SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PLANET ENTERTAINMENT CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN CHARTER)
FLORIDA 33-0471728
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
222 HIGHWAY 35
POST OFFICE BOX 4085
MIDDLETOWN, NEW JERSEY 07748
(732) 530-8819
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN S. ARNONE
222 HIGHWAY 35
POST OFFICE BOX 4085
MIDDLETOWN, NEW JERSEY 07748
(732) 530-8819
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
JOHN B.M. FROHLING, ESQUIRE
FROHLING, HUDAK & MCCARTHY
425 EAGLE ROCK AVENUE
ROSELAND, NEW JERSEY 07068
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each Proposed Maximum Proposed Maximum
Class of securities Amount To Offering Price Aggregate Offering Registration
Be Registered (1)(2) Registered Per Unit Price Fee
- -------------------- ---------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock, .001 par value 1,441,336 $ 5.85 $8,431,815.56 $2,487.59
</TABLE>
(1) The Shares are offered at prices not presently determinable. The offering
price is estimated pursuant to the provisions of Rule 457 solely for the purpose
of calculating the registration fee based on the average bid and ask price for
the Company's Common Stock on September 23, 1998, which was $5.85 per share.
(2) The exact number of shares issuable upon conversion of the Series A
Convertible Preferred Stock is not presently determinable. The Company will rely
on Rule 416 to cover any additional shares that are ultimately issuable upon
such conversion.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH
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DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1998
PROSPECTUS
[LOGO]
PLANET ENTERTAINMENT CORPORATION
1,441,336 SHARES
COMMON STOCK
$.001 PAR VALUE
ITEM 1.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT").
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
This Prospectus relates to 1,441,336 shares (the "Shares") of common
stock, $.001 par value (the "Common Stock"), of Planet Entertainment
Corporation, a Florida corporation ("Planet", the "Company", the "Small Business
Issuer" or the "Registrant"). This Prospectus is filed with the United States
Securities and Exchange Commission (the "Commission" or the "SEC") and relates
to
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a Registration Statement on Form SB-2 (the "Registration Statement") also filed
with the SEC. The Shares will be outstanding shares of Common Stock acquired
upon exercise of warrants or the conversion of convertible Preferred Stock,
owned by the persons named in this Prospectus under the caption "SELLING
STOCKHOLDERS" or by pledges, donees, transferees or other successors in interest
and permitted assigns of such selling stockholders (the "Selling Stockholders").
The Shares were or will be acquired by the Selling Stockholders upon the
conversion of convertible Preferred Stock ("Preferred Stock") held by certain of
the Selling Stockholders and the exercise of warrants ("Warrants") by certain of
the Selling Stockholders. The Preferred Stock and Warrants were exempt from the
registration provisions of the Securities Act. This Prospectus relates to
1,216,336 shares of Common Stock issuable upon conversion of the Preferred
Stock, taking into consideration adjustments of the conversion price and the
requirements of the Preferred Stock Purchase Agreement documents, and 225,000
shares of Common Stock issuable upon exercise of the Warrants. The Preferred
Stock and Warrants were issued in June 1998. The Preferred Stock is convertible
at any time into shares of Common Stock at the lower of a designated conversion
price (a) $8.885 per share, or (b)78% multiplied by the average of the five
lowest per share market prices of the Company's Common Stock during ten trading
days immediately proceeding notice of conversion, which as of September 15, 1998
was $4.11 per share or otherwise adjusted according to the terms of certain
agreements. (See "SELLING STOCKHOLDERS").
The Company will not receive any of the proceeds from the sale of the
Shares; however, in consideration of issuing the Preferred Stock and Warrants,
the Company received net proceeds of $4,475,000 which was or is intended to be
used for working capital acquisitions expansion of its principal lines of
business and other general corporate purposes. The weighted average exercise
price of the outstanding Warrants is approximately $9.625, the exercise of which
would result in the issuance of 225,000 shares of Common Stock, which are
currently outstanding. If all of the Warrants were exercised, and assuming it is
not a cashless exercise, the Company would receive aggregate proceeds of
approximately $2,165,625.
The Company has not made any underwriting arrangements with respect to
the Shares. The Common Stock is traded on the over the counter ("OTC")
electronic bulletin board maintained by the National Association of Securities
Dealers (the "Bulletin Board") under the symbol "PNEC". On September 23, 1998,
the closing bid and asked prices of the Common Stock as reported on the OTC
Bulletin Board were $5.75 and $5.94, respectively.
This Prospectus is to be used without limitation in connection with the
sale of the Shares from time to time by the Selling Stockholders. The Shares may
be sold from time to time by the Selling Stockholders, directly or through
underwriters, dealers or agents, in market transactions on the OTC Bulletin
Board, on any other national securities exchange or automated quotation system
on which the Common Stock may be listed or traded, including block trades or
ordinary brokers transactions or in privately negotiated transactions. The price
at which any of the Shares may be sold, and the commissions, if any, paid in
connection with any sale, may be privately negotiated, may be based on then
prevailing market prices and may vary from transaction to transaction and as a
result are not currently known. (See "PLAN OF DISTRIBUTION").
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The Selling Stockholders and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the 1933 Act, and any commissions or discounts given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
1933 Act. The Shares have not been registered for sale by the Selling
Stockholders under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Shares should
confirm the registration thereof under the securities laws of the states in
which transactions occur or the existence of any exemption from registration.
The Company will pay certain of the legal and other expenses of this
offering (estimated to be approximately $15,000), except that the Selling
Stockholders will bear the cost of any brokerage commissions or discounts or
other selling expenses incurred by the Selling Stockholders in connection with
the sale of their Shares. The Company has agreed to indemnify the Selling
Stockholders against certain liabilities, including liabilities arising under
the Securities Act. (See "PLAN OF DISTRIBUTION".)
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained, or incorporated by
reference, in this Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or the Selling Stockholders. This Prospectus does not constitute an offer to
sell or the solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Company since such date.
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. (SEE "RISK FACTORS").
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 25, 1998.
ITEM 2. AVAILABLE INFORMATION
This Prospectus constitutes a part of the Registration Statement filed
by the Company with the U.S. Securities and Exchange Commission (the
"Commission") under the Securities Act
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with respect to the Shares offered hereby. In accordance with the rules and
regulations of the Commission, this Prospectus omits certain of the information
contained in the Registration Statement. Reference is hereby made to the
Registration Statement and related exhibits for further information with respect
to the Company and the Company's Common Stock. Statements contained herein
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
The Company has not filed any documents or reports pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act before the date of this
Prospectus. On September 23, 1998, the Company filed a Registration Form 10-SB
with the Commission. This Form 10-SB has not been declared effective and until
such time as the Form 10-SB is declared effective, the Company is not required
to file reports with the Commission under the Exchange Act. Upon the effective
date of the Form 10-SB, the Company is required to file with the Commission
reports, proxy statements and other information under the Exchange Act
commencing with its next succeeding fiscal year. The Company has not filed an
annual report on Form 10-KSB with the Commission for fiscal year 1997, but the
Company intends to provide audited financial statements to its stockholders, in
anticipation of the annual meeting of stockholders scheduled to be held October
19, 1998. With respect to fiscal years in which the Company is required to file
an annual report with the Commission, the Company will furnish annual reports to
its stockholders which include audited financial statements. The audited
financial statements to be available to stockholders are reported on by its
independent auditors. A quarterly report containing unaudited condensed
financial information for the first two quarters of 1998 are also available. The
Company will also furnish such other reports from time to time as it may
determine or as may be required by law.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all the documents referenced herein,
other than exhibits to such documents unless such exhibits are specifically
incorporated by reference in such documents, and any other documents
specifically referenced herein or in the Registration Statement to which this
Prospectus relates or into such other documents. Requests should be addressed
to: Planet Entertainment Corporation, 222 Highway 35, Middletown, New Jersey
07748 (732) 530-8819.
Reports and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of
the SEC at Seven World Trade Center, Suite 1300, New York, New York and at Suite
1400, 500 West Madison Street, Chicago, Illinois. Copies of such information can
be obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
Filings with the Commission made by the Company electronically through
the EDGAR system, such as the Registration Statement and the Form 10-SB
(including certain exhibits),
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are also available on the Commission's site on the World Wide Web, by pointing a
browser to (http://www.sec.gov/cgi-bin/srch-edgar), inserting in the search box
the phrase "Planet Entertainment Corporation" and selecting the documents
identified under "Company name" as "Planet Entertainment Corporation"
The Company's executive offices are located at 222 Highway 35,
Middletown, New Jersey 07748, and its telephone number is (732) 530-8819.
ITEM 3. SUMMARY OF PROSPECTUS AND RISK FACTORS
The Company was incorporated under the laws of the State of Delaware in
May 1996. On October 9, 1996, all of the outstanding capital stock of the
Company was acquired by Ampro International Golf Tour, Inc. ("Ampro"), a Florida
corporation, which as the surviving corporation, changed its name to Planet
Entertainment Corporation.
The Company is currently involved in various areas of the recorded
music industry. The Company's principal activities involve the acquisition,
licensing, production, marketing and distribution of high quality recorded music
in a variety of music formats: Compact Diskettes ("CDs"), video, CD-ROM and, to
a lesser extent, cassette tapes. The Company produces such types of music as
gospel, adult contemporary, reggae, top 40, blues, country, rap, rock,
instrumental, rock & roll, jazz, pop rock, classical, easy listening, big band,
rhythm & blues, and various ethnic folk music recordings.
The Company has acquired certain rights associated with approximately
15,000 music master recordings from existing music catalogues of recorded music.
The Company also records new artists. These master recordings are typically
stored on Digital Audio Tape ("DAT"). The Company, through its 48-track
recording studio and mastering facility in Chester, Pennsylvania, and its
24-track studio in Jackson, New Jersey, re-digitizes existing master recordings,
enhances these master recordings by removing certain impure sounds due to aging,
and re-compiles these recordings along with its recordings of new artists on
"glass master" CDs for mass production and distribution to its customers through
traditional and non-traditional distribution channels.
The Company's strategy has been to produce compilation CDs containing
enhanced or re-digitized master recordings from its existing library, to
contribute these compilation CDs to joint ventures involving the Company, and to
license these compilation CDs to third parties for marketing and sale by
unaffiliated distributors. (See "RECENT DEVELOPMENT OF BUSINESS"). To date,
however, substantially all the Company's revenues have been derived from studio
rental sales and from licensing royalties and not from the licensing or sale of
the Company's compilation CDs. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS"). In
September 1998, the Company entered into an agreement to purchase all of the
issued and outstanding capital stock of Northeast One Stop, Inc. ("NEOS"). NEOS
is principally engaged in the distribution of records and compact diskettes
through "one-stops" and "rack-jobbers." "One-stops" are centralized order
fulfillment centers for small to medium sized retail stores, typically record
stores, that obtain a wide-variety of recorded music in a variety of formats
from several
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independent producers at a stated price, or mark-up. "Rack-jobbers," typically
purchase and distribute recorded music through racks and kiosks in retail
stores, and encompass a narrower range of selection, typically from proprietary
sources for a stated percentage of sales, and often with the full right of
return. The Company's agreement to purchase NEOS is subject to the consent of
NEOS' secured creditor. The Company is unable to make any assurances that this
transaction will be consummated, or will be consummated on terms favorable to
the Company, or that, if consummated, the combined operations will be
profitable. (See "RECENT DEVELOPMENT OF BUSINESS"). The Company's strategy is,
however, pending completion of the acquisition of NEOS, and the completion of
its Website to permit the sale of the Company's products and other "front line"
titles over the Internet, to serve as its own fulfillment center. In addition,
the Company expects to distribute compilation CDs from the Company's proprietary
catalogue of existing master recordings through NEOS, at a lower cost to NEOS,
and thereby improve NEOS' gross profit margins while at the same time generating
increased revenues for the Company.
In June 1998, the Company authorized and issued 500 shares of 7% Series
A Convertible Preferred Stock to JNC Opportunity Fund Ltd. at a stated value of
$10,000 per share for a total of $5 million. Each share of the Preferred Stock
over a period of two years is convertible into the Company's Common Stock at the
lesser of (a) $8.885 per share, or (b) 78% multiplied by the average of the five
lowest per share market price of the Company's Common Stock during ten trading
days immediately preceding notice of conversion. In connection with this
transaction, the Company issued warrants to purchase 75,000 shares of the
Company's Common Stock to JNC Opportunity Fund Ltd. at a price of $9.625 per
share exercisable over a term of five years, and the Company also issued
warrants to purchase 150,000 shares of the Company's Common Stock to CDC
Consulting, Inc. at a price of $9.625 per share over a term of five years from
June 1998. As a result of this transaction, the Company received net proceeds of
approximately $4,475,000. Under the terms of the agreements entered into by the
Company in connection with this transaction (the "Preferred Stock Agreements"),
the Company was required to file a registration statement for 200% of the Common
Stock underlying the Preferred Shares, including payment of dividends thereon in
the form of Common Stock, at the conversion price of $8.885 per share, or 78%
multiplied by the average of the five lowest per share market prices of the
Company's Common Stock during ten trading days immediately preceding notice of
conversion, along with an additional 225,000 shares of common stock underlying
the warrants within 30 days of the Closing Date, and if such registration
statement was not declared effective within 95 days from the Closing Date or by
September 4, 1998, according to the Preferred Stock Agreements, the conversion
price will decrease by 2.5%. Each month thereafter the conversion price shall
decrease by 2.5%, and after the second month, the Preferred shareholder may
demand additional 2.5% cumulative discounts or the payment of 2.5% of the stated
value of the preferred shares each month until such registration statement
becomes effective. On September 23, 1998, the Company filed a registration
statement on SEC Form 10-SB.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating an investment in the Shares
offered by this Prospectus:
DEPENDENCE ON DISTRIBUTORS. The Company expects that a material portion
of its sales will continue to be made through unaffiliated distributors. If the
Company is not successful in signing distribution agreements with distributors,
its ability to sell its products may be materially adversely affected. In
addition, distributors generally offer products of several different companies,
including products that may compete with the Company's products. Typically,
agreements with distributors are terminable at will and at the termination of
any distributor's relationship with the Company may have a material adverse
effect on any future results of operations. In accordance with industry
practice, the Company's music products are sold on a 25% return basis. The
Company intends to establish reserves for returns of finished products in
accordance with industry standards. With the sale of finished products, and any
increase in returns, however, the Company's reserves could prove to be
inadequate and adversely affect the Company's results of operations as well as
profits. Moreover, there can be no assurance that the Company will be able to
generate sufficient revenues from successful releases to cover the costs of
unsuccessful releases.
POTENTIAL FOR INTERNET DISTRIBUTION OF THE COMPANY'S PRODUCTS. In
connection with securing the distribution of its products and the products of
others, the Company has expended, and will continue to expend, significant
capital resources to upgrade and enhance the Company's Internet website to
market and distribute its products over the Internet by making its enhanced
catalogue available for sale and downloading to consumers, in a variety of
compositions. The Company has completed the first stage of the development of
its Internet website, and through the final stage, is expected to complete the
design and development of its enhanced site within the second quarter of fiscal
1999. No assurances can be made however, that the Company will complete the
enhancement of its website or that such site will be functional in fiscal 1999.
The failure of the Company's website to be functional and permit the marketing,
ordering, and sale of the Company's products over the Internet may substantially
and adversely affect the Company's business prospects and its ability in the
future to expand and compete with other larger corporations, several of which
have significantly greater resources, such as N2K, Inc., CD Now, Inc. and K-Tel
Corporation, all of which currently sell, market and distribute their products
to consumers over the Internet. (See "COMPETITIVE BUSINESS CONDITIONS.")
The online commerce market is new, rapidly evolving and intensely
competitive, and the Company expects that competition will further intensify in
the future. Barriers to entry are minimal, and current and new competitors can
launch new sites at a relatively low cost. The Company competes and intends to
compete with a variety of companies, including (i) online vendors of music,
music videos and other related products, (ii) online vendors of movies, books
and other related products, (iii) online service providers which offer music
products directly to or in cooperation with other retailers, (iv) traditional
retailers of music products, including specialty music retailers, (v) other
retailers that offer music products, including mass merchandisers, superstores
and consumer electronic stores; and (vi) non-store retailers such as music
clubs. Many of these traditional retailers also support dedicated websites which
would compete directly with the Company.
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LACK OF SUFFICIENT CAPITAL RESOURCES. In June 1998, the Company
realized approximately $4.475 million in proceeds from the sale of shares of its
Preferred Stock (See "RECENT SALES OF UNREGISTERED SECURITIES"), and as of June
30, 1998, had current assets of approximately $4,758,013, current liabilities of
approximately $1,406,411, and working capital of approximately $3,351,602. In
September 1998, the Company entered into an Agreement to purchase all the issued
and outstanding common stock of a distributor of recorded music in consideration
of approximately $3 million and options to acquire 250,000 shares of the
Company's common stock over a period of two years from the date of closing, at a
price equal to the lessor of $5.25 or the closing bid price for the Company's
securities on the date of Closing. According to the terms of the Agreement, the
Company is required to pay $2,250,000 at the closing, and also issue two short
term interest free notes totaling $750,000, $375,000 of which is payable within
six months from the date of closing, and of which $375,000 is due one year from
the date of Closing. (See "POTENTIAL ACQUISITION".) In August 1998, the Company
acquired the right to the return of 1,400,000 shares of its Common Stock and the
outstanding principal portion of the Promissory Note together with accrued
interest from Gulf Coast Music, Inc. in exchange for approximately $175,000 in
cash and short term notes for approximately $2,850,000. (See "DISPUTED
INTELLECTUAL PROPERTY RIGHTS.") These transactions, if consummated, would result
in a significant depletion of the Company's capital resources. Together with the
Company's continued losses from operations, the Company may lack sufficient
capital resources to perform under these agreements, which may have a material
adverse impact on the Company, its business and business prospects if additional
capital or loans are not secured. (See "CONTINUED OPERATING LOSSES.")
DEPENDENCE ON SUPPLIERS, MANUFACTURERS, AND RAW MATERIALS.
Substantially all of the Company's products are manufactured by Denon
Interactive Media, a division of Nippon Columbia, Ltd. The Company has
identified several manufacturers located in the far east that are capable of
reproducing the Company's products at a reasonable cost but has not entered into
any other production contracts. The Company's business is, however, dependent on
certain raw materials in the form of blank compact diskettes, on which the
Company encodes its master recordings for sale to consumers and end users. Any
increase in the price of blank compact diskettes, or the unavailability of blank
compact diskettes in the marketplace may have a significant adverse impact on
the resale price of the Company's products, the Company's revenue, gross profit
margins, and the demand for the Company's products.
DEPENDENCE ON FEW MAJOR SOURCES AND CUSTOMERS. For the year ended
December 31, 1996, substantially all the Company's revenues were derived from
licensing royalties from one source, Black Tiger Records, a joint venture
between the Company and JAD/Anansi Records. In fiscal 1996, the Company
recognized revenue of approximately $105,000 as a result of the agreement with
JAD Records. In fiscal 1997, these amounts were reserved by the Company as
uncollectible and in June 1998, the Company assigned the collection of all
producer and publisher royalties collectible pursuant to the first agreement and
the second agreement to an unaffiliated third party. (See "RECENT
DEVELOPMENTS"). For the year ended December 31, 1997, approximately 50% of the
Company's sales and royalty revenue were generated from one customer, Multimedia
Industries Corporation ("MMIC"). One of the Company's executive officers and
directors, Joseph Venerri, is a principal
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shareholder and officer of MMIC, and Richard Bluestine, the Company's Chief
Financial Officer and a director, from June of 1995 through May of 1997, served
as an officer and director of MMIC and remains a stockholder of MMIC. (See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"). For the six months ended June
30, 1998, approximately 46% the Company's revenues were derived from studio
rental sales and approximately 52% of the Company's revenues were derived from
sales by the Company's Higher Ground Records subsidiary. No one customer
accounted for more than 10% of these sales.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The Company is dependent
upon several of its management and key personnel, including sound engineers,
technicians, marketing and management personnel. The Company is particularly
dependent on the continued services of its officers and directors, including
Wallace M. Giakas, its Chairman and Secretary, John S. Arnone, its President and
Chief Executive Officer, Joseph Venneri, its Executive Vice President, Richard
Bluestine, its Executive Vice-President and Chief Financial Officer, and will be
dependent on Louis J. Del Signore, the Chairman of Northeast One Stop, Inc.
("NEOS"), and Ron Nicks, the President and Chief Executive Officer of NEOS when
the acquisition by the Company of NEOS is consummated and they are elected
officers. With the exception of Richard Bluestine, the Company's Executive Vice
President and Chief Financial Officer, the Company has obtained employment
agreements with respect to each of the individuals shown above. In the event
that the Company does not offer continued employment to Mr. Bluestine, or is
unable to obtain the services of Mr. Bluestine on terms favorable to the
Company, the Company intends to hire a new Chief Financial Officer. In
connection with the employment of Messrs. Giakas, Arnone and Venneri, the
Company has obtained "key man" life insurance with respect to these individuals,
which in the event of their death, the first $500,000 in benefits from any such
insurance policy to be paid to the Company. (See "EXECUTIVE COMPENSATION" and
"EMPLOYMENT AGREEMENTS").
COMPETITIVE BUSINESS CONDITIONS. The Company's ability to succeed in
the future and to meet future competition in the pursuit of satisfying the
public's tastes will depend on its ability to attract talented new artists or
persons or companies who control existing valuable libraries of master
recordings as well as the appeal of compositions in its existing library. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors. New technologies and the expansion of
existing technologies may increase the competitive pressures of the Company.
