pretax income (loss) $ (1,641,139) $ (710,715)
Permanent differences 144,149 (8,103)
State income taxes, net of Federal benefit - -
Tax effect of unrecognized net operating
loss carryforward 1,496,990 718,819
------------ ------------
$ - $ -
============ ============
F-27
<PAGE>
NOTE 11 - INCOME TAXES (Continued)
At December 31, 1998, the Company had Federal net operating loss carryforwards
of approximately $9,907,384, which expire in 2018. 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.
NOTE 12 - BUSINESS ACQUISITIONS
Interactive Events, Inc. Purchase and Re-Conveyance
On November 1, 1996, On Stage entered into Common Stock Purchase Agreement with
Interactive Events, Inc. under this agreement to which Interactive sold all of
its assets to On Stage in exchange for an aggregate of 30,304 shares of
On Stage's common stock. Additionally, Richard S. Kanfer, President of
Interactive, agreed to join On Stage as its Vice President of Sales. On Stage
recorded $129,180 as the excess of the purchase price over the net assets
acquired, which was being amortized over ten years. At December 31, 1998,
On Stage determined there was an impairment in the value of the excess of the
purchase price over the net assets acquired in connection with the Interactive
purchase and wrote off the remaining unamortized balance of $102,131.
On February 23, 1999, On Stage entered into a Common Stock Purchase Agreement
with Kanfer, under which the parties agreed to rescind the Interactive
acquisition. Under the terms of the repurchase, On Stage reconveyed all of the
assets of Interactive to Kanfer, in consideration for the reconveyance by Kanfer
of 30,304 shares of On Stage's common stock valued at $1.125 per share, along
with the cancellation of a non-plan option to purchase 15,000 shares of common
stock and incentive stock options to purchase 19,835 shares of common stock at a
price of $5.00 per share. In addition, the parties agreed to release one another
from any liability arising out of the Interactive acquisition and any claim
relating to Kanfer's subsequent employment with us. On Stage and Kanfer also
entered into an exclusive right of representation agreement in February 1999,
under which we granted to Kanfer the right to represent our Legends production
in designated areas in consideration of a portion of the gross proceeds
generated.
Gedco USA, Inc. Acquisition
On March 13, 1998, the Company completed its acquisition of certain assets from
Gedco USA, and its affiliates for a purchase price of $14,000,000, consisting of
$11,500,000 in cash and 595,238 shares of common stock valued at $2,500,000 (the
"Gedco Acquisition").
Included in the Gedco Acquisition were substantially all of the income producing
assets and associated real property of Orlando Entertains and LA Entertains,
consisting of King Henry's Feast, Blazing Pianos piano bar, the Fort Liberty
shopping complex that includes a Wild Bill's Dinner Theater, each of which is
located in greater Orlando, Florida, and a second Wild Bill's Dinner Theater
located in Buena Park, California. Gerard O'Riordan, President of Gedco USA,
Inc., joined the Company as President of On Stage Theaters, Inc., a wholly
subsidiary of the Company that manages the acquired dinner theaters and piano
bar as well as other selected theaters.
F-28
<PAGE>
NOTE 12 - BUSINESS ACQUISITIONS (Continued)
The Company funded the cash portion of the purchase price and transaction fees
and expenses with $12.5 million of mortgage financing from Imperial Credit
Commercial Mortgage Investment Corp. ("ICCMIC") (see Note 3).
On May 27, 1999, Hanover Restaurants, Inc. returned 595,238 shares of On Stage
common stock originally issued to Hanover in connection with the Gedco asset
acquisition. The Hanover Shares were returned to On Stage under the terms of a
Mutual Release and Settlement Agreement, which was entered with Gedco as a
result of a dispute that arose in connection with the Gedco asset acquisition.
In exchange for the stock at a purchase price of $1.50; and (2) released its
claim to approximately $925,000 which was being held in escrow as security for
those representations and warranties made by Gedco representatives in connection
with the Gedco asset acquisition..