The creation and distribution of music compositions is highly
competitive and the Company has a substantial number of direct competitors,
including large companies with substantially greater financial and marketing
resources. Although the Company believes that its enhanced compositions are new
and unique, no assurance can be given that competitors possessing greater
financial resources and established distribution facilities, may be able to
develop products which directly compete with the Company's products and may be
offered at substantially lower prices than those available from the Company.
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LIMITED OPERATING HISTORY. In 1996, the Company began selling
music-related products. Accordingly, the Company has only a very limited
operating history on which to base an evaluation of its business and prospects.
For the year ended December 31, 1997, approximately 80% of the Company's net
revenues were derived from studio revenues, and approximately 20% from the sales
or licensing of the Company's products. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as online commerce. Such
risks include, but are not limited to, possible inability to respond promptly to
changes in a rapidly evolving and unpredictable business environment and the
risk of inability to manage growth. Development and sales of the Company's
enhanced musical compositions must compete with numerous artists and products.
Future revenues and profits, are highly dependent on various factors, including,
but not limited to, the successful enhancement and distribution of the Company's
products and successful implementation of its planned marketing strategies.
Although certain of the Company's management are experienced in the field of
identifying potentially successful artists, producing their works and enhancing
musical compilations, the Company and its management, as such, are not
experienced. In addition, continued representation of artists and production of
their compositions is subject to public popularity trends and the continued
appeal of the artists and these compositions. To address these risks, the
Company must, among other things, expand its customer base, successfully
implement its business and marketing strategies, continue to develop its website
and transaction-processing systems, provide superior customer service, respond
to competitive developments, and attract and retain qualified personnel. If the
Company is not successful in addressing such risks, its profitability could be
adversely affected.
CONTINUED OPERATING LOSSES. Since inception, the Company has incurred
significant losses, and as of December 31, 1997 had an accumulated deficit of
$862,359. For the six months ended June 30, 1998, the Company's net loss was
$414,998. The Company intends to invest heavily in Web site development and
technology, acquisitions, and the development of traditional methods of
distributing its products. There can be no assurance that the Company will be
able to generate sufficient revenues to achieve or sustain profitability in the
future. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.")
SEASONALITY. The Company's results of operations are subject to
seasonal variations by the timing of new releases. In accordance with industry
practice, the Company records revenues for music products, except those related
to telemarketing C.O.D. sales, when such products are shipped to retailers.
Companies in this field usually experience a decline in revenues and net income
in December, January and February, due in significant part to retailers having
purchased products prior to December in anticipation of holiday sales. If
planned releases are delayed beyond the peak holiday season, the Company's
operating results could be materially adversely affected.
The Company believes that period-to-period comparisons of the Company's
historical results are not necessarily meaningful and should not be relied upon
as an indication of future results.
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<PAGE>
The Company's results of operations in future periods may not meet the
expectations of securities analysts and investors, in which case the price of
the Company's Common Stock would likely be materially adversely affected.
COPYRIGHT AND TRADEMARK PROTECTION. The Company's success will depend
in substantial part on its ability to obtain and maintain copyright or trademark
protection for its compositions in order to preserve the value of its master
recordings library; and to generate revenues from operations without infringing
on the proprietary rights of third parties. The Company is currently not the
subject of any action regarding ownership and the Company's right to market,
reproduce and distribute its master recordings. In certain instances, the
Company's rights to its master recordings are not exclusive, and the Company is
engaged in licensing activities involving both the acquisition of rights to
certain master recordings and compositions for its own projects, and the
granting of sub-licenses or rights to third parties concerning the use of the
Company's master recordings. The availability on acceptable terms of such
cross-licensing arrangements is generally made possible by existing industry
practice based on reciprocity. Should such industry practices change, there is
no assurance that the Company will be able to obtain licenses from third parties
on terms satisfactory to the Company or at all, and the Company's business,
particularly with respect to compilation products, could be materially adversely
affected.
The Company has not applied for patent protection and does not intend
to do so because it believes that patents would not offer significant
protection. Although the Company holds or has the use of various trademarks and
copyrights associated with its works, even with such protection there is no
assurance that unauthorized use will not occur. The Company will be operating in
an industry in which revenues are often adversely affected by the unauthorized
reproduction of recordings for commercial sale, commonly referred to as
"piracy", and by home taping for personal use. In addition, in the event that
another party infringes on any copyright or trademark covering the Company's
products, the enforcement of such rights is at the option of the Company. Also,
other parties may be issued copyrights or trademarks that may prevent the sale
of the Company's products or require licenses and the payment of royalties by
the Company. To date certain claims have been brought against the Company and
its predecessors alleging that certain of a limited number of its compositions
infringe on the intellectual property rights of others, and there can be no
assurance that additional claims will not be brought against the Company in the
future, or that any such claims will not be successful. If such a claim were
successful, the Company's business could be materially adversely affected. In
addition to any potential monetary liability for damages, the Company would be
required to obtain a license in order to continue to market the compositions in
question or could be enjoined from enhancing or selling such compositions if
such a license were not made available on acceptable terms. If the Company
should become involved in such litigation, it could require significant Company
resources. There can be no assurance that the Company will be successful in
acquiring licenses for individual compositions when allegations of infringement
arise, the absence of which may have a material adverse effect on the Company.
However, of those master recordings not subject to dispute, possession of the
master recordings permits the Company to reproduce and distribute these master
recordings under the Company's own label, or sub-license these rights to others
in exchange for royalties. (See "DISPUTED INTELLECTUAL PROPERTY RIGHTS").
12
<PAGE>
DISPUTED INTELLECTUAL PROPERTY RIGHTS. Documents supporting the chain
of title to each master recording owned by the Company are maintained by the
Company, but no assurances can be made that the Company, and the Company's right
to use any and or all of its master recordings, will not be subject to dispute
which may result in delay or the inability to use or exploit the Company's
master recordings and require that the Company pay royalties which may not be
available or affordable by the Company. The value of these master recordings is
reflected in the Company's financial statements at predecessor cost, less
amortization over the useful life of each master recording. However, the Company
as of this date has not recorded any amortization nor has it created any reserve
should any master recording purchased by the Company be determined to be the
property of others.
From time to time, the Company has received notice from various third
parties claiming an ownership interest in certain master recordings published by
the Company, and sold through its distributors demanding, among other things,
that the Company immediately cease distributing these master recordings, or in
the alternative, demanding that the Company pay royalties to these third
parties. Should the Company not prevail in any dispute concerning the right to
publish and distribute any master recording that may be subject to dispute, the
Company, its business and business prospects may be adversely and materially
affected, and in certain cases, the Company may not be able to license, nor be
able to afford to license these master recordings. In addition to these
potential claims, the Company may be subject to claims for indemnification or
contribution from its distributors. The Company has established a policy of
creating a reserve and placing certain funds in escrow pending the resolution of
any dispute concerning the ownership of any master recording published by the
Company. To date, in the opinion of the Company's management, no disputes are
pending in which the Company is not expected to prevail and the Company has
therefore created no reserve with respect to any disputed property. Should the
Company not prevail in any such action, or be forced to pay a royalty to any of
these third parties, any reserves established by the Company in the future may
prove to be wholly insufficient, and the Company, its business and business
prospects may be materially and adversely affected.
In November 1996, the Company agreed to acquire certain studio assets
and rights associated with 10,000 master recordings from Music Marketeers, Inc.
and J. Jake, Inc. in exchange for 2,000,000 shares of Planet Common Stock,
valued at approximately $2,150,000, and the assumption of three promissory notes
totaling $1,250,000 payable over 5 years. (the "Promissory Note"). J. Jake, Inc.
and Music Marketeers, Inc. obtained all rights, claims and interests in these
master recordings purchased by the Company from PEP Music, Inc., Hallelujah
Music, Inc., and UpBeat Music Inc. pursuant to a Plan of Reorganization approved
by the United States Bankruptcy Court for the Eastern District of Louisiana.
In November 1996, an amended agreement was subsequently entered into
between the Company and J. Jake, Inc. and Music Marketeers, Inc. whereby 500,000
shares of stock were returned to the Company and the Company was not required to
purchase certain studio assets. As of June 1998, neither J. Jake, Inc., Music
Marketeers, Inc. nor their successor Gulf Coast Music L.L.C. had completed their
respective obligations under the agreement and all have failed to deliver proof
of
13
<PAGE>
unencumbered title to approximately 2,000 of these master recordings. As of
September 1, 1998, the Company is in compliance with all material terms of its
Agreement with J. Jake, Inc. and Music Marketeers, Inc., and Gulf Coast Music,
Inc. (See "RECENT BUSINESS DEVELOPMENTS.")
The Company has received assurances from its contract partners,
however, that disputes related to title to these master recordings are in the
process of being resolved through the Bankruptcy Court proceedings and will be
resolved satisfactorily to the Company or the vendors will deliver acceptable
substitutes to the Company. The Company is not a party to these Court
proceedings. As of July 1998, Gulf Coast Music, Inc. has, through the Bankruptcy
Court, successfully resolved claims with 13 entities claiming title to certain
master recordings, and has filed counter-claims against 34 additional entities
claiming title to approximately 2,000 master recordings of the 3,400 that were
initially subject to dispute. No assurances can be given that the Company will
obtain clear and undisputed title to these master recordings, but has received
assurances from Gulf Coast Music, Inc., J. Jake, Inc. and Music Marketeers, Inc.
that all master recordings delivered without clean and undisputed title will be
replaced with clear and undisputed title to recordings of substantially the same
quality, appeal and commercial value acceptable to the Company, or that the
Bankruptcy Court will approve the amended agreement.
DEPENDENCE ON TECHNOLOGY. The market for the Company's products and
services is characterized by rapidly changing technology, changing customer
needs, frequent new product introductions and evolving industry standards that
may render existing products and services obsolete. The life cycles of the
Company's products are difficult to estimate. The Company's growth and future
financial performance will depend upon its ability to enhance its existing
products and to introduce new products on a timely and cost-effective basis and
that meet dynamic customer requirements. There can be no assurance that the
Company will be successful in developing new products or enhancing its existing
products or that such new or enhanced products will receive market acceptance or
be delivered timely to the market. The Company has experienced product
development delays in the past and may experience delays in the future.
YEAR 2000 ISSUES. Many existing computer programs use only two digits
to identify a year in the date field, with the result that data referring to
year 2000 and subsequent years may be misinterpreted by these programs. The
Company is not significantly dependent on customized or highly sophisticated
computer systems and software. Presently and for the foreseeable future the
Company utilizes and will utilize commercially available, "small office"
computers and commercially available "off-the-shelf" software. The Company is
not part of and is not interfaced or otherwise electronically connected to any
large or sophisticated industrial, financial or banking computer networks or
systems. Accordingly, the Company does not expect to be faced with a "Year 2000
Problem," which refers to a design flaw in many computer systems (and,
particularly, in large, highly sophisticated or custom-designed systems) whereby
the system cannot distinguish between the year (or numbers) 1900 and 2000. The
Company believes that appropriate "off-the-shelf" hardware and software
up-grades will be readily available, at reasonable cost, in time for the Company
to purchase, install and test them prior to the year 2000. If such a problem
were to persist in the computer applications of the Company, its suppliers, or
its customers, and not corrected, such problem could
14
<PAGE>
cause a disruption in operations and have a short term adverse effect on the
Company's business and results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is subject,
both directly and indirectly, to various laws and regulations relating to its
business, although there are few laws or regulations directly applicable to
access to the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet. Such laws and regulations may cover issues such as
user privacy, pricing, content, copyrights, distribution and characteristics and
quality of products and services. Furthermore, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business online. The enactment of any additional laws or regulations may impede
the growth of the Internet which could, in turn, decrease the demand for the
Company's products and services and increase the Company's cost of doing
business, or otherwise have an adverse effect on the Company. The applicability
to the Internet of existing laws in various jurisdictions governing issues such
as property ownership, sales and other taxes, libel and personal privacy is
uncertain and could expose the Company to substantial liability. The laws of
certain foreign countries provide the owner of copyrighted products with the
exclusive right to expose, through sound and video samples, copyrighted items
for sale to the public and the right to distribute such products. Any new
legislation or regulation, or the application of existing laws and regulations
to the Internet could have a material adverse effect on the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. There may be significant volatility
in the market price of the Company's Common Stock. Quarterly operating results
of the Company, deviations in results of operations from estimates of securities
analysts, changes in general conditions in the economy or the Internet services
industry or other developments affecting the Company or its competitors could
cause the market price of the Company's Common Stock to fluctuate substantially.
The equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies' securities
and that have often been unrelated to the operating performance of these
companies. Any such fluctuations that occur may adversely affect the market
price of the Company's Common Stock. The market price of the Company's Common
Stock could also be adversely affected by critical or negative statements or
reports by brokerage firms, industry and/or financial analysts and/or industry
periodicals concerning the Company, its products, or by the advertising or
marketing efforts of competitors, or other factors that could affect consumer
perception.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS: A number of
statements contained herein are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied in the applicable statements. These risks and uncertainties
include, but are not limited to: the Company's vulnerability to rapid industry
change, technical obsolescence, limited customer base and reliance on a
relatively small number of customers, the possible impact of competitive
products and pricing, uncertainties in the duration of
15
<PAGE>
the life cycle of its products, manufacturing difficulties, dependence on key
personnel, market acceptance, reliance on a limited number of outside vendors,
potential difficulties managing growth, the ability to perform on existing and
future agreements, the availability of financing, and other risks all, or any
one of which may have a material adverse effect on the Company, its business,
business prospects, and financial condition.
ITEM 4. USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares; however, in consideration of issuing the Preferred Stock and Warrants,
the Company received net proceeds of $4,475,000 which was used for working
capital, expansion of its principal lines of business and a substantial portion
is reserved for use in connection with the possible acquisition of a
distribution company. The weighted average exercise price of the outstanding
Warrants is approximately $9.625, the exercise of which would result in the
issuance of 225,000 shares of Common Stock. If all of the Warrants were
exercised, and assuming it is not a cashless exercise, the Company would receive
aggregate proceeds of approximately $2,165,625.
ITEM 5. DETERMINATION OF OFFERING PRICE
The Company will not determine the offering price for the securities
sought to be registered and sold. The Selling Stockholders may, from time to
time, sell all or a portion of the Shares on the OTC Bulletin Board, in
privately negotiated transactions or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices.
ITEM 6. DILUTION
The net tangible book value attributable Common Stock at June 30, 1998
was $7,505,000, or $.63 per share of Common Stock. "Net tangible book value" per
share is equal to the Company's total tangible assets less its total liabilities
and Preferred Stockholder's equity, divided by the total number of shares of
Common Stock outstanding. As a result of the conversion of the Preferred Stock
into 1,216,336 shares of Common Stock being registered by the Company (assuming
no exercise of the 225,000 Common Stock warrants an at a conversion price of
$4.11 per share, before deducting commissions and offering expenses of $525,000)
and proceeds received from the sale of the Preferred Stock, therefrom, the pro
forma net tangible book value of the Company was approximately $11,980,000, or
$.91 per share of Common Stock. This represents an immediate increase in net
tangible book value of $4,475,000 or $.28 per share to existing stockholders and
an immediate dilution of $3.20 per share to the Preferred Stockholders at the
assumed conversion price. The following table illustrates this per share
dilution:
Assumed conversion price per share $ 4.11
Net tangible book value before conversion $ .63
Increase attributable to conversion $ .28
Pro forma net tangible book value per share after conversion $ .91
--------
Dilution per share to Preferred Stockholders $ 3.20
========
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<PAGE>
The following table sets forth, on an adjusted basis as of September 15, 1998
the number of shares of Common Stock purchased from the Company (the total cash
consideration paid to the Company and the average price per share paid by the
existing holders of Common Stock and by the purchasers of the Preferred Stock,
assuming the conversion of the Series A Preferred Stock into an aggregate of
1,216,336 shares of Common Stock at an assumed conversion price of $4.11 per
share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders 11,976,055 91% $ 8,902,339 64% $ .74
Preferred stockholders 1,216,336 9% $ 5,000,000 36 $ 4.11
---------- ---- ----------- ----
Total 13,192,311 100% $13,902,339 100%
========== ==== =========== ====
</TABLE>
ITEM 7. SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Selling Stockholders as of September
15, 1998, and the number of shares of Common Stock included in this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE AND
BENEFICIALLY NUMBER OF SHARES
OWNED PRIOR NUMBER OF BENEFICIALLY
TO SHARES BEING OWNED AFTER
SELLING STOCKHOLDER OFFERING OFFERED OFFERING (4)
- ------------------- -------- ------- ------------
NUMBER OF
PERCENT SHARES
------- ---------
<S> <C> <C> <C> <C>
JNC Opportunity Fund Ltd. 1,291,336 (1) 1,291,336 (2) -0- -0-
CDC Consulting, Inc. 150,000 (3) 150,000 -0- -0-
</TABLE>
(1) The Selling Stockholder is contractually prohibited from converting
shares of Preferred Stock (or receiving shares of Common Stock in
payment of dividends thereon) or exercising its Warrant to the extent
that the number of shares of Common Stock beneficially owned by it and
its affiliates after such conversion or exercise exceeds 4.999% of the
issued and outstanding shares of Common Stock following such conversion
or exercise. The number of
17
<PAGE>
shares of Common Stock listed as beneficially owned includes the number
of shares of Common Stock issuable upon, subject to the limitation
expressed in the first sentence of this footnote, (i.) conversion of
the Preferred Stock at an assumed conversion price of the lesser of (a)
$8.885 per share, or (b) 78% multiplied by the average of the five
lowest per share market values of the Company's Common Stock during ten
trading days immediately preceding notice of conversion, and (ii.)
exercise of the Warrant. However, because the conversion price
applicable to the Preferred Stock is dependent in part upon the market
price of the Common Stock prior to a conversion, the actual number of
shares of Common Stock that will be issued in respect of such
conversions or dividend payments, and consequently the number of shares
of Common Stock that will, subject to the limitation expressed in the
first sentence of this footnote, be beneficially owned by the Selling
Stockholder, will fluctuate daily and cannot be determined at this
time.
(2) Includes shares of Common Stock reflected herein as beneficially owned
by the Selling Stockholder. However, subject to the limitation
expressed in footnote 1, because the number of shares of Common Stock
issuable upon conversion of the Preferred Stock and as payment of
dividends thereon is dependent in part upon the market price of the
Common Stock that will be issued in respect of such conversions or
dividend payments and, consequently, offered for sale under this
Registration Statement, cannot be determined at this time. However, to
provide for such fluctuations, the Company has contractually agreed to
include herein an aggregate of 1,291,336 shares of Common Stock
issuable, subject to the limitation expressed in footnote 1, upon
conversion of the Preferred Stock, payment of dividends thereunder and
upon exercise of the Warrant.
(3) Includes the number of shares of Common Stock issuable upon conversion
of the warrants to purchase 150,000 shares of the Company's common
stock to CDC Consulting, Inc. at a price of $9.625 per share over a
term of five years from June 1998.
(4) Assumes the sale by the Selling Stockholders of all Shares offered
thereby.
The shares to be sold shall include, in addition to the numbers
indicated, any additional shares of Common Stock of the Company that become
issuable in connection with the Shares by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without the
receipt of consideration that results in an increase in the number of
outstanding shares of the Company's Common Stock.
ITEM 8. PLAN OF DISTRIBUTION
The Selling Stockholders, their pledgees, donees, transferees or other
predecessors in interest, may, from time to time, sell all or a portion of the
Shares on the OTC Bulletin Board, in privately negotiated transactions or
otherwise, at fixed prices that may be changed, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Shares may be sold by the Selling Stockholders by one or more of the
following methods, without limitation: (a) block trades in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction, (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this
18
<PAGE>
Prospectus, (c) an exchange distribution in accordance with the rules of such
exchange, (d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers, (e) privately negotiated transactions, (f) short
sales and (g) a combination of any such methods of sale. In effecting sales,
brokers and dealers engaged by the Selling Stockholders may arrange for other
brokers or dealers to participate. Brokers or dealers may receive commissions or
discounts from the Selling Stockholders (or, if any such broker-dealer acts as
agent for the purchaser of such shares, from such purchaser) in amounts to be
negotiated which are not expected to exceed those customary in the types of
transactions involved. Broker-dealers may agree with the Selling Stockholders to
sell a specified number of such Shares at a stipulated price per share, and, to
the extent such broker-dealer is unable to do so acting as agent for a Selling
Stockholder, to purchase as principal any unsold Shares at the price required to
fulfill the broker-dealer commitment to the Selling Stockholders. Broker-dealers
who acquire Shares as principal may thereafter resell such Shares from time to
time in transactions (which may involve block transactions and sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market or otherwise at prices and on terms then
prevailing at the time of sale, at prices then related to the then-current
market price or in negotiated transactions and, in connection with such resales,
may pay to or receive from the purchasers of such Shares commissions as
described above. The Selling Stockholders may also sell the Shares in accordance
with Rule 144 under the Securities Act, rather than pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in sales of the Shares may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the Shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
From time to time the Selling Stockholders may engage in short sales,
short sales against the box, puts and calls and other transactions in securities
of the Company or derivatives thereof, and may sell and deliver the Shares in
connection therewith or in settlement of securities loans. If the Selling
Stockholders engage in such transactions, the conversion price may be affected.
From time to time the Selling Stockholders may pledge their Shares pursuant to
the margin provisions of its customer agreements with its brokers. Upon a
default by the Selling Stockholders, the broker may offer and sell the pledged
Shares from time to time.
The Company is required to pay all fees and expenses incident to the
registration of the Shares, including fees and disbursements (in the approximate
amount of $15,000) of counsel to the Selling Stockholders. The Company has
agreed to indemnify the Selling Stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
ITEM 9. LEGAL PROCEEDINGS
There are currently no threatened or pending legal proceedings against
the Company. From time to time, the Company receives claims from third parties
challenging the Company's right
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<PAGE>
to exploit certain master recordings. The Company, in the opinion of its
management, believes that it has a valid and enforceable chain of title to these
recordings and is expected to prevail in any such action if brought against the
Company. The Company is aware that approximately 2,000 of the master recordings
purchased from J. Jake, Inc., Music Marketeers, Inc., or their successor, Gulf
Coast Music, Inc. may be subject to dispute, and it is the Company's policy not
to release or exploit any master recording that is subject to dispute. If the
Company does, however, become the subject of any such action, and were not to
prevail in such an action, the Company does not believe its business, financial
condition or business prospects would be materially adversely affected as the
above named vendors have agreed to replace the disputed items with 2,000
recordings acceptable to the Company. Also, the Company intends to obtain the
approval of the Bankruptcy Court as to the amended agreement but there is no
assurance that such approval will be obtained.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors, executive officers, and control persons of the Company
and their ages as of this date are set forth below. None of the directors and
executive officers are related to one another:
<TABLE>
<CAPTION>
Name Age Position(s) Held
---- --- ----------------
<S> <C> <C>
Wallace M. Giakas 43 Chairman of the Board, Secretary
John S. Arnone 40 President, Chief Executive Officer, Director
Joseph Venneri 62 Executive Vice President, Director
Richard Bluestine 56 Executive Vice-President, Chief Financial Officer,
Director, and Chairman of Audit Committee
Louis J. DelSignore* 60 Director, Planet Entertainment Corporation,
Chairman, Northeast One Stop, Inc.
Ronald J. Nicks* 45 Director, Planet Entertainment Corporation,
President, Chief Executive Officer, Northeast One
Stop, Inc., One Stop Division
</TABLE>
*These persons will not serve as Directors unless and until the
acquisition of Northeast One Stop, Inc. is fully consummated. If consummated,
Messrs. Arnone and Giakas have agreed to execute and deliver an irrevocable
proxy to elect said persons to the Company's Board of Directors at the next
regular Stockholder's meeting.
20
<PAGE>
The Bylaws of the Company currently provide for a minimum of two (2)
directors. All directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
The Company's officers are appointed by the Board of Directors. A copy of the
Company's Bylaws is available upon request.
The Company does not reimburse its directors for out-of-pocket expenses
incurred in connection with their rendering of services as directors, but may do
so in the future. The Company currently does not intend to pay cash fees to
directors for attendance at meetings.
WALLACE M. GIAKAS, age 43, is the Chairman of the Board and Secretary.
From October 1992 until June 1995, Mr. Giakas was president of Chapman, Spira &
Carson, Inc., an investment and merchant banking firm located in New York, New
York. From April 1994 through March 1996, Mr. Giakas, served as executive vice
president of Emerald City Capital Corp., and from June 1995 through the present,
Mr. Giakas serves as president of Hamilton Wallace Group, Inc., a private
investment and venture capital firm located in Middletown, New Jersey.
JOHN S. ARNONE, age 40 is President, Chief Executive Officer and a
Director of the Company. From October 1996 through June 1997, Mr. Arnone was
Secretary and Director of the Company. From July 1992 through August, 1993, Mr.
Arnone was president of Lancaster Leeds & Co., a private investment and merchant
banking firm located in New York, New York. From August 1993 through April,
1994, Mr. Arnone was a managing director of Chapman, Spira & Carson, Inc., a
private investment and merchant banking firm located in New York, New York. From
April 1994 through March, 1996, Mr. Arnone was president of J.W. Cabott & Co.,
Inc., a private investment firm, and from April 1994 through March 1996, Mr.
Arnone also served as president of Emerald City Capital Corp., a private
investment firm.
JOSEPH VENNERI, age 62, Executive Vice President and Director. Prior to
June 1998, Mr. Venneri was President and Chief Executive Officer of the Company.
Mr. Venneri has 38 years experience in the entertainment industry, beginning as
an artist and has been the President and owner of several recording studios and
was an original member of the "Tokens." Mr. Venneri also has experience in
production, where he produced more than 100 gold records over the last 25 years.
Mr. Venneri has worked for EMI, RCA, MGM, Atlantic Records, Warner Brothers
Records, Mercury Records, Plantation Records, and Sun Records. He is highly
regarded by producers, engineers and restoration experts in the music industry,
and has recorded and re-recorded such stars as Bob Marley, Sammy Davis, Jr.,
Jethro Tull, Grateful Dead, REM, Cher, Michael Bolton, Kenny Rogers, Willie
Nelson, Luciano Pavarotti, and hundreds more.
RICHARD C. BLUESTINE, C.P.A., age 56, Executive Vice-President and
Chief Financial Officer, is a Certified Public Accountant with experience in the
record and film industry. Mr. Bluestine is presently a partner at the accounting
firm of Brinster & Bergman, L.L.P., and since January 1990, Mr. Bluestine has
been Vice President of SBR Industries, Inc., a manufacturer and distributor in
the apparel industry. From June 1995 through May 1997, Mr. Bluestine was an
officer, director, and stockholder of Multi-Media Industries Corporation MMIC.
(See "CERTAIN RELATIONSHIPS
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AND RELATED TRANSACTIONS"). From 1971 through 1990, Mr. Bluestine served as a
Certified Public Accountant with various firms including KMG Main Hurdman. He
has served as a pension trustee for the New York City Fire Department, as a
member of the Mayor's Investment Fiscal Policy Committee for the City of New
York. He received his accounting degree from New York University and has served
on various AICPA and NYSSCPA committees. As of September 15, 1998, the Company
has not offered, nor has it secured, an employment agreement relating to the
continued services of Mr. Bluestine, and the Company may seek to hire a new
chief financial officer. (See "DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL").
LOUIS J. DELSIGNORE, 60, Director, Chairman, Northeast One Stop, Inc.
From 1983 through September 1998, Mr. DelSignore served as president of
Northeast One Stop, Inc. From August 1973 through January 1983, Mr. DelSignore
was vice president of finance and a member of the Board of Directors of Trans
World Music Corporation. Mr. DelSignore has substantial experience in the
wholesale distribution of recorded music and other entertainment related
products. Mr. DelSignore has a Bachelor of Science degree from the State
University of New York at Albany.
RONALD J. NICKS, 45, Director, Planet Entertainment Corporation,
President, Chief Executive Officer, Northeast One Stop, Inc., One Stop Division.
From July 1996 through September 1998, Mr. Nicks was Senior Vice President of
Alliance Entertainment Corporation ("Alliance"), and from January 1994 through
July 1996 was Chief Executive Officer of Alliance's One Stop Group. From
November 1990 through January 1994, Mr. Nicks was Vice President and General
Manager of CD One Stop, where he oversaw all operations including sales and
purchasing. From November 1988 through November 1990, Mr. Nicks was director of
purchasing for CD One Stop, and from April 1987 through November 1988, was
associated with Western Merchandisers, Inc. Mr. Nicks has significant experience
in the wholesale distribution of recorded music.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof, information
regarding ownership of the Company's Common Stock by each person known by the
Company to be the beneficial owner of more than 5% of the Company's outstanding
Common Stock, by each director, by certain related shareholders, and by all
executive officers and directors of the Company as a group. All persons named
below have sole voting and investment power over their shares except as
otherwise noted.
NAME OF
BENEFICIAL OWNER OR NUMBER OF PERCENT OF
IDENTITY OF GROUP SHARES OWNED CLASS
- ----------------- ------------ ----------
Wallace M. Giakas 3,439,000(1)(2)(3)* 26.2%
4 Tall Oaks Court
Farmingdale, N.J. 07727
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NAME OF
BENEFICIAL OWNER OR NUMBER OF PERCENT OF
IDENTITY OF GROUP SHARES OWNED CLASS
- ----------------- ------------ ----------
Joseph Venneri 3,127,000(1)(2)* 24.0%
336 East Pleasant Grove Rd.
Jackson, N.J. 08527
John S. Arnone 3,491,000(1)(2)(3)* 26.6%
30 Penbrooke Court
Shrewsbury, N.J. 07702
Briollette Investments, Ltd. 605,334 5.0%
c/o Richard J. Fagen
Charles House
St. Helier, Jersey JE49NZ
William J. Valenziano 806,000(1) 6.7%
2500 Uranium Drive
Channel Islands, CA
Gulf Coast Music, Inc. 694,000 5.7%
757 St. Charles Ave.
New Orleans, LA 70130
Richard Bluestine 560,000(1)(2)* 4.6%
100 Merrick Road
Rockville Centre, N.Y. 11570
All executive officers, directors
and principal shareholders
as a Group (7 persons) 9,442,934 100%
- ----------
* Officers and/or Directors of the Company.
(1) Includes shares beneficially owned by that person, including that
person's spouse, children, parents, siblings, mothers and fathers in
law, sons and daughter in laws, and brothers and sisters in law. See
table under "Management" for officer and directorships held by the
persons listed above.
(2) Includes 100,000 warrants to purchase 10 shares of Common Stock issued
by the Company to Wallace M. Giakas, John S. Arnone, and Joseph
Venneri, and 16,000 warrants issued to Richard Bluestine, which are
exercisable for a period of ten years from the date of issuance, or
until January 29, 2007, at $20.00 per warrant, or the equivalent of
$2.00 per share.
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(3) Includes options to purchase 125,000 shares of the Company's common
stock exercisable at $5.25 per share over a period of five years
granted to Messrs. Arnone and Giakas as compensation in connection with
the acquisition of Northeast One Stop, Inc. At the time these options
were granted, the price of the Company's stock was $5.25 per share.
ITEM 12. DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized voting Common Stock of the Company consists of
50,000,000 shares of Common Stock, with a par value of $0.001. As of June 30,
1998, the Company had 11,976,055 shares of Common Stock outstanding and
approximately 260 shareholders. (See "MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS").
PREFERRED STOCK
The Company authorized and issued 500 shares of non-voting 7% Series A
Convertible Preferred Stock to with and aggregate stated value of $5 million.
Each share of the Preferred Stock over a period of two years is convertible into
the Company's Common Stock at the lesser of (a) $8.885 per share, or (b) 78%
multiplied by the average of the five lowest per share market prices of the
Company's Common Stock during ten trading days immediately preceding notice of
conversion. No public market exists, or is expected to exist, for these shares
of Preferred Stock.
ITEM 13. INTEREST OF NAMED EXPERTS AND COUNSEL.
The validity of the Common Stock offered hereby will be passed upon for
the Company by Frohling, Hudak & McCarthy, P.C., 425 Eagle Rock Avenue,
Roseland, New Jersey. No person affiliated with said firm is an officer,
director or principal stockholder of the Company.
The financial statements of the Company, as of December 31, 1996 and
1997 and for the period from Inception (May 17, 1996) to December 31, 1996 and
the years ended December 31, 1995 and 1996, included in this Prospectus have
been audited by AJ. Robbins, P.C., independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of such firm as experts in giving said report.
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ITEM 14. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES.
Officers and directors of the Company are indemnified by the Company in
accordance with its Articles of Incorporation, and its Bylaws, under each, to
the maximum extent permissible by law. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the Laws of the
State of Florida or the provisions of the Company's Articles of Incorporation or
Bylaws, or otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
the indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 15. ORGANIZATION WITHIN THE LAST FIVE YEARS
The Company was incorporated under the laws of the State of Delaware in
May 1996. On October 9, 1996, all of the outstanding capital stock of the
Company was acquired by Ampro International Golf Tour, Inc. ("Ampro"), a Florida
corporation, which, as the surviving corporation, changed its name to Planet
Entertainment Corporation.
ITEM 16. DESCRIPTION OF BUSINESS
The Company is currently involved in various areas of the recorded
music industry. The Company's principal activities involve the acquisition,
licensing, production, marketing and distribution of high quality recorded music
in a variety of music formats: Compact Diskettes ("CDs"), video, CD-ROM and, to
a lesser extent, cassette tapes. The Company produces such types of music as
gospel, adult contemporary, reggae, top 40, blues, country, rap, rock,
instrumental, rock & roll, jazz, pop rock, classical, easy listening, big band,
rhythm & blues, and various ethnic folk music recordings.
The Company has acquired certain rights associated with approximately
15,000 music master recordings from existing music catalogues of recorded music.
The Company also records new artists. These master recordings are typically
stored on Digital Audio Tape ("DAT"). The Company, through its 48-track
recording studio and mastering facility in Chester, Pennsylvania, and its
24-track studio in Jackson, New Jersey, re-digitizes existing master recordings,
enhances these master recordings by removing certain impure sounds due to aging,
and re-compiles these recordings along with its recordings of new artists on
"glass master" CDs for mass production and distribution to its customers through
traditional and non-traditional distribution channels.
The Company's strategy has been to produce compilation CDs containing
enhanced or re-digitized master recordings from its existing library, to
contribute these compilation CDs to joint
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ventures involving the Company, and to license these compilation CDs to third
parties for marketing and sale by unaffiliated distributors. (See "RECENT
DEVELOPMENT OF BUSINESS"). To date, however, substantially all the Company's
revenues have been derived from studio rental sales and from licensing royalties
and not from the licensing or sale of the Company's compilation CDs. (See
"MANAGEMENT'S DISCUSSION AND ANALYSIS"). In September 1998, the Company entered
into an agreement to purchase all of the issued and outstanding capital stock of
Northeast One Stop, Inc. ("NEOS"). NEOS is principally engaged in the
distribution of records and compact diskettes through "one-stops" and
"rack-jobbers." "One-stops" are centralized order fulfillment centers for small
to medium sized retail stores, typically record stores, that obtain a
wide-variety of recorded music in a variety of formats from several independent
producers at a stated price, or mark-up. "Rack-jobbers," typically purchase and
distribute recorded music through racks and kiosks in retail stores, and
encompass a narrower range of selection, typically from proprietary sources for
a stated percentage of sales, and often with the full right of return. The
Company's agreement to purchase NEOS is subject to the consent of NEOS' secured
creditor. The Company is unable to make any assurances that this transaction
will be consummated, or will be consummated on terms favorable to the Company,
or that if consummated, the combined operations will be profitable. (See "RECENT
DEVELOPMENT OF BUSINESS"). The Company's strategy is, however, pending
completion of the acquisition of NEOS, and the completion of its Website to
permit the sale of the Company's products and other "front line" titles over the
Internet, to serve as its own fulfillment center. In addition, the Company
expects to distribute compilation CDs from the Company's proprietary catalogue
of existing master recordings through NEOS, at a lower cost to NEOS, and thereby
improve NEOS' gross profit margins while at the same time generating increased
revenues for the Company.
INDUSTRY OVERVIEW.
According to the International Federation of the Phonographic Industry,
worldwide sales of pre-recorded music and music videos in 1997 were
approximately $40 billion. It is estimated that the United States recording
industry had sales of approximately $15 billion in 1997, and that over the last
five years, the industry has been growing in excess of 20% per year. During this
period, it is estimated that total CD sales increased from $6.6 billion to $10.2
billion, or 55%, due in substantial part from the conversion of cassette tapes
to CDs. In 1996 and 1997, the sale of CDs, and to a lesser extent cassette
tapes, comprised more than 97% of total sales of recorded music.
THE COMPANY
The Company markets and distributes recorded music, in a variety of
formats including CDs, Digital Video-Enhanced CDs ("DVDs"), and to a lesser
extent cassettes, from its existing catalog of approximately 15,000 master
recordings. The Company compiles, digitizes and repackages these master
recordings through its recording and production facilities, and distributes
these master recordings through joint ventures and licensing agreements. The
Company's current inventory of master recordings includes a broad range of
musical genres including adult contemporary, classical, gospel, blues, rap,
reggae, jazz, instrumental, easy listening, big band, swing, Christmas, country,
pop, rock and roll, and rhythm and blues.
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ACQUISITION OF MASTER RECORDINGS. In June 1996, as a result of the
Company's acquisition of Maestro Holding Corporation ("Maestro"), the Company
acquired certain rights associated with the exploitation of approximately 5,000
master recordings, and in November 1996, through its agreements with J. Jake,
Inc., Music Marketeers, Inc., and Gulf Coast Music, Inc., the Company acquired
certain rights associated with the exploitation of approximately 10,000
additional master recordings.
The Company's current inventory of master recordings includes a broad
range of musical genres including adult contemporary, classical, gospel, blues,
rap, reggae, jazz, instrumental, easy listening, big band, swing, Christmas,
country, pop, rock and roll, and rhythm and blues, and a partial listing of
artists included in the Company's master catalogue include Louis Armstrong, Tony
Bennett, George Benson, Chuck Berry, Glen Campbell, Ray Charles, Chicago, Nat
King Cole, Alice Cooper, Bing Crosby, Sammy Davis, Jr., Fats Domino, Donovan,
Duke Ellington, Ella Fitzgerald, Aretha Franklin, Judy Garland, Marvin Gaye,
George Gershwin, Dizzy Gillespie, Bill Haley's Comets, Billie Holliday, John Lee
Hooker, Lena Horne, The Ink Spots, Jackson Five, Jefferson Airplane, Al Jolson,
Quincy Jones, BB King, Frankie Lane, Jerry Lee Lewis, Glenn Miller, Willie
Nelson, Charlie Parker, Dolly Parton, Luciano Pavarotti, Kenny Rogers, Neil
Sedaka, Pete Segar, Sisters Sledge, Steely Dan, Steppenwolf, and Ike & Tina
Turner.
PRODUCTION. The Company owns and operates a twenty-four track studio in
Jackson, New Jersey and a full service forty-eight track digital studio in
Chester, Pennsylvania. The Company currently has five new artists under contract
as well as several established groups recently acquired with the Higher Ground
Group including, GMWA Youth Mass Choir, Charles Fold, Philadelphia Mass Choir,
and others. Other artists presently under contract with the Company include Nino
Rossano (an Italian opera and classical singer), the Crystals, the Trammps, the
Tokens, and Dakota McLeod. The continued representation of these artists and the
production of their compositions are subject to popularity trends, and the
continued appeal of these artists and these compositions.
COMPOSITIONS AND ENHANCEMENTS. The Company markets either from its
existing catalog of recordings or repackages compilations of previously recorded
music by utilizing its library of master recordings. Through the Company's
studios in New Jersey and Pennsylvania, the Company composes musical CDs
containing the original and re-recorded music of various artists arranged
according to musical genre, and designed to be mass marketed by the Company
through its distribution channels. The Company has hired experienced engineers
and owns certain multi-media equipment that permits the Company to transform and
edit its previously published and unpublished master recordings from their
original state to a higher quality state using certain sound purification
techniques and by converting older recordings produced under the analogue format
into a digital format.
By combining these compositions with visual graphics and video clips,
the Company can produce an entirely new product by re-mastering the Company's
recordings in compositions expected to appeal to the public's tastes. Moreover,
by combining these compositions, with outstanding visual effects, the Company
has the technology to produce video enhanced Compact
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Diskettes. In connection with the transformation, editing, re-composition, and
republishing of the Company's master recordings, the Company produces its own
art work, posters, CD inserts, informational materials and brochures. The
Company's associated labels include PNEC Records, Magnum Records, Century
Records, Planet Records, Black Tiger Records and Higher Ground Records.
MANUFACTURING. The Company manufacturers "glass masters," and prototype
CDs for use as samples, together with all artwork and CD inserts, but it employs
and is dependent upon others to press and mass produce the Company's compact
diskette recordings for resale. Currently, the Company's products are mass
produced or pressed by Denon Active Media, a division of Denon Corporation, USA.
DISTRIBUTION. At present, all of the Company's products are sold
through distributors. The Company's strategy is to produce digitally enhanced
and re-arranged master recordings, from its existing catalogue, and from its
catalogue of new artists, and to license these products to be mass produced and
marketed by others through traditional retail distribution channels, in exchange
for royalties. In addition, the Company has entered into joint ventures with
other record promoters, record labels, and distribution companies to sell and
market the Company's products, and the Company intends to develop the
distribution of its products through traditional and non-traditional
distribution channels including promotional and premium licensing, specialty
marketing, and through the use of the Internet.
The Company's products are distributed through Navarre Corporation, as
a result of its joint venture with Black Tiger Records, and certain of the
Company's products are also distributed in the Far East through Nippon Columbia
Co., Ltd. In November 1997, the Company entered into agreement with DRG
Associates, Inc. ("DRG"), and with Koch International Corporation for the
distribution of the Company's products. In February 1998, the Company entered
into an agreement with Monaco Records, and entered in a joint venture agreement
with New Millenium Communications concerning the distribution of the Company's
products in Europe. (See "RECENT DEVELOPMENT OF BUSINESS").
In September 1998, the Company executed an agreement to acquire, all of
the issued and outstanding capital stock of Northeast One Stop, Inc. ("NEOS"), a
record and compact diskette distributor, in exchange for $3 million, plus
options to acquire 250,000 shares of the Company's common stock over a period of
two years at an exercise price of the lesser of $5.25 or the closing bid price
for the Company's securities on the date of closing. NEOS is principally engaged
in the distribution of records and compact diskettes through "one-stops" and
"rack-jobbers." "One-stops" are centralized order fulfillment centers for small
to medium sized retail stores, typically record stores, that obtain a
wide-variety of recorded music in a variety of formats from several independent
producers at a stated price, or mark-up. "Rack-jobbers," typically purchase and
distribute recorded music through racks and kiosks in retail stores, and
encompass a narrower range of selection, typically from proprietary sources for
a stated percentage of sales, and often with the full right of return. The
Company's agreement to purchase NEOS is subject to the consent of NEOS' secured
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creditor. The Company is unable to make any assurances that this transaction
will be consummated, will be consummated on terms favorable to the Company, or
even if consummated, that the combined operations will be profitable. (See "LACK
OF SUFFICIENT CAPITAL RESOURCES").