The components of the purchase price and its allocation to the assets and
liabilities as of March 13, 1998 are as follows:
Amount
--------------
Purchase price:
Liabilities assumed $ 986,044
Issuance of 595,238 restricted shares of common stock 2,500,000
--------------
3,486,044
--------------
Cost of acquisition incurred 1,645,874
Cash paid 11,500,000
--------------
$16,631,918
==============
Cash paid for the purchase of Gedco, USA, Inc. net of cash received is as
follows:
Amount
--------------
Cash paid to sellers $ 11,500,000
Acquisition costs 1,645,874
--------------
13,145,874
Less cash received (383,444)
--------------
$ 12,762,430
==============
The costs of acquisition increased primarily relates to the lenders origination
fee of $750,000, legal fees of $240,000, financing fees of $100,000, recording
fees of $100,000, and accounting fees of $125,000.
F-29
<PAGE>
NOTE 12 - BUSINESS ACQUISITIONS (Continued)
The acquisition was accounted for as a purchase and the assets acquired were
recorded at a fair market value. The building and equipment are being
depreciated over twenty and three years, respectively, under the straight-line
method. The costs of acquisition incurred primarily relates to the lenders
origination fee of $750,000, legal fees of $240,000, financing fees of $100,000,
recording fees of $100,000, and accounting fees of $125,000. The allocation of
the purchase price was as follows:
Amount
--------------
Cash $ 383,444
Inventory 120,084
Prepaid expenses 157,516
Land 11,275,507
Building 3,214,740
Equipment 730,627
Deferred financing acquisition expenses 750,000
--------------
Deferred financing acquisition expenses $ 16,631,918
==============
The assets acquired and liabilities assumed were transferred to either the
Company's wholly-owned subsidiary, On Stage Theaters, Inc., or wholly owned
subsidiaries of On Stage Theaters, Inc., concurrent with the acquisition.
The Gedco acquisition was accounted for as a purchase and the operations of
Gedco are included in the Company's operations as of the date of the
acquisition.
On October 1, 1999, On Stage and two of our wholly-owned subsidiaries,
Fort Liberty, Inc. and King Henry's Inc., each received a notice of default and
demand for payment of rents collected from our Wild Bill's Wild West
Extravaganza production and Fort Liberty Retail Shopping Complex in Kissimmee,
Florida and our King Henry's Feast production in Orlando, Florida.
The unaudited pro forma results of operations presented below reflect the
Company's operations as though the acquisition had taken place at the beginning
of each period presented. The pro forma results have been prepared for
comparative purposes only, and are not necessarily indicative of what the actual
result of operations would have been had such acquisitions occurred at the
beginning of the periods presented, or what results of operations will be in the
future.
Year ended
December 31,
1998
----------------
Revenues $ 30,328,361
Operating income (loss) (3,003,214)
Net loss (4,758,688)
Basic and diluted loss per share (0.65)
Basic and diluted average number of common shares
outstanding 7,307,062
F-30
<PAGE>
NOTE 12 - BUSINESS ACQUISITIONS (Continued)
Calvin Gilmore Productions, Inc.
On June 30, 1998, the Company completed its acquisition of certain assets from
Calvin Gilmore Productions, Inc. ("CGP"), an affiliate of Fox Family Worldwide,
for a purchase price of $1,000,000 in cash and 206,612 shares of common stock
valued at $723,142 (the "Fox Acquisition").
Included in the Fox Acquisition were substantially all of CGP's income producing
assets and associated real and personal property in the greater Myrtle Beach,
South Carolina area, consisting of the fee simple purchase of The Surfside Beach
Theater, which the Company had leased from CGP for its presentation of its
flagship Legends in Concert production since 1995, and a leasehold interest in
The Eddie Miles Theater.
The Company funded the cash portion of the purchase price and transaction fees
and expenses with $1,100,000 million of mortgage financing from ICCMIC (see Note
3).
NOTE 13 - IMPAIRMENT OF TORONTO ASSETS
The Company decided to close its Legends production in Toronto, Canada on
December 31, 1998. As part of the restructuring, the Company had an impairment
of net assets and wrote off net assets of $409,000.