RECENT DEVELOPMENT OF BUSINESS.
In June, 1996 the Company acquired, under the "pooling of interests
method" all of the outstanding capital stock of Maestro Holding Corporation
("Maestro") in consideration for the issuance of 3,060,000 shares of the
Company's Common Stock, valued at $5,850,860, the predecessor's cost. Maestro
holds title to over 5,000 master recordings, publishing rights to over 300
songs, and all equipment and fixtures contained in a twenty-four track studio
located in Jackson, New Jersey. Prior to this transaction, Maestro was in
substantial part owned and controlled by the Company's principal stockholders,
Messrs. Joseph Venneri, Wallace Giakas, and John S. Arnone. (See "RECENT SALES
OF UNREGISTERED SECURITIES").
In September 1996, the Company entered into a production and
distribution agreement with Multimedia Industries Corporation ("MMIC"), under
the label Century Records concerning the production and distribution of enhanced
multi-media CDs, playable on computers with compact diskette drives. In
accordance with the terms of the agreement, since September 1996, the Company
has produced ten compilation CDs, including six visually enhanced CDs, and
through Koch International Corporation, the Company has shipped approximately
35,000 units. One of the Company's executive officers and directors, Joseph
Venerri, is a principal shareholder of MMIC, and Richard Bluestine, the
Company's Chief Financial Officer and a director of the Company, is a
shareholder of MMIC, and from June 1995 through May 1997, was an officer and
director of MMIC. (See "CERTAIN RELATIONSHIPS AND RELATED PARTIES").
On October 9, 1996, all the outstanding capital stock of the Company
was acquired by Ampro International Golf Tour, Inc. ("Ampro"), a Florida
corporation. In connection with this transaction, each share of Planet common
stock issued and outstanding was exchanged for one share of Ampro, with Ampro as
the surviving corporation which changed its name to Planet Entertainment
Corporation. Prior to this transaction, Ampro effected a reverse stock split at
the rate of one share for every three hundred shares previously issued and
outstanding.
In November 1996, the Company agreed to acquire all of the outstanding
stock of Higher Ground Records ("HGR"), an unaffiliated Company, in
consideration for 25,000 shares of Planet common stock under the "pooling of
interests" method of accounting. HGR's assets principally consist of production
and publishing agreements with various artists and gospel catalogs. HGR is a
gospel production Company that produces new gospel artists such as GMWA Youth
Mass Choir, Carlton Burgess, and Charles Ford, as well as many prominent artists
in the gospel field. (See "RECENT SALES OF UNREGISTERED SECURITIES").
In November 1996, the Company agreed to acquire certain studio assets
and rights associated with 10,000 master recordings from Music Marketeers, Inc.
and J. Jake, Inc. in exchange
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for 2,000,000 shares of Planet common stock, valued at $2,150,000, the
predecessor's cost, and the assumption of three promissory notes totaling
$1,250,000 payable over 5 years. (the "Promissory Note"). J.Jake, Inc. and Music
Marketeers, Inc. obtained all rights, claims and interests in these master
recordings purchased by the Company from PEP Music, Inc., Hallelujah Music,
Inc., and UpBeat Music Inc. pursuant to a Plan of Reorganization by the United
States Bankruptcy Court for the Eastern District of Louisiana.
In November 1996, a subsequent agreement was reached between the
Company and J. Jake, Inc. and Music Marketeers, Inc. to return 500,000 shares of
stock and to not transfer certain studio assets. As of September 1, 1998, the
Company is in compliance with all material terms of its Agreement with J. Jake,
Inc. and Music Marketeers, Inc., and Gulf Coast Music L.L.C. Inc. However, as of
June 1998, neither J. Jake, Inc., Music Marketeers, Inc. nor Gulf Coast Music
had completed their respective obligations under the agreement and had failed to
deliver proof of unencumbered title to approximately 2,000 of these master
recordings. In August 1998, Gulf Coast Music, L.L.C. and Music Marketeers, Inc.
granted the Company the right to reacquire 1,400,000 shares of its common stock
and to cancel the outstanding principal portion of the Promissory Note together
with accrued interest in exchange for approximately $175,000 in cash and short
term notes for approximately $2,850,000. The Company intends to obtain the
approval of the Bankruptcy Court of this agreement. (See "DISPUTED INTELLECTUAL
PROPERTY RIGHTS" and "LACK OF SUFFICIENT CAPITAL RESOURCES").
In February, 1997, the Company, through a joint venture with JAD
Records and Anansi Records, obtained a 50% interest in Black Tiger Records
consisting primarily of certain master recordings embodying the performances of,
among others, Bob Marley and the Wailers (the "Marley Masters"), Gene Chandler
("Tell It Like It Is"), Jocelyn Brown ("Diva"), and Johnny Nash ("The Very Best
Of"). Under the terms of the Joint Venture Agreement assigned to the Company by
Joseph Venerri, one of its principal shareholders, Black Tiger Records
contracted with Navarre Corporation for the sale and distribution of these
recordings to retail outlets, one stops, racks, wholesale clubs, and
sub-distributors (the "first agreement"). On April 23, 1998, the Company entered
into an additional agreement with JAD Records and Anansi Records regarding the
production of eight music recordings of Bob Marley and the Wailers (the "second
agreement"). In fiscal 1996, the Company recognized revenue of approximately
$105,000 as a result of the first agreement with JAD Records. In fiscal 1997,
these amounts were reserved by the Company as uncollectible. As of June 1998,
JAD Records and Anansi Records, Inc. have failed to provide the Company or Black
Tiger Records with an accounting of such sales in accordance with the terms of
the second agreement, and the Company has not recognized revenue or other income
in connection with the second agreement. In June 1998, the Company assigned the
collection of all producer and publisher royalties to an unaffiliated party but
has no assurance that it will be able to collect any revenues in the future.
In March, 1997, the Company acquired all the issued and outstanding
capital stock of Al Alberts On Stage, Ltd. in exchange for 100,000 shares of the
Company's common stock valued at $214,000, under the "purchase" method of
accounting. The assets of Al Alberts On Stage, Ltd. consisted primarily of
furniture, fixtures and equipment contained in a forty-eight track studio
located in Chester, Pennsylvania. The Company also entered into a lease with the
former shareholders of Al
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Alberts On Stage, Ltd. to lease a 13,400 square foot building together with
improvements in Chester, Pennsylvania where the Company's studio is located.
(See "RECENT SALES OF UNREGISTERED SECURITIES").
On April 22, 1997, the Company entered into a licensing agreement with
Sun Entertainment Corporation of Nashville, Tennessee pursuant to which the
Company obtained non-exclusive rights to all master recordings, including "Whole
Lotta Shakin Going On," by Jerry Lee Lewis, "I Walk The Line," by Johnny Cash,
"Blue Suede Shoes," by Carl Perkins, "Chapel of Love," by the Dixie Cups, "The
Boy From New York City," by the Ad Libs, and "Harper Valley PTA," by Jeannie C.
Riley, in consideration for advance payments against future royalties that will
accrue on all tapes and CDs that are sold by the Company. To date the Company
has not attempted to exploit these master recordings, has not received any
royalties, and has not recognized any revenue or income as a result of this
agreement.
In July 1997, the Company entered into a joint venture agreement with
Multimedia Industries Corporation ("MMIC") regarding the production of 20
compilation CDs per year by the Company. According to the terms of the
agreement, all net income from the production, development and distribution of
the releases are to be divided equally on a 50%-50% basis between the Company
and MMIC. No revenues have been earned under this agreement. One of the
Company's executive officers and directors, Joseph Venerri, is a principal
shareholder of MMIC, and Richard Bluestine, the Company's Chief Financial
Officer and a director of the Company, is a shareholder of MMIC, and from June
1995 through May 1997, was an officer and director of MMIC. (See "CERTAIN
RELATIONSHIPS AND RELATED PARTIES").
In July 1997, the Company entered into an agreement with Nippon
Columbia Co. Ltd. ("NCC"). Pursuant to the terms of this agreement, the Company
granted the exclusive rights to NCC and its wholly owned subsidiary, Denon
Corporation, USA, to press, duplicate, distribute, sell and market music CDs and
video tapes in Japan, Hong Kong, Taiwan, Korea and Singapore. According to the
terms of the agreement, an advance payment was made to the Company of $150,000
and allocated towards the purchase price of finished products and the payment of
future license royalties due to the Company. The agreement is for a term of 16
months, and may be renewed by NCC provided NCC makes certain minimum payments
and purchases during the term of the agreement. In July, 1998, the Company
shipped 50 of the 100 compilation CDs to NCC for distribution into the above
markets pursuant to the agreement.
In February, 1998, the Company entered into an agreement with Monaco
Records of Monaco to form a joint venture to distribute the Company's products
throughout Europe on a non-exclusive basis under the label Monaco/PNEC, and the
Company has the exclusive rights to market and distribute the recordings of any
new artists produced by the joint venture on an exclusive basis in North
America. According to the agreement, all catalogue sales, after costs, will be
divided on a fifty-fifty percent basis. To date the Company has received no
royalties, and has recognized no revenue or income as a result of this joint
venture.
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On April 30, 1998, the Company entered into a multi-phase agreement to
expand and enhance the Company's website (www.planetentertainment.com) with
Atlantic Coast Digital Concepts, Inc. ("ACDC"). ACDC specializes in new media
technologies including content and process management, user interface design and
development, hosting, and VRML site configuration, for a large variety of
Internet applications. It is expected that this project will be substantially
completed by the second quarter of 1999.
On May 18, 1998, the Company entered into an agreement with New
Millennium Communications, Ltd. to form a joint venture operating under the name
Planet Entertainment Europe, Ltd. concerning the licensing and distribution of
master recordings owned by the Company. According to the terms of the agreement,
Planet Entertainment Europe, Ltd. has the non-exclusive right to market,
reproduce and distribute all subject master recordings for a term of 99 years,
with each party to the joint venture to recover their respective costs and to
divide any resultant profits on a 50%-50%, equal basis. As of June 1998, the
Company has contributed 15 compilations of its master recordings to the joint
venture, and distribution is expected to begin in the Winter of 1998-99. To
date, however, the Company has received no royalties, and has recognized no
revenue or income as a result of this agreement.
In June 1998, the Company authorized and issued 500 shares of 7% Series
A Convertible Preferred Stock to JNC Opportunity Fund Ltd. at a stated value of
$10,000 per share for a total of $5 million. Each share of the Preferred Stock
over a period of two years is convertible into the Company's common stock at the
lesser of (a) $8.885 per share, (b) or 78% multiplied by the average of the five
lowest per share market price of the Company's common stock during ten trading
days immediately preceding notice of conversion. In connection with this
transaction, the Company issued warrants to purchase 75,000 shares of the
Company's common stock to JNC Opportunity Fund Ltd. at a price of $9.625 per
share exercisable over a term of five years, and the Company also issued
warrants to purchase 150,000 shares of the Company's common stock to CDC
Consulting, Inc. at a price of $9.625 per share over a term of five years from
June 1998. As a result of this transaction, the Company received net proceeds of
approximately $4,475,000. Under the terms of the Preferred Stock Agreements the
Company was required to file a registration statement for 200% of the common
stock underlying the Preferred Shares, including payment of dividends thereon in
the form of Common Stock, at the conversion price of $8.885 per share, or 78%
multiplied by the average of the five lowest per share market values of the
Company's common stock during ten trading days immediately preceding notice of
conversion, along with an additional 225,000 shares of common stock underlying
the warrants within 30 days of the Closing Date, and if such registration
statement was not declared effective within 95 days from the Closing Date or by
September 4, 1998, according to the Preferred Stock Agreements, the conversion
price will decrease by 2.5%. Each month thereafter the conversion price shall
decrease by 2.5%, and after the second month, the Preferred shareholder may
demand additional 2.5% cumulative discounts or the payment of 2.5% of the stated
value of the preferred shares each month until such registration statement
becomes effective. On September 23, 1998, the Company filed a registration
statement on SEC Form 10-SB.
32
<PAGE>
In September, 1998, the Company executed an agreement to purchase all
of the issued and outstanding capital stock of NEOS in consideration for $2.25
million in cash, and a non-interest bearing Promissory Note in the amount of
$750,000, of which $375,0000 is payable on or about March 1999 and the remaining
$375,000 is payable on or about September 1999, and options to purchase 250,000
shares of the Company's common stock. If this transaction is consummated it will
be effective as of September 1, 1998. The Company's agreement to purchase NEOS
is subject to the consent of NEOS' secured creditor, and the Company is unable
to give any assurances that it will be able to secure the consent of NEOS'
secured creditor, or that the acquisition of NEOS will not consume a substantial
amount of the Company's cash and working capital. The Company anticipates
closing the transaction during September 1998. (See "DISTRIBUTION", "PENDING
ACQUISITION" and "LACK OF SUFFICIENT CAPITAL RESOURCES").
ITEM 17. MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED FINANCIAL AND OPERATING DATA
The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and notes thereto
appearing elsewhere herein. The selected statement of operations data for the
periods ended December 31, 1996 and 1997 and the selected balance sheet data as
of December 31, 1996 and 1997 have been derived from the Financial Statements,
which have been audited by the Company's independent public accountants, and are
included elsewhere in this Registration Statement. The selected statement of
operations data for the six months ended June 30, 1997 and 1998, and the
selected balance sheet data as of June 30, 1997 and 1998 have been derived from
the unaudited financial statements of the Company which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial condition and
results of operation for these interim periods.
The results for the six months ended June 30, 1998 are not necessarily
indicative of results that may be expected for any other interim period or for
the entire year. The Company expects that it will experience seasonality in its
business, reflecting a combination of seasonal fluctuations in Internet usage
and traditional retail seasonality patterns affecting sales of recorded music.
Sales in the traditional retail music industry are significantly higher in the
fourth calendar quarter of each year than in the preceding three quarters.
33
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Six Months Ended
(Inception) June 30,
May 17, 1996 through Year Ended ----------------------------
December 31, 1996 December 31, 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statement of Operations Data: (unaudited) (unaudited)
Revenue $ 105,000 $ 293,428 $ 23,326 $ 63,464
Costs & Expenses
Cost of Sales -- $ 19,052 -- $ 11,413
Selling, General and
Administrative Expenses $ 104,342 $ 794,314 $ 375,617 $ 378,848
Depreciation and Amortization $ 10,005 $ 40,592 $ 17,833 $ 22,002
Interest Expense $ 43,100 $ 144,382 $ 71,777 $ 77,991
Bad Debt Expense -- $ 105,000 $ 105,000 --
Other Income -- -- -- $ 11,792
Net (loss) $ (52,447) $ (809,912) $ (546,901) $ (414,998)
Net (loss) per share $ (.02) $ (.08) $ (.05) $ (.04)
Weighted Average Number of
Common Shares Outstanding 3,377,255 10,211,250 10,035,917 11,776,635
Balance Sheet Data:
Total Assets $ 14,057,688 $ 14,447,835 $ 14,170,991 $ 18,856,393
Total Liabilities $ 6,104,110 $ 6,656,202 $ 6,431,315 $ 6,756,411
Current Assets $ 141,808 $ 327,453 $ 37,941 $ 4,758,013
Current liabilities $ 504,110 $ 1,306,202 $ 831,315 $ 1,406,411
Working capital (deficiency) $ (362,302) $ (978,749) $ (793,374) $ 3,351,602
Stockholders' equity $ 7,953,578 $ 7,791,633 $ 7,739,676 $ 12,099,982
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's strategy is to acquire new music catalogues of master
recordings, to record new artists, and to enhance digitally its existing music
catalogues of master recordings, and to package and compile these recordings on
to a CD format for licensing and sale through distributors and others, through
traditional and non-traditional distribution channels, including the Internet.
Since its inception, the Company has incurred significant net losses and, as of
June 30, 1998, had accumulated losses of $1,277,357. For the year ended December
31, 1997 and the six months ended June 30, 1998, 82% and 46% of the Company's
revenue was from studio rental sales, and 17% and 52% of the Company's revenue
was derived from the sale and licensing of the Company's products for these same
periods, respectively. In July 1998, the Company released 50 compilation CDs in
the Far East, pursuant to the terms of its agreement with Nippon Columbia Co.,
Ltd., and the Company expects to release an additional 50 compilation CDs in the
Fall of 1998 to this market. Also the Company plans to commence the distribution
of its products in Europe in the last quarter of 1998 pursuant to the terms of
its Planet Entertainment Europe joint venture with New Millenium Communications,
Ltd. and its joint venture with Monaco Records.
In accordance with industry practice, the Company records revenue from
the sale of CDs when such products are shipped to its customers. Studio rental
revenue is recognized when the services are performed, and royalty revenue is
recognized upon notification of retail sales by the Company's distributors.
Advances to the Company are recorded as deferred revenue, and are recognized
when earned by the Company pursuant to the terms of any agreement.
34
<PAGE>
The Company's results of operation are subject to seasonal variations.
The industry has historically experienced a decline in revenues and net income
during December, January and February. This decline is primarily due to the fact
that retailers purchase products from the Company prior to November 30 in
anticipation of holiday sales followed by heavier than normal returns after the
holidays.
RESULTS OF OPERATION
The following table sets forth, for the period indicated, certain items
derived from the Company's statements of operations as a percentage of gross
revenues.
<TABLE>
<CAPTION>
Six Months ended
June 30
May 17, 1998 (Inception) Year End --------------------------
Through December 31, 1996 December 31, 1997 1997 1998
------------------------- ----------------- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue 100% 100% 100% 100%
------ ------ ------ ------
Total net revenues 100% 100% 100% 100%
Cost of Sales -- 6% -- 18%
------ ------ ------ ------
Gross Profit 100% 94% 100% 82%
------ ------ ------ ------
Expenses:
Depreciation and amortization 10% 14% 76% 35%
Selling general and
administrative expenses 100% 271% 1,610% 597%
Bad Debt Expense -- 36% 450% --
------ ------ ------ ------
110% 321% 2,136% 632%
------ ------ ------ ------
Operation Income(loss) (10)% (227)% (2,036)% (550)%
Interest Expense 41% 49% 301% 123%
Other Income -- -- -- 19%
------ ------ ------ ------
Pre-tax Income(loss) (51)% (276)% (2,345)% (654)%
Income Tax Expense -- -- -- --
------ ------ ------ ------
Net Income(loss) (51)% (276)% (2,345)% (654)%
------ ------ ------ ------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997.
NET REVENUE. Net revenue primarily reflects the sales of CDs and
related merchandise, net of estimated returns, and studio rental revenue. Net
sales increased by $40,138 or 172%, to $63,464 for the six months ended June 30,
1998 compared to $23,326 for the six months ended June 30, 1997. This increase
is primarily attributable to an increase in studio rental revenues and an
increase in sales of compact disks through the Company's Higher Ground Records
subsidiary.
For the six months ended June 30, 1998, the Company did not record any
material revenue from international sales. In July 1998, the Company shipped 50
of the 100 compilation CDs to Nippon Columbia, Ltd. for distribution in the Far
East, and the Company expects that net sales
35
<PAGE>
from international markets will start to grow in the future and could or will
become significant in the future.
COST OF SALES. Cost of sales consists primarily of the cost of
merchandise sold to customers, including product fulfillment and outbound
shipping and handling, and studio production costs. Cost of sales also includes
royalties paid by the Company on CD sales. For the six months ended June 30,
1997, the Company's revenues were almost exclusively derived from studio rental
sales, and the Company did not incur any significant additional cost of sales.
Cost of sales for the six months ended June 30, 1998 was $11,413, and the
Company's gross profit margin on these sales was 82% for this period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense consists of payroll, consulting fees, legal and
accounting fees, costs of marketing, travel expenses and other general corporate
expenses. Selling, general and administrative expense increased by $3,231 to
$378,848 for the six months ended June 30, 1998 compared to $375,617 for the six
months ended June 30, 1997. This increase was primarily due to the recruitment
and hiring of additional personnel and increases in professional fees and travel
expenses. As a percentage of net sales, these expenses decreased by 597% for the
six months ended June 30, 1998 compared to 1610% for the six months ended June
30, 1997.
NET LOSS. The Company incurred a net loss of $414,998 for the six
months ended June 30, 1998 compared to a net loss of $546,901 for the six months
ended June 30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD MAY 17, 1996
(INCEPTION) THROUGH DECEMBER 31, 1996
NET REVENUE. Net revenue primarily reflects the sales of CDs and
related merchandise, net of estimated returns and studio rental revenues. Net
revenues increased by $188,428 or 179%, to $293,428 for the year ended December
31, 1997 compared to $105,000 for the period May 17, 1996 (inception) through
December 31, 1996. In fiscal 1996, revenue consisted of producer's and
publisher's royalties with respect to the Bob Marley Album, "Soul Almighty." In
fiscal 1997, that amount was reserved in its entirety. (See "RECENT BUSINESS
DEVELOPMENTS"). This increase is primarily attributable to studio fees
associated with the Century Records releases and the rental of studio time and
services. At December 31, 1997, one customer accounted for more than 10% of the
Company's sales, and should the Company lose this customer or fail to attract
new customers, its business and operating results may be materially and
adversely affected.
COST OF SALES. Cost of sales consists primarily of the cost of
merchandise sold to customers, including product fulfillment and outbound
shipping and handling. Cost of sales also includes royalties paid by the Company
on CD sales in return for licensing of ratings, reviews and other information,
as well as production costs. There were no costs of sales for the period May 17,
1996 (inception) through December 31, 1996. Cost of sales for the year ended
December 31, 1997
36
<PAGE>
was $19,052, consisting primarily of studio production costs. The Company's
gross profit margin was 94% for the year ended December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense which consists primarily of payroll, consulting fees,
legal and accounting fees, sales, marketing, professional fees, travel and other
corporate expenses, increased by $689,972 to $794,314 for the year ended
December 31, 1997 compared to $104,342 for the period May 17, 1996 (inception)
through December 31, 1996. As a percentage of net sales, these expenses were
271% for the year ended December 31, 1997 and 100% for the period May 17, 1996
(inception) through December 31, 1996. This increase was due to increased costs
related to corporate expansion.
INTEREST EXPENSE. Interest expense consists primarily of accruals on
related party debt. Interest expense increased by $101,282 to $144,382 for the
year ended December 31, 1997 compared to $43,100 for the period May 17, 1996
(inception) through December 31, 1996. As a percentage of net sales, these
expenses increased to 49% for the year ended December 31, 1997 from 41% for the
period May 17, 1996 through December 31, 1996. This increase was due primarily
to increased debt incurred in 1996 and interest accrued thereon in 1997.
NET LOSS. The Company incurred a net loss of $809,912 for the year
ended December 31, 1997 compared to a net loss of $52,447 for the period May 17,
1996 through December 31, 1996. This increase was primarily due to an increase
in administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through advances and loans from its principal shareholders, as well as through
the private sales of capital stock totaling approximately $5,547,773, which
included approximately $4.475 million raised in June of 1998.
Net cash used in operating activities totaled $295,791 for the year
ended December 31, 1997 compared to net cash used in operating activities of
$63,245 for the period May 17, 1996 through December 31, 1996. Net cash used in
operating activities for the year ended December 31, 1997 was attributable to a
net loss of $809,912 and increases in accounts receivable of $204,710 and
prepaid expenses of $89,264, partially offset by increases of $131,926 in
accounts payable and accrued expenses, $144,384 in accrued interest on related
party debt, $146,226 in deferred revenues, and $40,592 in depreciation and
amortization.
Net cash used in operating activities was $118,519 for the six months
ended June 30, 1998 compared to net cash used by operating activities of
$209,084 for the six months ended June 30, 1997. For the six months ended June
30, 1998, net cash used in operating activities was attributable to a $414,998
net loss, $248,347 from the issuance of common stock for services, and a
$146,655 increase in prepaid expenses, partially offset by a $98,171 increase in
accounts payable and accrued expenses, a $77,991 increase in accrued interest,
and $23,002 in depreciation and amortization.
37
<PAGE>
Net cash used in investing activities totaled $10,094 for the year
ended December 31, 1997 for the purchase of equipment. No cash was used for
investing activities for the period May 17, 1996 (inception) through December
31, 1996.
Net cash from financing activities totaled $302,557 for the year ended
December 31, 1997 compared to $70,243 for the period May 17, 1996 through
December 31, 1996. The increase was principally attributable to $118,557 in
proceeds from advances from stockholders and proceeds from the issuance of notes
payable, and $84,000 from the issuance of common stock.
Cash flows from financing activities was $4,399,973 for the six months
ended June 30, 1998 compared to $209,414 provided by financing activities for
the six months ended June 30, 1997. This increase was primarily the result of
$4.475 million in net proceeds received from the private placement of shares of
7% Series A convertible Preferred Stock, net of issuance costs of approximately
$525,000 and the proceeds from issuance of notes of $150,000. The Company also
repaid $250,000 in obligations to related parties.
As of June 30, 1998, the Company had $4,285,124 of cash and cash
equivalents. As of that date, the Company's principal current commitments
consisted of obligations to J. Jake, Inc. and Music Marketeers, Inc. in the
amount of $1,000,000 of which $250,000 is currently due and remains unpaid. As
of June 1998, neither J. Jake, Inc., Music Marketeers, Inc. nor Gulf Coast
Music L.L.C. had completed their respective obligations to deliver unencumbered
title to 10,000 master recordings under the agreement. As of September 1, 1998,
the Company has made all principal payments due under the Promissory Note, and
has released a certain portion of these funds into an escrow account pending the
final resolution of this matter. In August 1998, Gulf Coast Music, Inc. and
Music Marketeers, Inc. granted the Company the right to reacquire 1,400,000
shares of its Common Stock and the outstanding portion of the $1,250,000
Promissory Note in exchange for approximately $3.025 million in cash and short
term notes, and the Company intends to obtain the approval of the Bankruptcy
Court of this agreement.
Accounts receivable as of June 30, 1998 totaled $207,161, net of
reserves of $105,000. These amounts are due from two customers, and are an
average of 180 days old. Of this amount, $184,684 is owed by MMIC, a related
party, whose principal shareholder, Joseph Venerri, is also the former
President, a principal shareholder, and a director of the Company, and whose
former officer, and current stockholder, Richard Bluestine, is also officer and
director of the Company. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
These reserves may be insufficient to cover actual losses, and the inability to
collect any of these amounts may adversely affect the Company's results of
operations.
There can be no assurance that the Company will be able to obtain
additional capital on favorable terms, if at all, if needed. Any additional
equity financing will be dilutive to the Company's shareholders, and if
available, may involve restrictive covenants with respect to dividends, raising
future capital and other financial and operational matters which could restrict
its operations or finances. If the Company is unable to obtain additional
financing as needed and on favorable terms,
38
<PAGE>
the Company may be required to reduce the scope of its operations or slow its
anticipated expansion, which could have a material adverse effect on the
financial results of the Company.
At June 30, 1998, the Company had a net operating loss ("NOL")
carryforward of approximately $915,000, which will begin to expire in 2012. The
utilization of the NOL carryforward may be limited as there is no assurance as
to future taxable income.
In 1997 and during the first half of 1998, the Company generated
$5,155,240 from investing and borrowing activities. During 1996 and 1997, the
Company borrowed $100,000 and $166,234, respectively in the form of a series of
Promissory Notes, payable upon demand and bearing an interest rate of 9% from
Walextin, Inc. ("Walextin"), a corporation owned and controlled by two principal
shareholders and directors of the Company, Messrs. Arnone and Giakas. In
addition, in May, 1997, the Company issued 28,000 shares of common stock to two
individuals residing in the Municipality of Monaco in consideration for $84,000.
In January 1997, the Company borrowed $100,000 from Briollette Investments, Ltd.
in the form of a 10% Promissory Note due, together with interest, in January
1998. In December, 1997, the Company renegotiated the note whereby Briollette
Investments, Ltd. canceled the note due January 1998 in exchange for 1,100,000
shares of the Company's common stock, and in January 1998, lent the Company an
additional $150,000 in exchange for a 10% promissory note due January 1999. In
January 1998, the Company borrowed an additional $16,150 from Walextin, and
another Company controlled by Messrs. Arnone and Giakas on demand and paying 9%
interest per annum. (See "Certain Relationships and Related Transactions").
Between December 1997 and April 1998, the Company, through its Board of
Directors, authorized the issuance of approximately 1,843,000 shares of Common
Stock in a private offering to related and unrelated parties for the purposes of
performing on certain contractual obligations and compromising or paying in full
certain accounts payable and trade liabilities totaling approximately $501,314,
a portion of which was attributable to expenses incurred by the Company in 1997,
and the six months ended June 30, 1998. To the extent that the Company has
issued Common Stock in performance on certain contracts to be performed after
1997, the Company has recorded these amounts as pre-paid expenses over the term
of any such contract or agreement relating to the provision of services to the
Company.
In June 1998, the Company authorized and issued of 500 shares of 7%
Series A Convertible Preferred Stock to JNC Opportunity Fund Ltd. at a stated
value of $10,000 per share for a total of $5 million. Each share of the
Preferred Stock for a period of two years is convertible into the Company's
Common Stock at the lesser of (a) $8.885 per share, or (b) 78% multiplied by the
average of the five lowest per share market values of the Company's Common Stock
during ten trading days immediately preceding notice of conversion unless
adjusted as per the terms of the Preferred Stock. In connection with this
transaction, the Company issued warrants to purchase 75,000 shares of the
Company's Common Stock to JNC Opportunity Fund Ltd. at a price of $9.625 per
share exercisable for a term of five years, and the Company also issued warrants
to purchase 150,000 shares of the Company's Common Stock to CDC Consulting, Inc.
at a price of $9.625 per share over a term
39
<PAGE>
of five years from June 1998. As a result of this transaction, the Company
received net proceeds of approximately $4,475,000. Under the terms of the
Preferred Stock Agreements, the Company is required to file a registration
statement for 200% of the Common Stock underlying the Preferred Shares
(including payments of dividends thereon in the form of Common Stock) at the
conversion price of the lesser of $8.885 per share, or 78% multiplied by the
average of the five lowest per share market price of the Company's Common Stock
during ten trading days immediately preceding notice of conversion, along with
an additional 225,000 shares of Common Stock underlying the warrants, within 30
days of the Closing Date, and if such registration statement was not declared
effective within 95 days from the Closing Date or by September 4, 1998.
According to the Preferred Stock Agreements, if the applicable dates are not
complied with, the conversion price shall decrease by 2.5%, and after the second
month, the Preferred shareholder may demand additional 2.5% cumulative discounts
or the payment of 2.5% of the stated value of the preferred shares each month
until such registration statement becomes effective. The Company did not comply
with certain required dates.
The Company is highly dependent upon its ability to borrow money or
sell its capital stock until such time as other sources of capital are obtained
or cash flow from operations is adequate to fund the Company's continuing
operations and service existing debt. (See "LACK OF SUFFICIENT CAPITAL
RESOURCES").
ITEM 18. DESCRIPTION OF PROPERTY
The Company's principal office, located at 222 Route 35 South,
Middletown, New Jersey 07748, is leased from the brother-in-law of Wallace
Giakas, an officer, director, and one of the Company's principal shareholders in
consideration for the sum of $1,000 per month for a term of three years. The
Company also rents a 1,500 square foot facility in Jackson, New Jersey, for the
sum of one dollar per month for a term of five years from Joseph Venerri, an
officer, director, and principal shareholder of the Company, where the Company
operates a full service, 24-track recording studio. (See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS"). No assurances can be made that these shareholders or
their relatives may not in the future demand increased rent from the Company in
consideration for the use of these properties, or that the Company will not
relocate its operations at substantial cost to the Company, if necessary, which
may adversely affect the Company's financial condition and results of
operations.
Currently, the Company is also party to a five year lease agreement
relating to approximately a 13,400 sq. ft. facility located on 15 East 8th
Street, Chester, Pennsylvania from Albert N. Albertini, Albert V. Albertini,
Christopher M. Albertini, and Al Alberts On Stage, Ltd. These premises are
leased for a term of five years from March 1, 1997 through February 28, 2002,
and which may be renewed at the election of the Company for an additional five
years. Rent during the initial term is equal to debt service on the mortgage and
the real estate taxes imposed on the premises of approximately $24,000 per year.
At the end of the first term, the Company has the option to acquire the premises
for $10, with the assumption of certain liabilities principally consisting of an
outstanding mortgage in the approximate amount of $226,500. These studios are
utilized by the
40
<PAGE>
Company to produce enhanced musical compositions and new master recordings to be
distributed by the Company and others.
ITEM 19. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since June 1996, the Company has obtained the use of certain office and
production space located in Jackson, New Jersey from Joseph Venerri, one of its
directors and principal shareholders for a term of five years for the sum of one
dollar per month. In addition, the Company has entered into a lease agreement
with the brother-in-law of Wallace Giakas, one of the Company's principal
shareholders and directors, for the rent of office space in Middletown, New
Jersey for rent in the amount of $1,000 per month for a term of three years.
Since the Company's inception, the Company has been highly dependent on
loans from its principal shareholders, Messrs. Arnone and Giakas, and from
others. As of December 31, 1997, there was approximately $266,234 due and owing
Arnone and Giakas. During 1996 and 1997, the Company borrowed $100,000 and
$166,234, respectively, in the form of a series of Promissory Notes, payable
upon demand and bearing an interest rate of 9% from Walextin, Inc. ("Walextin"),
a corporation owned and controlled by Messrs. Arnone and Giakas. In January
1998, the Company borrowed an additional $16,150 from Walextin, and another
Company also owned and controlled by two of its principal shareholders, Messrs.
Arnone and Giakas, payable on demand bearing interest at 9% per annum.
In September 1996, the Company entered into a production and
distribution agreement with Multi-Media Industries Corporation ("MMIC"), to
distribute the recordings and compilations under the label Century Records, and
pursuant to which the Company was to receive compensation in the form of 10% of
the cash receipts, net of returns, of the production and distribution of ten
compact diskettes, including six enhanced multi-media compact diskettes.
Pursuant to the terms of the agreement, MMIC was required to pay directly or
reimburse the Company for all production costs. For the six month period ended
June 30, 1998, the Company recorded income of approximately $3,775 under this
agreement. One of the Company's Vice Presidents, directors and principal
shareholders, Joseph Venerri, is also a principal shareholder of MMIC, and
Richard Bluestine, the Company's Chief Financial Officer and a director of the
Company, is also a shareholder of MMIC, and from June 1995 through May 1997, was
an officer and director of MMIC.
In 1997, the Company entered into a joint venture agreement with MMIC.
The agreement provides for the production of a minimum of 20 new releases per
year, contingent upon attaining a specified level of funding. All net revenue
from the production, development and distribution of releases under the
agreement will be split 50% to the Company and 50% to MMIC. Under the agreement,
the Company is entitled to a distribution royalty for foreign and domestic
distribution of the produced compact disks. No revenues have been earned under
this agreement, and in 1998, the Company expects that revenues pursuant to this
agreement will not exceed 3% of the Company's total revenues.
41
<PAGE>
There are no other material agreements and/or arrangements between the
Company, its officers, directors or shareholders, and the Company believes that
the terms of its agreements with related parties are no less favorable to the
Company than those that would be available from unrelated third parties.
ITEM 20. MARKET PRICE OF COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is currently traded on the National
Association of Securities Dealers, Inc. Automated Quotation System's Bulletin
Board (OTC:BB), and only a limited public trading market exists for the
Company's outstanding stock. There can be no assurance that an active public
market will develop for this outstanding Common Stock. Further, no assurance can
be given that, in the event that such a public market does develop, the price
will be equal to or higher than the price established by the Company upon the
issuance of such equity. Prices for the Company's securities are as follows:
High Low Close
---- --- -----
1996
December 31, 1996 $ 3.75 $ 1.00 $ 3.75
1997
March 31, 1997 $10.00 $ 3.625 $ 8.875
June 30, 1997 $ 8.875 $ 7.625 $ 7.875
September 30, 1997 $ 8.00 $ 3.50 $ 4.750
December 31, 1997 $ 6.00 $ 2.75 $ 2.875
1998
March 31, 1998 $ 4.87 $ 1.87 $ 3.000
June 30, 1998 $11.43 $ 2.75 $ 6.000
- ----------
Source: National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ"), OTC Bulletin Board.
DIVIDEND POLICY. The Company has not paid any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements, applicable contractual restrictions and
such other factors as the Board of Directors deems relevant.
VOLATILITY AND LIMITED MARKET. The market price of the Company's Common
Stock has in the past been highly volatile and is expected to continue to be
subject to significant price and volume fluctuations in the future based on a
number of factors, including market uncertainty about
42
<PAGE>
the Company's financial condition or business prospects; shortfalls in the
revenues or results of operations expected by securities analysts; announcements
of new products by the Company or its competitors; quarterly fluctuations in the
Company's financial results or in the results of other entertainment companies,
including those of direct competitors of the Company; changes in analysts'
estimates of the Company's financial performance, the financial performance of
competitors, or the financial performance of entertainment companies in general;
the introduction of new products or product enhancements by the Company or its
competitors; general conditions in the industry; changes in prices for the
Company's products or competitors' products; changes in revenue growth rates for
the Company, and its competitors in general; changes in the mix of revenues
attributable to domestic and international sales; and seasonal trends in
purchases and other general economic conditions.
In addition, the stock market may from time to time experience extreme
price and volume fluctuations, which particularly affect the market for the
securities of many entertainment companies and which have often been unrelated
to the operating performance of the specific companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future. To date, the Company has
neither declared nor paid any cash dividends on shares of its Common Stock. The
Company presently intends to retain all profits for its business for operations
and it does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
ITEM 21. EXECUTIVE COMPENSATION.
The following table sets forth the cash and accrued compensation, and
warrants issued by the Company to each executive officer of the Company for the
year ended December 31, 1997. No compensation was accrued during the period May
17, 1996 (inception) through December 31, 1996 or the six months ended June 30,
1998, nor has any compensation been paid to any officer or director of the
Company with the exception of Joseph Venerri. In 1997, Mr. Venneri received cash
compensation of approximately $36,200.
<TABLE>
<CAPTION>
Other Long Term Total
Name Of Individual Principal Position Year Salary Compensation Compensation Compensation
- ------------------ ------------------ ---- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
John S. Arnone President, Chief Executive 1996 - 0 - - 0 - - 0 - - 0 -
Officer, Director 1997 $ 31,250 $3,359,493 - 0 - $3,390,743
1998 $125,000 $ 573,875 (1) - 0 - $ 698,875
Wallace M. Giakas Chairman of the Board, 1996 - 0 - - 0 - - 0 - - 0 -
Secretary 1997 $ 31,250 $3,359,493 - 0 - $3,390,743
1998 $125,000 $ 573,875 (1) - 0 - $ 698,875
Joseph Venneri Executive Vice President 1996 - 0 - - 0 - - 0 - - 0 -
Director 1997 $ 36,200 $3,359,493 - 0 - $3,395,693
1998 $125,000 - 0 - - 0 - $ 125,000
Richard Bluestine Executive Vice- 1996 - 0 - - 0 - - 0 - - 0 -
President, Finance 1997 $ 18,750 $ 537,519 - 0 - $ 556,269
Director, Chairman of 1998 - 0 - - 0 - - 0 - - 0 -
Audit Committee
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Other Long Term Total
Name Of Individual Principal Position Year Salary Compensation Compensation Compensation
- ------------------ ------------------ ---- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Louis J. DelSignore *Vice President, 1998 $145,000 - 0 - (3) - 0 - $ 145,000
Director
Ron Nicks *Vice President, 1998 $125,000 - 0- (4) - 0 - $ 125,000
Director
</TABLE>
- -------------
* These persons will not be officers until the acquisition by the Company of
Northeast One Stop, Inc. is fully consummated and therefore their positions and
these terms are subject to change.
(1) Includes options to purchase 125,000 shares of the Company's common
stock exercisable at $5.25 per share over a period of five years
granted to Messrs. Arnone and Giakas as compensation in connection with
the acquisition of Northeast One Stop, Inc. At the time these options
were granted, the price of the Company's stock was $5.25 per share.
(2) The Company has not entered into an executive compensation agreement
with Mr. Bluestine as of September 15, 1998. In the event that the
Company does not offer or is unable to secure an executive compensation
agreement with Mr. Bluestine, the Company intends on hiring a new chief
financial officer.
(3) Does not include options to purchase 250,000 shares of the Company's
common stock exercisable at the lesser of $5.25 per share or the
closing bid price for the Company's securities at the time of Closing
over a period of two years as granted to Mr. Del Signore in connection
with the acquisition of Northeast One Stop, Inc. At the time these
options were granted, the price of the Company's stock was $5.25 per
share. (See "PENDING ACQUISITION").
(4) Does not include options to purchase 150,000 shares of the Company's
Common Stock exercisable at $5.25 per share over a period of three
years from September 17, 1998 granted to Mr. Nicks, 75,000 of which
vested upon execution of his executive compensation agreement with the
Company on September 17, 1998, with the remaining options to vest over
the term of the agreement. At the time these options were granted, the
price of the Company's stock was $5.25 per share.
EMPLOYMENT AGREEMENTS
As of even date, with the exception of Joseph Venneri, none of the
officers and directors have received any cash compensation from the Company. As
set forth above, the amounts due to officers and directors have been accrued and
expensed for the year ended December 31, 1997.
On January 29, 1997, the Board of Directors approved the employment
agreements, effective January 1, 1997, for Wallace Giakas, Joseph Venneri, John
Arnone and Richard Bluestine for the amounts indicated. However, on March 24,
1998, the individual officers and directors of the Company, agreed to waive,
except with respect to the accrued amounts shown above, all other amounts due or
owing pursuant to these employment agreements effective March 31, 1998. The
Board did however retain certain incentive based compensation for the Board of
Directors of the Company in the form of warrants which are convertible into 10
shares of Company's common stock at the price of $2.00 over a term of ten years.
On August 14, 1998 the Company entered into an employment agreement
with Mr. Giakas. This agreement is for the term of ten years, and provides for
compensation in the amount $125,000 to Mr. Giakas together with annual incentive
based bonuses in the form of 2.5% of all pre-tax profits recorded by the Company
in accordance with Generally Accepted Accounting Principles ("GAAP"), and the
greater of 2% of the value of any acquisition made by the Company, as computed
by the purchase price plus the value of any additional consideration paid by the
Company in
44
<PAGE>
connection with any such acquisition, or 2% of the revenue reported by any such
acquisition in the preceding fiscal year by the acquiree. In the case that any
portion of such consideration shall consist of publicly held securities, the
market price of these securities shall be used to determine value, and the value
related to any option, warrant or right to purchase these securities shall be
determined by the Black-Scholes Model. In addition, Mr. Giakas is entitled to
2.5% of any capital raised for the Company. At the option of Mr. Giakas, any
compensation due under this provision may be converted into the Company's common
stock at a conversion price equal to the average closing bid price for the
Company's securities 30 days prior to any such acquisition or capital funding.