NOTE 14 - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131, which
was adopted by the Company in the fourth quarter of 1998.
The Company derives its net revenues from five reportable segments:
o Casinos. The Casinos segment primarily sells live theatrical
productions to casinos worldwide for a fixed fee. In addition, this
Casinos segment also operates our Legends show at the Imperial Palace
in Las Vegas, Nevada and Biloxi, Mississippi and at Bally's Park Place
in Atlantic City, New Jersey.
o Theaters. The Theaters segment owns and /or rents live theaters and
dinner theaters in urban and resort tourist locations primarily in the
United States. This Theaters segment derives revenues from the sale of
tickets along with food and beverages to patrons who attend our live
theatrical productions.
o Production Services. The Production Services segment sells technical
equipment and services to commercial clients. However, the Production
Services segment's primary focus is to provide technical support for
all of the Casinos, Theaters, Events and Merchandise segments.
o Merchandise. The Merchandise segment sells merchandise and souvenir
photography products to patrons who attend our Casinos, Theaters, and
Events productions. Revenues generated from the merchandising segment
are included in the Theaters segment.
o Events. The Events segment sells live theatrical productions to
commercial clients, which include corporations, theme and amusement
parks and cruise lines for a fixed fee. Revenues generated from the
Events segment are included in the Casinos segment.
The accounting policies of the reportable operating segments are the same as
those described in the Summary of Accounting Policies. The Company's management
evaluates the performance of its operating segments based upon the profit or
loss from operations.
F-31
<PAGE>
NOTE 14 - SEGMENT INFORMATION (Continued)
The Company's reportable segments are strategic business units because each
business unit services a different market or performs a specialized function in
support of a given market.
The following table sets forth the segment profit/(loss) and asset information:
<TABLE>
Year Ended December 31, 1999
--------------------------------------------------------------------------------------
Casinos Production Corporate Total
Entertainment Services Theaters Office Consolidation
------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues from external customer $ 10,006,642 $ 103,896 $ 18,438,104 $ - $ 28,548,642
Interest expense 84 1,123 2,648,061 230,359 2,879,627
Depreciation and amortization 401,664 90,239 559,335 192,910 1,244,148
Segment profit (loss) 2,328,150 (666,594) (1,622,340) (2,129,555) (2,090,339)
Segment assets 3,226,262 861,265 16,538,994 1,856,045 22,482,566
Additions to long-lived assets 165,061 18,229 3,419 8,272 194,982
</TABLE>
<TABLE>
Year Ended December 31, 1998
---------------------------------------------------------------------------------------
Casinos Production Corporate Total
Entertainment Services Theaters Office Consolidation
--------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues from external customer $ 9,522,739 $ 71,589 $ 18,253,148 $ - $ 27,847,476
Interest expense 3,522 - 1,412,116 139,239 1,554,877
Depreciation and amortization 409,234 44,704 1,086,824 265,764 1,806,526
Segment profit (loss) 1,499,493 (494,607) (2,055,408) (3,820,467) (4,870,989)
Segment assets 3,033,466 775,130 18,393,505 1,887,118 24,089,219
Additions to long-lived assets 589,054 60,001 577,602 866,678 2,093,335
</TABLE>
F-32
<PAGE>
NOTE 15 - SUBSEQUENT EVENTS
Wild Bill's California Ground Lease
On February 18, 2000, Spiegel Enterprises, the ground lessor of the Wild Bill's
Dinner Theater in Buena Park, California, filed a complaint against On Stage and
its wholly-owned subsidiary, Wild Bill's California, Inc., in the Superior Court
of the State of California for the County of Los Angeles alleging, among other
counts, that Wild Bill's breached its Ground Lease with Spiegel Enterprises. On
March 15, 2000, this complaint was dismissed without prejudice, pursuant to the
terms of a settlement agreement reached by and between Wild Bill's California,
Inc. and Spiegel Enterprises on February 23, 2000.