In connection with the acquisition of Northeast One Stop, Inc., Mr. Giakas has
waived all incentive based compensation due under the terms of his agreement and
to accept options to acquire 125,000 shares of the Company's common stock at a
price of $5.25 exercisable over a period of five years from the date of Closing.
This agreement also provides that in the event of a change control, Mr. Giakas
may resign and all amounts due and owing for the term of his agreement shall
become due and payable.
On August 14, 1998 the Company entered into an employment agreement
with Mr. Arnone. This agreement is for the term of ten years, and provides for
compensation in the amount $125,000 to Mr. Arnone together with annual incentive
based bonuses in the form of 2.5% of all pre-tax profits recorded by the Company
in accordance with Generally Accepted Accounting Principles ("GAAP"), and the
greater of 2% of the value of any acquisition made by the Company, as computed
by the purchase price plus the value of any additional consideration paid by the
Company in connection with any such acquisition, or 2% of the revenue reported
by any such acquisition in the preceding fiscal year by the acquiree. In the
case that any portion of such consideration shall consist of publicly held
securities, the market price of these securities shall be used to determine
value, and the value related to any option, warrant or right to purchase these
securities shall be determined by Black-Scholes. In addition, Mr. Arnone is
entitled to 2.5% of any capital raised for the Company. At the option of Mr.
Arnone, any compensation due under this provision may be converted into the
Company's common stock at a conversion price equal to the average closing bid
price for the Company's securities 30 days prior to any such acquisition or
capital funding. In connection with the acquisition of Northeast One Stop, Inc.,
Mr. Arnone has waived all incentive based compensation due under the terms of
his agreement and to accept options to acquire 125,000 shares of the Company's
common stock at a price of $5.25 exercisable over a period of five years from
the date of Closing. This agreement also provides that in the event of a change
control, Mr. Arnone may resign and all amounts due and owing for the term of his
agreement shall become due and payable.
On August 14, 1998 the Company entered into an employment agreement
with Mr. Venneri. This agreement is for the term of ten years, and provides for
compensation in the amount $125,000 to Mr. Venneri together with annual
incentive based bonuses in the form of 2.5% of all pre-tax profits recorded by
the Company in accordance with Generally Accepted Accounting Principles ("GAAP")
from the Company's Entertainment Division.
45
<PAGE>
As of September 15, 1998, the Company has no employment or executive
compensation agreement with Mr. Bluestine. In the event that the Company does
not secure an agreement with Mr. Bluestine, the Company intends to hire a new
chief financial officer. (See "DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL").
In connection with the Company's acquisition of Northeast One Stop,
Inc., the Company intends to secure the continued employment of Louis J.
DelSignore, the former sole shareholder of Northeast One Stop, Inc., for a term
of one year at the rate of $145,000 per year. In addition, the Company intends
to secure an employment or executive compensation agreement with Mr. Nicks for a
term of three years at the rate of $125,000 per year and options to acquire
150,000 shares of the Company's common stock at a price of $5.25 per share.
These options would vest over a period of three years with 75,000 options
vesting on September 17, 1998, and with the remaining 75,000 options to vest in
equal installments of 25,000, each year for the remaining three years.
As of September 15, 1998, the Company and its subsidiaries had a total
of six employees, all of whom were full-time employees. Of these, the Company
has no collective bargaining agreement with its employees and no union
represents them. There have been no interruptions or curtailments of operations
due to labor disputes and the Company believes that relations with its employees
are good.
ITEM 22. FINANCIAL STATEMENTS
Financial Statements: The financial statements filed herewith are set
forth in the Index to Financial Statements.
ITEM 23. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLSOURE.
AJ. Robbins, PC of Denver, Colorado was retained by the Company on
August 6, 1996, replacing Fung T. Yen, C.P.A, of San Gabriel California.
The Board of Directors retained AJ. Robbins, PC voluntarily and without
any disagreement with the Company's prior accountant.
46
<PAGE>
================================================================================
PROSPECTUS
[LOGO]
PLANET ENTERTAINMENT CORPORATION
1,441,336 SHARES
COMMON STOCK
$.001 PAR VALUE
================================================================================
TABLE OF CONTENTS
Summary Information and Risk Factors................................6
Use of Proceeds....................................................18
Determination of Offering Price....................................18
Dilution...........................................................18
Selling Security Holders...........................................19
Plan of Distribution...............................................19
Legal Proceedings..................................................20
Directors, Executive Officers......................................21
Security Ownership of
Certain Beneficial Owners and Management...........................22
Description of Securities..........................................24
Interest of Named Experts and Counsel..............................26
Disclosure of Commission Position on Indemnification
For Securities Act Liabilities.....................................26
Organization Within the Last Five Years............................27
Description of Business............................................27
Management's Discussion and Analysis...............................27
Description of Property............................................34
Certain Relationships and Related Transactions.....................41
Market For Common Equity...........................................21
Executive Compensation.............................................42
Financial Statements...............................................44
Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.............................47
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1998 (25 DAYS
AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Financial Statements:
Proforma Explanatory Headnote F-2
For the Year Ended December 31, 1997 (Unaudited)
Unaudited Proforma Consolidated Statement of Operations and
Comprehensive Loss F-3
For the Six Months Ended and as of June 30, 1998 (Unaudited)
Unaudited Proforma Consolidated Balance Sheet F-4
Unaudited Proforma Consolidated Statement of Operations and
Comprehensive Loss F-6
Notes to Proforma Consolidated Financial Statements F-7
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-14
Financial Statements:
Consolidated Balance Sheets F-15
Consolidated Statements of Operations F-16
Consolidated Statement of Stockholders' Equity F-17
Consolidated Statements of Cash Flows F-19
Notes to Consolidated Financial Statements F-20
</TABLE>
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PROFORMA EXPLANATORY HEADNOTE
The following unaudited proforma consolidated financial statements give effect
to the proposed acquisition by Planet Entertainment Corporation (the "Company")
of Northeast One Stop, Inc. ("NEOS") and are based on the estimates and
assumptions set forth herein and in the notes to such statements. This proforma
information has been prepared utilizing the historical financial statements of
the Company and notes thereto, which are included in this registration
statement. The historical financial statements of NEOS are unaudited and the
notes thereto are included in Note 6 to the proforma financial statements. The
proforma financial data does not purport to be indicative of the results which
actually would have been obtained had the acquisitions been effected on the
dates indicated or the results which may be obtained in the future.
The proforma consolidated balance sheet assumes the acquisition was consummated
at June 30, 1998. The proforma consolidated statements of operations for the
year ended December 31, 1997 and the six months ended June 30, 1998 includes the
operating results of the Company and NEOS for such periods.
Effective September 1, 1998, (the proposed effective date of the acquisition)
the Company will have acquired all of the issued and outstanding common stock of
NEOS. The purchase price for NEOS was $3,000,000 comprised of $2,250,000 in cash
and $750,000 in notes, of which $375,000 is to be paid by February 28, 1999 and
$375,000 is to be paid by August 31, 1999. Additionally, the Company granted
options to the stockholder of NEOS to purchase 250,000 shares of the Company's
common stock, exercisable at a price equal to the lesser of $5.25 per share or
the closing bid price of the Company's stock on the closing date of the
transaction, exercisable for a term of two years from the date of closing. The
cash paid at closing was obtained by the Company through its sale of 500 shares
of the Company's 7% non-voting, convertible preferred stock (for net proceeds of
$4,475,000) on May 31, 1998.
The purchase price for NEOS is estimated to be allocated as follows:
<TABLE>
<S> <C>
Inventory $ 8,000,000
Accounts receivable 4,500,000
Property and equipment 700,000
Other assets 100,000
Accounts payable (7,000,000)
Notes payable (4,700,000)
Capitalized lease obligations (200,000)
Other liabilities (400,000)
Goodwill 2,333,750
Options granted, NEOS stockholder - additional paid-in capital 814,000
-----------
Total purchase price (including acquisition costs of $1,147,750) 4,147,750
Less:
Notes payable (750,000)
Options granted, acquisition costs - additional paid-in capital (1,147,750)
-----------
Cash paid at closing $ 2,250,000
===========
</TABLE>
F-2
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Planet
Entertainment
Corporation and Northeast Proforma Consolidated
Subsidiaries One Stop, Inc. Adjustments Proforma
------------ -------------- ----------- --------
<S> <C> <C> <C> <C>
REVENUES:
Sales, net $ 49,883 $ 27,023,573 $ -- $ 27,073,456
Royalty 3,775 -- -- 3,775
Studio 239,770 -- -- 239,770
------------ ------------ ------------ ------------
Total Revenues 293,428 27,023,573 -- 27,317,001
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 19,052 22,776,854 -- 22,795,906
Selling, general and 794,314 3,195,389 -- 3,989,703
administrative
Depreciation and 40,592 263,587 58,000(3) 362,179
amortization
Interest expense -- 346,326 -- 346,326
Interest expense - related party 144,382 -- 74,000(4) 218,382
Bad debt expense 105,000 76,491 -- 181,491
------------ ------------ ------------ ------------
Total Costs and Expenses 1,103,340 26,658,647 132,000 27,893,987
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
PROVISION (BENEFIT) FOR
INCOME TAXES (809,912) 364,926 (132,000) (576,986)
------------ ------------ ------------ ------------
PROVISION (BENEFIT) FOR
INCOME TAXES:
Current -- 138,000 (138,000) --
Deferred -- 8,000 -- 8,000
------------ ------------ ------------ ------------
-- 146,000 (138,000) 8,000
------------ ------------ ------------ ------------
NET INCOME
(LOSS)/COMPREHENSIVE
INCOME (LOSS) $ (809,912) $ 218,926 $ 6,000 $ (584,986)
============ ============ ============ ============
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (.06)
============
Weighted average number of
common shares outstanding 10,211,250
============
</TABLE>
SEE ACCOMPANYING HEADNOTE AND NOTES TO UNAUDITED PROFORMA
CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
Planet
Entertainment
Corporation and Northeast Proforma Consolidated
Subsidiaries One Stop, Inc. Adjustments Proforma
------------ -------------- ----------- --------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,285,124 $ 49,428 $ (2,250,000) $ 2,084,552
Trade accounts receivable, net 12,315 4,188,105 -- 4,200,420
Accounts and notes receivable-
related parties 194,846 21,468 -- 216,314
Inventories -- 8,100,543 -- 8,100,543
Prepaid expenses and other
current assets 265,728 34,057 -- 299,785
Deferred income taxes -- 12,000 -- 12,000
Current maturities of notes
receivable -- 10,694 -- 10,694
------------ ------------ ------------ ------------
Total Current Assets 4,758,013 12,416,295 (2,250,000) 14,924,308
------------ ------------ ------------ ------------
PROPERTY, PLANT AND
EQUIPMENT, net 178,833 778,383 -- 957,216
------------ ------------ ------------ ------------
OTHER ASSETS, net
Record masters 13,800,000 -- -- 13,800,000
Goodwill 73,667 -- 2,737,969 2,811,636
Publishing rights 880 -- -- 880
Organization costs 45,000 -- -- 45,000
Security deposits -- 12,147 -- 12,147
Notes receivable less current
maturities -- 31,332 -- 31,332
------------ ------------ ------------ ------------
13,919,547 43,479 2,737,969 16,700,995
------------ ------------ ------------ ------------
$ 18,856,393 $ 13,238,157 $ 487,969 $ 32,582,519
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING HEADNOTE AND NOTES TO UNAUDITED PROFORMA
CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Planet
Entertainment
Corporation and Northeast Proforma Consolidated
Subsidiaries One Stop, Inc. Adjustments Proforma
------------ -------------- ----------- --------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Deferred revenue $ 145,292 $ 237,455 $ -- $ 382,747
Note payable - line of credit -- 3,531,774 -- 3,531,774
Notes payable - related party 150,000 -- -- 150,000
Accounts payable and accrued
expenses 316,871 7,659,636 -- 7,976,507
Accrued interest - related party 255,475 -- -- 255,475
Due to stockholder 288,773 374,000 -- 662,773
Current portion of long-term debt-
related parties 250,000 -- -- 250,000
Current portion of obligation under
capital lease -- 212,371 -- 212,371
Purchase obligation, current portion -- -- 375,000(4) 375,000
Due to customers -- 511,806 -- 511,806
------------ ------------ ---------- ------------
Total Current Liabilities 1,406,411 12,527,042 375,000 14,308,453
------------ ------------ ---------- ------------
LONG-TERM LIABILITIES:
Deferred taxes 4,600,000 -- -- 4,600,000
Long-term debt - related parties,
net of current portion 750,000 -- -- 750,000
Obligation under capital lease, net
of current portion -- 40,334 -- 40,334
Due to employee -- 75,000 -- 75,000
Purchase obligation, net of current
portion -- -- 375,000(4) 375,000
------------ ------------ ---------- ------------
Total Long-Term Debt 5,350,000 115,334 375,000 5,840,334
------------ ------------ ---------- ------------
Total Liabilities 6,756,411 12,642,376 750,000 20,148,787
------------ ------------ ---------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock 5,000,000 -- -- 5,000,000
Common stock 11,976 10,000 (10,000) 11,976
Additional paid-in capital 8,365,363 -- 333,750 8,699,113
Retained earnings (deficit) (1,277,357) 585,781 (585,781) (1,277,357)
------------ ------------ ---------- ------------
Total Stockholders' Equity 12,099,982 595,781 (262,031) 12,433,732
------------ ------------ ---------- ------------
$ 18,856,393 $ 13,238,157 $ 487,969 $ 32,582,519
============ ============ ========== ============
</TABLE>
SEE ACCOMPANYING HEADNOTE AND NOTES TO UNAUDITED PROFORMA
CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Planet
Entertainment
Corporation and Northeast Proforma Consolidated
Subsidiaries One Stop, Inc. Adjustments Proforma
------------ -------------- ----------- --------
<S> <C> <C> <C> <C>
REVENUES:
Sales, net $ 33,172 $ 14,535,664 $ -- $ 14,568,836
Royalty 1,274 -- -- 1,274
Studio 29,018 -- -- 29,018
---------- ------------ --------- ------------
Total Revenues 63,464 14,535,664 -- 14,599,128
---------- ------------ --------- ------------
COSTS AND EXPENSES:
Cost of sales 11,413 12,368,913 -- 12,380,326
Selling, general and
administrative 378,848 2,012,163 -- 2,391,011
Depreciation and
amortization 22,002 130,300 29,000(3) 181,302
Interest expense -- 220,516 -- 220,516
Interest expense - related party 77,991 -- 37,000(4) 114,991
---------- ------------ --------- ------------
Total Costs and Expenses 490,254 14,731,892 66,000 15,288,146
---------- ------------ --------- ------------
INCOME (LOSS) FROM
OPERATIONS (426,790) (196,228) (66,000) (689,018)
---------- ------------ --------- ------------
OTHER INCOME (EXPENSE):
Dividend income 11,792 -- -- 11,792
---------- ------------ --------- ------------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES (414,998) (196,228) (66,000) (677,226)
---------- ------------ --------- ------------
BENEFIT FOR INCOME TAXES:
Current -- -- -- --
Deferred -- (7,000) -- (7,000)
---------- ------------ --------- ------------
-- (7,000) -- (7,000)
---------- ------------ --------- ------------
NET (LOSS)/COMPREHENSIVE
(LOSS) $ (414,998) $ (189,228) $ (66,000) $ (670,226)
========== ============ ========= ============
NET (LOSS) $ (414,998) $ (189,228) $ (66,000) $ (670,226)
LESS PASSED PREFERRED STOCK
DIVIDENDS (20,317) -- -- (20,317)
---------- ------------ --------- ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDER $ (435,315) $ (189,228) $ (66,000) $ (690,543)
========== ============ ========= ============
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (.06)
============
Weighted average number of
common shares outstanding 11,776,635
============
</TABLE>
SEE ACCOMPANYING HEADNOTE AND NOTES TO UNAUDITED PROFORMA
CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PROFORMA ADJUSTMENTS
The adjustments relating to the proforma consolidated statements of operations
are computed assuming the acquisition of Northeast One Stop, Inc. ("NEOS") was
consummated at the beginning of the applicable periods presented.
NOTE 2 - ACQUISITION OF SUBSIDIARY
The proforma consolidated balance sheet as of June 30, 1998 reflects the
acquisition of the net assets of NEOS for debt and cash. The acquisition is
recorded using the purchase method.
NOTE 3 - ADDITIONAL AMORTIZATION
The proforma consolidated statement of operations for the year ended December
31, 1997 and six months ended June 30, 1998 reflect amortization of goodwill
using the straight-line method over 40 years.
NOTE 4 - PURCHASE OBLIGATION
In connection with the purchase of NEOS, the Company is obligated to pay the
NEOS stockholder $750,000 of which $375,000 is to be repaid by February 28, 1999
and $375,000 is to be repaid by August 31, 1999. Interest at 9% has been imputed
on the outstanding balance, and is reflected as a proforma adjustment.
NOTE 5 - ACQUISITION COSTS
Two stockholders of the Company were issued options to purchase 250,000 shares
of the Company's common stock valued at $1,147,750, in consideration for
advisory services rendered in connection with the acquisition.
NOTE 6 - NEOS NOTES TO PROFORMA FINANCIAL STATEMENTS
The following represents the footnotes to the proforma financial statements of
NEOS:
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
--------------------
NEOS was incorporated under the laws of New York on January 25, 1983.
NEOS distributes recorded music to the retail industry from its warehouse
located in Latham, New York. NEOS's products are sold through its sales
offices in Michigan, Vermont, Maryland, Pennsylvania and Brooklyn, New
York. NEOS grants credit to customers in the retail industry throughout
the nation. Consequently, NEOS's ability to collect the amounts due from
customers is affected by economic fluctuations in retailing.
CASH
----
NEOS maintains its cash accounts in commercial banks located in New York
and Rhode Island. The balance in each bank is insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000.
F-7
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NEOS FOOTNOTE TO PROFORMA FINANCIAL STATEMENTS (Continued)
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
INVENTORY
---------
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment including equipment, vehicles, leasehold
improvements and furniture and fixtures are stated at cost. Depreciation
is computed over the estimated useful lives of the assets using
straight-line and accelerated methods. Maintenance and repairs are charged
to operations in the period incurred.
FISCAL YEAR END
---------------
NEOS's fiscal year ends on the Saturday closest to August 31, which
results in a 52 or 53 week year.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
-----------------------------------------------------------
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 at
the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
INCOME TAXES
------------
Deferred income taxes are recorded to reflect the tax consequences in
future years of temporary differences between the tax basis of the assets
and liabilities and their financial statement amounts at the end of each
reporting period. Valuation allowances will be established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the current period and the
change during the period in deferred tax assets and liabilities.
The deferred tax assets and liabilities have been netted to reflect the
tax impact of temporary differences.
EARNINGS PER COMMON SHARE
-------------------------
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128) was issued in February 1997 (effective for financial
statements issued for periods ending after December 15, 1997). This
Statement simplifies the standards for computing earnings per share (EPS)
previously found in Accounting Principles Board Opinion No. 15, "Earnings
Per Share", and makes them more comparable to international EPS standards.
SFAS No. 128 replaces the presentation of primary EPS with a presentation
of basic EPS. In addition, the Statement requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
F-8
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NEOS FOOTNOTE TO PROFORMA FINANCIAL STATEMENTS (Continued)
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
ALLOWANCE FOR BAD DEBTS
-----------------------
Management provides for an allowance based on a review of specific
accounts and determination of collectibility.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 130, "Reporting Comprehensive Income", Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information", and Statement
No. 132, "Employer's Disclosures about Pensions and Other Postretirement
Benefits". These pronouncements, effective for fiscal years beginning
after December 15, 1997, have been adopted, and are reflected in the
financial statements and notes thereto, as applicable.
YEAR 2000 ISSUES
----------------
Many existing computer programs use only two digits to identify a year in
the date field, with the result that data referring to year 2000 and
subsequent years may be misinterpreted by these programs. If present in
the computer applications of the Company, or its suppliers and customers,
and not corrected, this problem could cause computer applications to fail
or to create erroneous results and could cause a disruption in operations
and have a short-term adverse effect on the Company's business and results
of operations. The Company will evaluate its principal computer system to
determine if they are substantially Year 2000 compliant.
NOTE B - NOTES RECEIVABLE
Notes receivable at June 27, 1998 consist of the following:
Installment note receivable due from an unrelated party.
Monthly payments of $850 including interest through
February 1999 at 8% per annum. $ 7,129
Installment note receivable due from an unrelated party.
Monthly payments of $500 include interest at 10% per annum
through November 2006. 34,897
----------
42,026
Less current portion 10,694
----------
$ 31,332
==========
F-9
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NEOS FOOTNOTE TO PROFORMA FINANCIAL STATEMENTS (Continued)
NOTE B - NOTES RECEIVABLE (Continued)
Future maturities of notes receivable are as follows:
Year ending June 26, 1999 $ 10,694
Year ending June 24, 2000 3,001
Year ending June 30, 2001 3,316
Year ending June 29, 2002 3,662
Year ending June 28, 2003 4,046
Thereafter 17,307
--------
$ 42,026
========
NOTE C - NOTES RECEIVABLE - RELATED PARTIES
Notes receivable-related parties, consist of amounts due from various
corporations related through common ownership and management.
NOTE D - FINANCING
NEOS has a $6,000,000 line of credit with Congress Financial Corporation,
collateralized principally by all of NEOS's assets and a $1,000,000 life
insurance policy on the stockholder. The line of credit is guaranteed by
the stockholder and certain related parties. Advances under the line of
credit are made on the basis of eligible accounts receivable and inventory
as defined in the line of credit agreement. Interest is charged at prime
plus 2%.
The provisions of the line of credit agreement contain various covenants.
NEOS is required to maintain a certain working capital and adjusted net
worth.
NOTE E - DUE TO STOCKHOLDER
Amounts due to the stockholder bear interest at 9%, and are due on or
before April 21, 1999. Interest expense for the year ended December 27,
1997 and six months ended June 27, 1998 $30,960 and $15,480, respectively.
NOTE F - PROVISION FOR INCOME TAXES
The composition of deferred tax assets and liabilities as of June 27, 1998
are as follows:
Total deferred tax assets $ 52,000
Total valuation allowance --
-------
Net total deferred tax assets 52,000
Total deferred tax liabilities (40,000)
-------
Net deferred tax assets $ 12,000
========
F-10
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NEOS FOOTNOTE TO PROFORMA FINANCIAL STATEMENTS (Continued)
NOTE F - PROVISION FOR INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and (liabilities) is as follows:
Property and equipment $ (40,000)
Inventory capitalization 28,000
Allowance for doubtful accounts 24,000
---------
$ 12,000
=========
The provision for income taxes consist of the following:
For the Six
For the Year Months
Ended Ended
December 27, June 27,
1997 1998
------------ --------
CURRENT:
Federal $116,000 $ --
State 22,000 --
-------- --------
Total Current Provision 138,000 --
-------- --------
DEFERRED:
Federal 7,360 (6,440)
State 640 (560)
-------- --------
Total deferred income taxes (benefit) 8,000 (7,000)
-------- --------
Total provision for income taxes $146,000 $ (7,000)
======== ========
Deferred income tax expense (benefit) for the year ended December 27, 1997
and June 27, 1998 relates to inventory capitalization.
The following is a reconciliation of the amount of income tax expense that
would result from applying the statutory federal income tax rates to
pre-tax income and the reported amount of income tax expense for the year
end:
Expected tax provision at federal statutory rates $ 124,000
Inventory capitalization 20,000
Excess of tax over back depreciation (54,000)
Bad debt expense 26,000
---------
$ 116,000
=========
F-11
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NEOS FOOTNOTE TO PROFORMA FINANCIAL STATEMENTS (Continued)
NOTE G - CAPITALIZED LEASE OBLIGATIONS
CAPITALIZED LEASE OBLIGATIONS
-----------------------------
NEOS leases various equipment under capitalized leases expiring through
2000. The assets have been recorded at the lower of the present value of
the minimum lease payments or their fair value and are generally
depreciated over the assets' estimated useful lives.
Minimum future lease payments under the capital leases are as follows:
<TABLE>
<S> <C>
Year ending June 29, 1999 $ 247,434
Year ending June 24, 2000 42,988
---------
Total minimum lease payments 290,422
Less amount representing interest 37,717
Present value of net minimum lease payments with interest at approximately
8% - 26% 252,705
Less current portion 212,371
---------
$ 40,334
=========
</TABLE>
The noncurrent portion of capitalized lease obligations are due during the
year ending June 24, 2000. As of June 27, 1998, machinery and equipment
includes $777,348 acquired through capital leases. Accumulated
depreciation related to these assets was $270,528.
NOTE H - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
---------------
NEOS leases its Latham office and warehouse from an affiliated company.
Rent paid to this Company was $128,000 and $72,000 for the year ended
December 27, 1997 and the six months ended June 27, 1998.
Future minimum rental payments required under operating leases are as
follows:
Year ending June 26, 1999 $ 120,000
Year ending June 24, 2000 180,000
Year ending June 30, 2001 180,000
Year ending June 29, 2002 180,000
Year ending June 28, 2003 180,000
Thereafter 2,340,000
-----------
Total $ 3,180,000
===========
F-12
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NEOS FOOTNOTE TO PROFORMA FINANCIAL STATEMENTS (Continued)
NOTE I - CONCENTRATION OF CREDIT RISK
MAJOR CUSTOMERS
---------------
During the year ended December 27, 1997, one customer accounted for
approximately 43% of sales. At December 27, 1997, the amounts due from
this customer included in accounts receivable, was approximately
$4,336,000. During the six months ended June 27, 1998, one customer
accounted for approximately 33% of sales. At June 27, 1998, the amount due
from this customer was approximately $1,695,000.
NOTE J - COMMON STOCK
Common stock consists of no par value, six shares issued and outstanding,
200 shares authorized.
NOTE K - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at June 27, 1998:
Leasehold improvements $ 25,357
Computer equipment 578,249
Computer software 158,900
Equipment 1,056,873
Furniture and fixtures 166,931
Rack jobbing fixtures 491,910
-----------
2,478,220
Accumulated depreciation and amortization (1,699,837)
-----------
$ 778,383
===========
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Planet Entertainment Corporation
Middletown, New Jersey
We have audited the accompanying consolidated balance sheet of Planet
Entertainment Corporation and subsidiaries, as of December 31, 1997 and 1996,
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for the year ended December 31, 1997 and
for the period from inception, May 17, 1996 to December 31, 1996. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Planet Entertainment
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and comprehensive loss and its cash flows for the year ended
December 31, 1997 and for the period from inception, May 17, 1996 to December
31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, on December 17, 1996, the
Company entered into an agreement of terms to amend and restate certain
agreements relating to the acquisition of masters and copyrights. The conditions
of the restated agreement are contingent on the approval by the bankruptcy
court. Should the bankruptcy court approval not be obtained, the original
agreements will remain in full force and effect. The effects are more fully
explained in the proforma balance sheet at Note 10.
Denver, Colorado
August 12, 1998
F-14
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,998 $ 3,670 $ 4,285,124
Accounts receivable, net 105,000 21,026 12,315
Accounts receivable, net - related party -- 183,684 194,846
Prepaid expenses and other current assets 29,810 119,073 265,728
------------ ------------ ------------
Total Current Assets 141,808 327,453 4,758,013
------------ ------------ ------------
EQUIPMENT, at cost, net 47,500 189,085 178,833
------------ ------------ ------------
OTHER ASSETS:
Record masters 13,800,000 13,800,000 13,800,000
Goodwill, net -- 77,917 73,667
Publishing rights, net 880 880 880
Organization costs, net 67,500 52,500 45,000
------------ ------------ ------------
Total Other Assets 13,868,380 13,931,297 13,919,547
------------ ------------ ------------
$ 14,057,688 $ 14,447,835 $ 18,856,393
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 65,767 $ 218,693 $ 316,871
Accrued interest expense, related party 43,100 177,484 255,475
Deferred revenue -- 146,225 145,292
Due to stockholders 145,243 263,800 288,773
Note payable, related party -- -- 150,000
Current portion of long-term debt, related party 250,000 500,000 250,000
------------ ------------ ------------
Total Current Liabilities 504,110 1,306,202 1,406,411
LONG-TERM DEBT, less current portion, related party 1,000,000 750,000 750,000
DEFERRED INCOME TAXES 4,600,000 4,600,000 4,600,000
------------ ------------ ------------
Total Liabilities 6,104,110 6,656,202 6,756,411
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, authorized,
10,000,000, $.0001 par value, 500 shares
issued and outstanding -- -- 5,000,000
Common stock, $.001 par value; 50,000,000
shares authorized; 9,826,055, 11,421,966 and
11,976,055 shares issued and outstanding 9,826 11,422 11,976
Additional paid-in capital 7,996,199 8,642,570 8,365,363
Accumulated deficit (52,447) (862,359) (1,277,357)
------------ ------------ ------------
Total Stockholders' Equity 7,953,578 7,791,633 12,099,982
------------ ------------ ------------
$ 14,057,688 $ 14,447,835 $ 18,856,393
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-15
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the Period
May 17, 1996 For the Year For the Six For the Six
(Inception) to Ended Months Ended Months Ended
December 31, December 31, June 30, June 30,
1996 1997 1997 1998
--------------- ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Royalty $ 105,000 $ 3,775 $ -- $ 1,274
Sales -- 49,883 -- 33,172
Studio -- 239,770 23,326 29,018
------------ ------------ ------------ ------------
Total Revenues 105,000 293,428 23,326 63,464
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 19,052 -- 11,413
Selling, general and
administrative 104,342 794,314 375,617 378,848
Depreciation and amortization 10,005 40,592 17,833 22,002
Interest expense, related
party 43,100 144,382 71,777 77,991
Bad debt expense -- 105,000 105,000 --
------------ ------------ ------------ ------------
Total Costs and Expenses 157,447 1,103,340 570,227 490,254
------------ ------------ ------------ ------------
OTHER INCOME:
Dividend income -- -- -- 11,792
------------ ------------ ------------ ------------
NET LOSS (52,447) (809,912) (546,901) (414,998)
OTHER COMPREHENSIVE INCOME -- -- -- --
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (52,447) $ (809,912) $ (546,901) $ (414,998)
============ ============ ============ ============
NET LOSS $ (52,447) $ (809,912) $ (546,901) $ (414,998)
Less passed preferred stock
dividend -- -- -- (20,317)
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (52,447) $ (809,912) $ (546,901) $ (435,315)
============ ============ ============ ============
NET LOSS PER COMMON SHARES
BASIC AND DILUTED (.02) $ (.08) $ (.05) $ (.04)
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding 3,377,255 10,211,250 10,035,917 11,776,635
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-16
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIODS MAY 17, 1996 (INCEPTION) TO DECEMBER 31, 1996,
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK REFERRED STOCK ADDITIONAL
------------------ ---------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS DEFICIT TOTAL
------ -------- ------ ------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
organizers of the Company as
founders shares 75,000 $ 75 -- $ -- $ -- $ -- $ -- $ 75
Issuance of common stock for
services rendered 5,065,000 5,065 -- -- -- -- -- 5,065
Issuance of common stock to
acquire Higher Ground
Records 25,000 25 -- -- -- -- -- 25
Effect of RECAPITALIZATION:
issuance of common stock to
Ampro International Golf Tour,
Inc. shareholders in reverse
merger 101,055 101 -- -- (101) -- -- --
Issuance of common stock
to acquire music masters 1,500,000 1,500 -- -- 2,148,500 -- -- 2,150,000
Issuance of common stock to
acquire Maestro Holding
Corporation 3,060,000 3,060 -- -- 5,847,800 -- -- 5,850,860
Net loss for the period -- -- -- -- -- (52,447) (52,447) (52,447)
----------- -------- ------ ------ ----------- -------- -------- ----------
BALANCES, DECEMBER 31, 1996 9,826,055 9,826 -- -- 7,996,199 (52,447) (52,447) 7,953,578
========
Issuance of common stock to
acquire Al Alberts On Stage,
Ltd. 100,000 100 -- -- 213,900 -- -- 214,000
Issuance of common stock for
services rendered 367,911 368 -- -- 239,599 -- -- 239,967
Issuance of common stock in
satisfaction of note payable,
and accrued interest 1,100,000 1,100 -- -- 108,900 -- -- 110,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-17
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIODS MAY 17, 1996 (INCEPTION) TO DECEMBER 31, 1996,
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK REFERRED STOCK ADDITIONAL
------------------ ---------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS DEFICIT TOTAL
------ -------- ------ ------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash 28,000 28 -- -- 83,972 -- -- 84,000
Net loss for the year -- -- -- -- -- (809,912) (809,912) (809,912)
----------- -------- ----- ---------- ---------- ---------- ----------- -----------
BALANCES, DECEMBER 31, 1997 11,421,966 11,422 -- -- 8,642,570 (809,912) (862,359) 7,791,633
==========
Issuance of common stock for
services rendered (unaudited) 554,089 554 -- -- 247,793 -- -- 248,347
Offering costs from sale of
convertible stock for
cash (unaudited) -- -- -- -- (525,000) -- -- (525,000)
Issuance of preferred stock -- -- 500 5,000,000 -- -- -- 5,000,000
Net loss for the period
(unaudited) -- -- -- -- -- (414,998) (414,998) (414,998)
----------- -------- ----- ---------- ---------- ---------- ----------- -----------
BALANCES, JUNE 30, 1998
(UNAUDITED) 11,976,055 $ 11,976 500 $5,000,000 $8,365,363 $ (414,998) $(1,277,357) $12,099,982
=========== ======== ===== ========== ========== ========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-18
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
May 17, 1996 For the Year For the Six For the Six
(Inception) to Ended Months Ended Months Ended
December 31, December 31, June 30, June 30,
1996 1997 1997 1998
-------------- ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS USED BY OPERATING
ACTIVITIES:
Net loss $ (52,447) $ (809,912) $ (546,901) $ (414,998)
Adjustments to reconcile net loss to net
cash used by operations:
Bad debt expense -- 105,000 105,000 --
Depreciation and amortization 10,000 40,592 17,833 22,002
Stock issued for services 5,140 239,967 35,000 248,347
Changes in:
Accounts receivable (105,000) (21,026) -- 8,711
Accounts receivable, related party -- (183,684) (805) (11,162)
Prepaid expenses and other current
assets (29,810) (89,264) -- (146,655)
Accounts payable and accrued
expenses 65,772 131,927 109,013 98,178
Accrued interest expense, related
party 43,100 144,384 71,776 77,991
Deferred revenue -- 146,225 -- (933)
----------- ----------- ----------- -----------
Cash Flows Used by Operating
Activities (63,245) (295,791) (209,084) (118,519)
----------- ----------- ----------- -----------
CASH FLOWS USED BY INVESTING
ACTIVITIES:
Purchase of equipment -- (10,094) -- --
----------- ----------- ----------- -----------
Cash Flows Used by Investing
Activities -- (10,094) -- --
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES:
Advances from stockholders 70,243 118,557 25,414 24,973
Proceeds from note payable -- 100,000 100,000 150,000
Proceeds from sale of common stock -- 84,000 84,000 --
Proceeds from issuance of preferred
stock -- -- -- 5,000,000
Preferred stock issuance costs -- -- -- (525,000)
Repayment of long-term debt -- -- -- (250,000)
----------- ----------- ----------- -----------
Cash Flows Provided by Financing
Activities 70,243 302,557 209,414 4,399,973
----------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 6,998 (3,328) 330 4,281,454
CASH AND CASH EQUIVALENTS, beginning of
period -- 6,998 6,998 3,670
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 6,998 $ 3,670 $ 7,328 $ 4,285,124
=========== =========== =========== ===========
</TABLE>
- -----------------
See Note 15
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-19
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HISTORY AND ACTIVITY
- --------------------
Planet Entertainment Corporation (the Company or Planet) was incorporated under
the laws of Delaware on May 17, 1996 and on October 1, 1996 was acquired by
Ampro International Golf Tour, Inc. (See Note 2). Planet was organized for the
purpose of acquiring existing libraries of master recordings of various types of
music and to enhance, market and produce new recordings to be licensed or
marketed domestically and internationally.
In November 1996, the Company acquired all the outstanding shares of common
stock of Higher Ground Records in exchange for 25,000 shares of Planet common
stock valued at a total of $25. Assets acquired include the rights to artists'
contracts, production agreements and publishing contracts.
The Company acquired over 10,000 master recordings from Gulf Coast Music, L.L.C.
(Gulf Coast) and J. Jake, Inc. (Jake) in exchange for 1,500,000 shares of Planet
common stock valued at $2,150,000 and the assumption of promissory notes
totaling $1,250,000 during 1996. (See Note 8.)
During the year ended December 31, 1996, the Company acquired all the
outstanding shares of common stock of Maestro Holding Corporation (Maestro) in
exchange for 3,060,000 shares of Planet common stock valued at $5,850,860.
Assets acquired include over 5,000 master recordings, publishing rights to 300
songs, royalty income and a recording studio located in New Jersey.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries; Higher Ground Records, Maestro Holding
Corporation and Al Alberts On Stage, Ltd. All significant intercompany accounts
and transactions have been eliminated.
UNAUDITED INTERIM FINANCIAL STATEMENTS
- --------------------------------------
In the opinion of management, the unaudited interim financial statements for the
six month periods ending June 30, 1997 and 1998 are presented on a basis
consistent with the audited annual financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary for fair
presentation of the results of such periods. The results of operations for the
interim period June 30, 1998 are not necessarily indicative of the results to be
expected for the year ended December 31, 1998.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
- -----------------------------------------------------------
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 at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions. The rate of
amortization of record masters is, in part, based upon anticipated total gross
revenues over the estimated life of the record masters. Although no amortization
has been recorded to date, actual gross revenues may differ from the amount
ultimately realized over the life of the record master.
F-20
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The difference may be material.
CASH AND CASH EQUIVALENTS
- -------------------------
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of six months or less to be
cash equivalents.
EQUIPMENT
- ---------
Equipment is carried at cost and depreciated on a straight-line basis over the
estimated useful lives of five to ten years. Depreciation expense was $18,509
and $2,500 for the periods ended December 31, 1997 and 1996 and $10,252 and
$7,500 for the six months ended June 30, 1998 and 1997.
REVENUE RECOGNITION
- -------------------
Royalties derived from the licensing of recording masters are recognized upon
notification of retail sales by the distributor. Studio revenue is recognized
when the services are performed. Sales of compact disks are recognized when the
inventory has been shipped to the customer.
PUBLISHING RIGHTS
- -----------------
Publishing rights consist of rights to 300 songs acquired in the Maestro
acquisition and are stated at predecessor cost.
Amortization of publishing rights is computed based on the ratio that current
years' revenues will bear to anticipated total gross revenues over the estimated
life of the publishing right (generally 5-10 years). No amortization has been
recorded for the periods ended December 31, 1997 and 1996 and June 30, 1998 and
1997.
RECORD MASTERS
- --------------
Record masters consist of record titles acquired in the Maestro acquisition and
Gulf Coast and Jake record master purchases stated at predecessor cost.
Amortization of record masters will be computed based on the ratio that current
years' revenues will bear to anticipated total gross revenues over the estimated
life of the record master (generally 5-10 years). No amortization has been
recorded for the periods ended December 31, 1997 and 1996 and June 30, 1998 and
1997.
ORGANIZATION COSTS
- ------------------
Amortization of organization costs are calculated using the straight-line method
over five years. Amortization expense for the periods ended December 31, 1997
and 1996 was $15,000 and $7,500 and for the six months ended June 30, 1998 and
1997 was $7,500 and, $7,500.
GOODWILL
- --------
Goodwill, representing the excess of the cost over the net tangible assets of
acquired business, is stated at cost and is amortized, principally on a
straight-line basis, over the estimated future periods to be benefited
(primarily 10 years). Amortization expense for the periods ended
F-21
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
December 31, 1997 and 1996 was $7,083 and $-0- and for the six months ended June
30, 1998 and 1997 was $4,250 and $2,833.
INCOME TAXES
- ------------
Deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax basis of the assets and
liabilities and their financial statement amounts at the end of each reporting
period. Valuation allowances will be established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the current period and the change during the period in
deferred tax assets and liabilities.
The deferred tax assets and liabilities have been netted to reflect the tax
impact of temporary differences.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying value of accounts receivable, accounts payable, accrued expenses
and due to stockholders approximate fair value because of the short maturity of
these items. The fair value of notes payable and long-term debt was based upon
current borrowing rates available for financings with similar terms and
maturities.
EARNINGS PER COMMON SHARE
- -------------------------
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128) was issued in February 1997 (effective for financial statements issued
for periods ending after December 15, 1997). This Statement simplifies the
standards for computing earnings per share (EPS) previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share", and makes them more
comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, the
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
ALLOWANCE FOR BAD DEBTS
- -----------------------
Management provides for an allowance based on a review of specific accounts and
determination of collectibility.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In 1997, the Financial Accounting Standards Board (FASB) issued Statements No.
130, "Reporting Comprehensive Income", and the Company's adoption of this
statement is reflected in the accompanying financial statements. The FASB has
also issued statements No. 131, "Disclosures about Segments of an Enterprise and
Related Information", and in February 1998 the FASB issued Statement No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits",
effective for fiscal years beginning after December 15, 1997. These
pronouncements are not applicable to the Company.
F-22
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
YEAR 2000 ISSUES
- ----------------
Many existing computer programs use only two digits to identify a year in the
date field, with the result that data referring to year 2000 and subsequent
years may be misinterpreted by these programs. If present in the computer
applications of the Company, or its suppliers and customers, and not corrected,
this problem could cause computer applications to fail or to create erroneous
results and could cause a disruption in operations and have a short-term adverse
effect on the Company's business and results of operations. The Company will
evaluate its principal computer system to determine if they are substantially
Year 2000 compliant.
NOTE 2 - BUSINESS RECAPITALIZATION AND RESTATEMENT
On October 1, 1996, the Company was acquired by Ampro International Golf Tour,
Inc. (Ampro) a public corporation.
The stock exchange transaction is treated as an acquisition by the Company of
the net tangible book value of the assets of Ampro at the date of acquisition,
which was minimal. Operating results of Ampro for all periods prior to the date
of its acquisition were immaterial and not included in the operating results of
the Company since such reverse merger is not treated as a pooling of interests
for accounting purposes.