Status of Foreclosure Sale for King Henry's Feast Theater in Orlando, Florida
On January 24, 2000, On Stage reached an agreement with its Mortgage Lender to
extend the foreclosure sale date on the King Henry's Feast Theater in Orlando,
Florida from January 26, 2000 until March 8, 2000. On March 7, 2000, On Stage
reached an agreement with its Mortgage Lender to extend the foreclosure sale
date on the King Henry's Feast Theater from March 7, 2000 until April 5, 2000.
On March 30, 2000, On Stage reached an agreement with its Mortgage Lender to
extend the foreclosure sale date on the King Henry's Feast Theater from April 4,
2000 until May 3, 2000.
Status of Foreclosure Sale for Fort Liberty Shopping Complex/Wild Bill's Dinner
Theater Extravaganza in Kissimmee, Florida
On January 25, 2000, On Stage reached an agreement with its Mortgage Lender to
extend the foreclosure sale date on the Fort Liberty Shopping Complex/Wild
Bill's Dinner Theater Extravaganza in Kissimmee, Florida from January 25, 2000
until March 7, 2000. On March 7, 2000, On Stage reached an agreement with its
Mortgage Lender to extend the foreclosure sale date on the Fort Liberty property
from March 7, 2000 until April 4, 2000. On March 30, 2000, On Stage reached an
agreement with its Mortgage Lender to extend the foreclosure sale date on the
Fort Liberty property from April 4, 2000 until May 2, 2000.
Status of Foreclosure Sale for Legends Family Theater in Surfside Beach, South
Carolina
On February 1, 2000, On Stage reached an agreement with its Mortgage Lender to
extend the foreclosure sale date on the Legends Family Theater in Surfside
Beach, South Carolina from February 7, 2000 until March 6, 2000. On March 3,
2000, On Stage reached an agreement with its Mortgage Lender to extend the
foreclosure sale date on the Legends Family Theater from March 6, 2000 until
April 3, 2000. On March 30, 2000, On Stage reached an agreement with its
Mortgage Lender to extend the foreclosure sale date on the Legends Family
Theater from April 3, 2000 until May, 2000.
Appeal of Judgment
On February 24, 2000, oral arguments were heard on the appeal of the $14,955
judgment awarded against On Stage in the United States Bankruptcy Court for the
District of Nevada. No decision has been rendered to date on this appeal.
F-33
<PAGE>
NOTE 15 - SUBSEQUENT EVENTS (Continued)
Status of Execution of Nevada Judgment
On March 30, 2000, On Stage reached an agreement with its Mortgage Lender to
extend the date which the Mortgage Lender had previously agreed to forego
collection efforts on the Nevada judgment, which was set to expire on March 31,
2000, until May 1, 2000.
Status of First Security Bank Forbearance Agreement
The Forebearance Agreement with First Security Bank expired on April 10, 2000 by
its own terms. On April 7, 2000, we received a letter from First Security Bank
requesting that we submit a further settlement plan, along with other documents,
on or before May 1, 2000. On Stage is currently preparing a settlement plan for
First Security Bank.
F-34
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
On Stage Entertainment, Inc.
4625 West Nevso Drive
Las Vegas, Nevada 89103
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (file number 333-56285) of our report dated April 13, 2000
relating to the consolidated fianncial statements of On Stage Entertainment,
Inc. appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Los Angeles, California
April 15, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements set forth in the Form 10KSB of On Stage Entertainment, Inc.
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001035514
<NAME> On Stage Entertainment, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 375
<SECURITIES> 0
<RECEIVABLES> 1250
<ALLOWANCES> 0
<INVENTORY> 235
<CURRENT-ASSETS> 2413
<PP&E> 23721
<DEPRECIATION> 5176
<TOTAL-ASSETS> 22483
<CURRENT-LIABILITIES> 21240
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 1141
<TOTAL-LIABILITY-AND-EQUITY> 22483
<SALES> 28549
<TOTAL-REVENUES> 28549
<CGS> 12921
<TOTAL-COSTS> 22177
<OTHER-EXPENSES> 6023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2880
<INCOME-PRETAX> (2090)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2090)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2090)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