NOTE 3 - PRODUCTION AND DISTRIBUTION AGREEMENTS
JAD RECORDS
- -----------
On April 23, 1998, the Company entered into an agreement with JAD Records
regarding the production of eight music records of Bob Marley and the Wailers.
During the year ended December 31, 1996, the Company recognized revenue of
approximately $105,000 as a result of a prior agreement with JAD Records. During
the year ended December 31, 1997, these amounts were reserved by the Company as
uncollectible, and to date, the Company has not received or recorded income or
revenue as a result of sales pursuant to the new agreement. In June 1998, the
Company assigned the collection of all producer and publisher royalties
collectible pursuant to the new agreement to a non-affiliated third party.
SUN ENTERTAINMENT
- -----------------
On April 22, 1997, the Company entered into a licensing agreement with Sun
Entertainment Corporation, pursuant to which the Company obtained non-exclusive
rights to various master recordings in consideration for advance payments
against future royalties that will accrue on all tapes and compact disks that
are sold by the Company. To date the Company has not attempted to exploit these
master recordings, and has not received royalties, recognized revenue or income
as a result of this agreement.
F-23
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PRODUCTION AND DISTRIBUTION AGREEMENTS (Continued)
BLACK TIGER RECORDS
- -------------------
In February 1997, the Company obtained a 50% interest in Black Tiger Records
consisting primarily of certain master recordings. Under the terms of the joint
venture agreement assigned to the Company, Black Tiger Records, through Anansi
Records, Inc., its agent, contracted with Navarre Corporation for the sale and
distribution of these recordings. To date, Anansi Records, Inc. has failed to
provide the Company or Black Tiger Records with an accounting of the sales in
accordance with the terms of the agreement, and the Company has recognized no
revenue or other income in connection with the Company's interest in the Black
Tiger Records joint venture.
MONACO RECORDS
- --------------
In February 1998, the Company entered into an agreement with Monaco Records to
form a joint venture under the label Monaco/PNEC to distribute the Company's
products throughout Europe. According to the agreement, all catalogue sales,
after costs, will be divided on a fifty-fifty percent basis, and the Company
acquired the right of first refusal to distribute these releases in the United
States and Canada. To date the Company has received no royalties, and has
recognized no revenue or income in connection with this agreement.
ATLANTIC COAST DIGITAL CONCEPTS, INC.
- -------------------------------------
On April 30, 1998, the Company entered into a multi-phase agreement with
Atlantic Coast Digital Concepts, Inc. to expand and enhance the Company's
website (www.planetentertainment.com) in consideration for 20,000 shares of the
Company's common stock for services rendered and to be rendered.
NEW MILLENNIUM COMMUNICATIONS, LTD.
- -----------------------------------
On May 18, 1998, the Company entered into an agreement with New Millennium
Communications, Ltd. to form a joint venture operating under the name Planet
Entertainment Europe, Ltd. concerning the licensing and distribution of master
recordings owned by the Company. According to the terms of the agreement, Planet
Entertainment Europe, Ltd. has the non-exclusive right to market, reproduce and
distribute all subject master recordings for a term of 99 years, with each party
to the joint venture to recover their respective costs and to distribute any
resultant profits on an equal basis. As of June 1998, the Company has
contributed 15 compilations of its master recordings to the joint venture, and
distribution is expected to begin in the fall of 1998. To date, however, the
Company has received no royalties, and has recorded no revenue or income as a
result of this agreement.
F-24
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - EQUIPMENT
Equipment consists of the following:
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ --------
(Unaudited)
Recording studio equipment $ 50,000 $ 200,000 $ 200,000
Computer equipment and other -- 10,094 10,094
Less accumulated depreciation and
amortization (2,500) (21,009) (31,261)
-------- --------- ---------
$ 47,500 $ 189,085 $ 178,833
======== ========= =========
NOTE 5 - MASTERS
The Company has entered into two agreements to secure rights to certain master
recordings and assets as follows:
A) The Company issued 3,060,000 shares of common stock to acquire 5,000
masters, publishing rights to 300 songs and a recording studio located
in New Jersey from a related party. The masters are valued at
predecessor cost of $9,200,000.
B) The Company issued 1,500,000 shares of common stock and assumed a
promissory note for $1,250,000 to acquire 10,000 masters from an
unrelated third party valued at predecessor cost of $4,600,000.
The Company has the non-exclusive right to manufacture, distribute, advertise,
sell, and promote in all configurations, the performances contained on the
masters.
NOTE 6 - DEFERRED REVENUE
On July 8, 1997, the Company entered into an agreement granting Nippon Columbia
Company, Ltd. (NCC) and its subsidiaries, the right to produce and distribute
music CD's and video tapes in Japan, Hong Kong, Taiwan and Singapore. The
agreement is for a term of one year and four months, commencing September 1,
1997, and may be extended by NCC provided NCC makes certain minimum payments and
purchases during the term of the agreement.
The Company received a $150,000 advance under the agreement which was recorded
as deferred revenue. For the period ended December 31, 1997 and June 30, 1998,
$3,775 and $933, respectively, were earned under the agreement.
F-25
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTE PAYABLE, RELATED PARTY
On January 27, 1997, the Company borrowed $100,000 at 10% interest due January
27, 1998 from an investment company. The Company converted the $100,000 note and
$10,000 in accrued interest to 1,100,000 shares of the Company's common stock.
On January 19, 1998, the Company borrowed an additional $150,000 from the
investment company. The note is due on demand, with interest payable on January
19, 1999 at 10% per annum.
NOTE 8 - LONG-TERM DEBT, RELATED PARTY
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ ---------
(Unaudited)
<S> <C> <C> <C>
Note payable to Gulf Coast Music, Inc.,
a stockholder of the Company, due
September 2001; interest at 9.75% per
annum. Payments of $250,000
principal plus interest are due annually
beginning September, 1997,
unsecured $ 1,250,000 $ 1,250,000 $ 1,000,000
Less current portion (250,000) (500,000) (250,000)
----------- ----------- -----------
$ 1,000,000 $ 750,000 $ 750,000
=========== =========== ===========
</TABLE>
The Company has not made all of the required payments due under the terms of the
note since Gulf Coast Music, Inc. has not completed its obligation to deliver
unencumbered title to certain of the master recordings. Gulf Coast claims there
have been certain adverse claims regarding certain of the master recordings
raised by various non-affiliated third parties. Management believes that all or
substantially all of the disputes will be resolved favorable to the Company.
Estimated maturities on long-term debt are as follows for the years ending
December 31,:
1998 $ 250,000
1999 250,000
2000 250,000
2001 250,000
-----------
$ 1,000,000
===========
Interest expense for the periods ended December 31, 1997 and 1996 was $144,382
and $43,100 and $77,991 and $71,777 for the six months ended June 30, 1998 and
1997.
F-26
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Accrued interest $ -- $ 50,000 $ 28,000
Meals and entertainment -- 28,000 8,000
Net operating loss carryforwards 1,600 222,000 339,000
----------- ----------- -----------
Gross deferred tax assets 1,600 300,000 375,000
Valuation allowance (1,600) (300,000) (375,000)
----------- ----------- -----------
Total deferred tax assets -- -- --
Deferred tax liability:
Record masters 4,600,000 4,600,000 4,600,000
----------- ----------- -----------
Net deferred tax liability $ 4,600,000 $ 4,600,000 $ 4,600,000
=========== =========== ===========
</TABLE>
No provision for income taxes has been recorded for the periods ended December
31, 1997 and 1996 and for the six months ended June 30, 1998 and 1997 as the
Company has incurred losses during these periods. Net operating loss carryovers
of approximately $4,000 as of December 31, 1996, $600,000 as of December 31,
1997 and $915,000 as of June 30, 1998 expire in 2011, 2012 and 2013,
respectively. The Company is providing a valuation allowance in the full amount
of deferred tax assets as there is no assurance of future taxable income.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
RESTATED AGREEMENT
- ------------------
The financial statements have been prepared based on the assumption of the
formation of Gulf Coast. Gulf Coast is to be formed upon confirmation of a plan
of reorganization in the bankruptcy proceedings of an individual not related to
Planet. The terms and conditions of the formation and details of the transaction
are described below.
F-27
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
On December 17, 1996, Planet entered into an agreement of terms to amend and
restate certain agreements entered into by Planet on September 17, 1996 between
Music Marketeers, Incorporated (Music) and J. Jake, Incorporated (Jake). These
agreements were for the acquisition of 10,000 master recordings, an option to
acquire a mortgage note on a recording studio and a consulting services
agreement with an individual in exchange for 2,000,000 shares of common stock of
Planet and promissory notes for $1,350,000. The agreements have been amended and
restated as an Asset Purchase Agreement between Planet, Gulf Coast and Jake for
the purchase of 10,000 master recordings and an amended and restated consulting
agreement between Planet and an individual in exchange for 1,500,000 shares of
common stock of Planet and a promissory note for $1,250,000.
The conditions of the restated agreement are contingent on the approval of the
bankruptcy court. Should such bankruptcy court approval not be obtained, the
original agreements will remain in full force. The financial statements have
been presented to reflect the amended and restated agreement.
Following is a proforma balance sheet for June 30, 1998 which reflects the
original agreements to acquire Music and Jake, which will be recorded if the
bankruptcy court approval is not obtained for the restated agreement.
<TABLE>
<CAPTION>
Music Jake
Proforma Proforma Proforma
Planet Adjustment Adjustment Balances
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Current assets $ 4,758,013 $ -- $ -- $ 4,758,013
Equipment 178,833 -- -- 178,833
Other assets 13,919,547 -- 570,000(2) 14,489,547
----------- ---------- --------- -----------
Total Assets $18,856,393 $ -- $ 570,000 $19,426,393
=========== ========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $ 1,406,411 $ 20,000(1) $ 570,000(2) $ 1,996,411
Long-Term debt 750,000 80,000(1) -- 830,000
Deferred income
taxes 4,600,000 -- -- 4,600,000
Stockholders' equity 12,099,982 (100,000)(1) -- 11,999,982
----------- ---------- --------- -----------
Total Liabilities and
Stockholders' Equity $18,856,393 $ -- $ 570,000 $19,426,393
=========== ========== ========= ===========
</TABLE>
F-28
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Proforma adjustments relating to the original agreements were recorded as
follows:
1. To record additional $100,000 note payable to stockholder of Music.
2. To record option to acquire mortgage note receivable and remaining debt owed
to acquire the recording studio located in New Orleans.
INSURANCE
- ---------
The Company does not maintain insurance to cover damages from fire, flood or
other casualty losses to its music master libraries. Costs resulting from
uninsured property losses will be charged against income upon occurrence. No
amounts for uninsured casualty property losses were charged to operations for
the periods ended December 31, 1997 and 1996 and June 30, 1998 and 1997.
RECORDING AGREEMENTS
- --------------------
Higher Ground Records has entered into several artist recording contracts. The
contracts are for an initial period of one year with options to renew for one to
two years. Recording costs are to be paid by Higher Ground Records and shall be
recouped from royalties due the artist. In accordance with the terms of the
contracts, all masters, records and reproductions are the property of Higher
Ground Records.
PRODUCTION AGREEMENT
- --------------------
Higher Ground Records has entered into an agreement with an unrelated individual
for production services. The agreement is for an initial period of one year with
two one year options. The contract calls for a commitment of at least $2,000 per
project advance and a royalty. The royalty is payable only after recoupment of
all recording costs under the applicable recording contract.
EMPLOYMENT AGREEMENTS
- ---------------------
Higher Ground Records has entered into two employment agreements with its former
stockholders for amounts and terms to be negotiated in the future.
CONSULTING AGREEMENTS
- ---------------------
Planet has entered into an agreement for consulting services with an unrelated
individual. The agreement is for a term of five years and requires a monthly
payment of $10,000 in consideration for services performed. Consulting services
include maintenance and administration of existing licenses; and negotiation and
acquisition of new licenses for master sound recordings.
On July 16, 1997, the Company entered into a consulting agreement with an
unrelated party. The agreement was for a term of one year, with payments of
$10,000 per month. The consultant was to assist the Company in conducting its
public relations activities with the financial community. On April 26, 1998, the
Company cancelled the agreement, and in consideration for settling a dispute
with the party, agreed to deliver $45,000 of the proceeds of the sale of 100,000
shares of the Company's stock to the party, within 30 days from the date that
the shares may become eligible for sale.
F-29
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
LEASE AGREEMENT
- ---------------
The Company entered into a lease agreement with the former shareholders of Al
Alberts On Stage, Ltd. (Note 17) to lease the land and building which house a
recording studio. The initial term is for a period of five years, with lease
payments of approximately $24,000 per year. Rent expense for the year ended
December 31, 1997 was $11,190.
LITIGATION
- ----------
The Company is a party to various claims, complaints, and other legal actions
that have arisen in the ordinary course of business. The Company believes that
the outcome of all pending legal proceedings, in the aggregate, will not have a
material adverse effect on the Company's financial condition or the results of
operations.
NOTE 11 - PLANET ENTERTAINMENT CORPORATION STOCK PLAN AND WARRANTS
On October 1, 1996, the Company adopted a plan known as Planet Entertainment
Corporation Stock Plan (the "Plan") pursuant to which the Board of Directors
shall issue awards, options and grants. Pursuant to the Plan 1,000,000 shares of
the Company's common stock have been reserved for issuance as awards. No options
have been issued to date.
NOTE 12 - RELATED PARTY TRANSACTIONS
In addition to transactions with related parties discussed throughout the notes
to financial statements, the following related party transactions have occurred:
DUE TO STOCKHOLDERS
- -------------------
Due to stockholders represent 9% interest bearing, working capital advances,
made by two stockholders. The advances are due upon demand.
AGREEMENTS WITH MULTI-MEDIA INDUSTRIES CORPORATION (MMIC):
- ----------------------------------------------------------
JOINT VENTURE AGREEMENT
- -----------------------
On July 22, 1997, the Company entered into a joint venture agreement with MMIC,
an entity whose certain shareholders are also shareholders of the Company. The
agreement requires the production of a minimum of 20 new releases per year,
contingent upon attaining a specified level of funding. All net revenue from the
production, development and distribution of releases under the agreement will be
split 50% to the Company and 50% to MMIC. Under the agreement, the Company is
entitled to a distribution royalty for foreign and domestic distribution of the
produced compact disks. No revenues have been earned under this agreement.
PRODUCTION
- ----------
In September 1996, the Company entered into a production and distribution
agreement with MMIC under the label Century Records, which calls for Planet the
Company to receive compensation of 10% of the cash receipts, net of returns, of
the production and distribution of 10 enhanced multi-media compact disks. MMIC
is required to pay directly or reimburse the Company for all production costs
incurred by the Company.
F-30
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LETTER OF AGREEMENT
In July 1998 the Company signed a letter of agreement to purchase a music label
distributor for $3,000,000 cash and 250,000 stock options in exchange for all of
the outstanding stock of the music label distributor.
NOTE 14 - PREFERRED STOCK
On May 31, 1998, the Company sold $5,000,000 (500 shares) of 7% non-voting,
convertible preferred stock to a private investment fund. The Company also
issued warrants to purchase 75,000 shares of common stock, exercisable at $9.625
for 5 years to the fund. The preferred stock pays a cumulative 7% annual
dividend on a quarterly basis in cash or shares of common stock and is
convertible to common stock at 78% of the prior 10 days trading price of the
common stock. The preferred stock automatically converts to common stock on the
same basis in two years. The Company has the right to redeem the preferred stock
on the same terms as the conversion. Passed preferred stock dividends as of June
30, 1998 were $20,317.
The agent for the transaction was paid a 10% ($500,000) fee and received
warrants to purchase 150,000 shares of common stock exercisable at $9.625 for 5
years. In addition, the Company paid $25,000 of direct expenses for the
transaction.
NOTE 15 - STOCK-BASED COMPENSATION
On January 29, 1997, warrants were issued to certain officers and directors to
purchase 3,160,000 shares of common stock. Each warrant is exercisable at $20
per warrant to purchase 10 shares. The warrants were issued at the fair value of
the stock on the date of the grant. The warrants are exercisable immediately and
for a period of 10 years beginning January 29, 1997. As of December 31, 1997 and
June 30, 1998, their effect on the weighted average number of shares outstanding
is anti-dilutive and no warrants have been exercised.
During 1997, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). The new standard
requires the Company to adopt the "fair value" method with respect to
stock-based compensation of consultants and other non-employees.
The Company did not change its method of accounting with respect to employee
stock options; the Company continues to account for these under the "intrinsic
value" method. Had the Company adopted the fair value method with respect to
options issued to employees as well, an additional charge to income of
$10,616,000 would have been required in 1997; proforma net loss would have been
$11,425,912 and net loss per share would have been $1.12 on both a basic and
diluted basis.
In estimating the above expense, the Company used the Modified Black-Scholes
European Pricing Model. The average risk-free interest rate used was 5.89%,
volatility was estimated at 131%; the expected life was less than 3 years.
F-31
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH
INVESTING AND FINANCING ACTIVITIES
For the year ended December 31, 1997
Issued 100,000 shares of common stock for the acquisition of Al Alberts On
Stage, Ltd.
Issued 1,100,000 shares of common stock in satisfaction of note payable.
Issued 367,911 shares of common stock for services.
For the period ended December 31, 1996:
Issued 5,065,000 shares of common stock for services.
Issued 3,060,000 shares of common stock for the acquisition of the New
Jersey recording studio, publishing rights to 300 songs and the rights to
5,000 master recordings.
Issued 25,000 shares of common stock for the acquisition of the Higher
Ground Records.
Issued 1,500,000 shares of common stock assumed and $1,250,000 in
promissory notes for the rights to 10,000 master recordings.
Issued 101,055 shares of common stock in a reverse stock split.
Accrued organization costs of $75,000 as due to stockholders.
For the period ended June 30, 1998:
Issued 554,089 shares of common stock for services.
NOTE 17 - AL ALBERTS ON STAGE, LTD.
On March 1, 1997, the Company acquired substantially all of the assets of Al
Alberts On Stage, Ltd., ("On Stage"), a recording studio. For financial
statement purposes the acquisition was accounted for as a purchase. Accordingly,
the assets and liabilities of the acquired business are included in the
consolidated balance sheets at December 31, 1997 and June 30, 1998 (unaudited).
On Stage's results of operations are included in the consolidated statement of
operations since the date of acquisition. The consideration, which included
100,000 shares of common stock valued at $2.14 per share ($214,000) was
allocated as follows:
Equipment $ 150,000
Goodwill 85,000
Liabilities (21,000)
---------
$ 214,000
=========
F-32
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - AL ALBERTS ON STAGE, LTD. (Continued)
The results of On Stage's operations from January 1, 1997 through February 28,
1997 are not material.
F-33
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and the Bylaws provide that the Company
shall indemnify and hold harmless each officer and director of the Company (and
each officer and director of another entity serving at the request of the
Company) who is a party to, or is threatened to be made a party to, any
threatened, pending or contemplated action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, against expenses (including
attorney's fees), judgment, fines, and amounts paid in settlement, actually and
reasonably incurred in connection with such action, suit or proceeding. They
further provide that the Company shall indemnify each such officer and director
in any derivative action, suit or proceeding, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Company or its shareholders; except that no indemnification shall be made
with respect to any such derivative action, suit or proceeding as to which he
shall have been adjudged to be liable for gross negligence or misconduct in the
performance of his duties to the Company (unless and only to the extent that the
court in which such action or suit was brought shall determine, upon
application, that, despite the adjudication or liability, but in view of all of
the circumstances of the case, he is fairly and reasonably entitled to indemnity
for such expenses which such court shall deem proper).
The Articles of Incorporation and the Bylaws also provide that costs in
defending any action, suit or proceeding referred to above may be paid by the
Company in advance of the final disposition thereof under certain circumstances.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other
thanunderwriting discounts and commissions, in connection with the issuance and
distribution of the shares of Common Stock being registered, all of which are
being borne by the Company:
Registration fee $ 2,487.59
Transfer agent and registrar fees 1,000.00
Printing and engraving 500.00
Legal fees 7,500.00
Blue Sky fees and expenses --
Accounting fees 3,500.00
Miscellaneous 12.41
----------
Total $15,000.00
==========
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<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In May 1996, the Company issued 75,000 shares of common stock to its
founding shareholders, Messrs. Arnone, Giakas and Venneri, and in June 1996,
issued 3,060,000 shares of common stock to Messrs. Arnone, Giakas and Venneri,
in exchange for all the issued and outstanding capital stock of Maestro Holding
Corporation valued at $5,847,800.
In October 1996, the Company issued 5,065,000 shares of its common
stock to Messrs. Arnone, Giakas and Venneri, and others in consideration for
services rendered in the approximate amount of $5,065, and also in October 1996,
the Company also issued 101,000 shares of its Common Stock to the shareholders
of Ampro International Golf Co. ("Ampro") valued at $101, par value, to effect
the recapitalization of the Company following its acquisition by Ampro.
In November 1996, the Company issued 25,000 shares of its Common Stock
at $.0001 par value, in exchange for all the issued and outstanding capital
stock of Higher Ground Records, Inc., and in November 1996, also issued
1,500,000 shares to J. Jake, Inc. and Music Marketeers, Inc. in exchange for
certain rights associated with 10,000 master recordings purchased by the
Company, valued at $2,148,500.
In March 1997, the Company issued 100,000 shares of its common stock to
the shareholders Al Alberts On Stage, Ltd. ("Al Alberts"), an unrelated company,
in exchange for all the issued and outstanding capital stock of Al Alberts
valued at $214,000, and also in 1997 issued 367,911 shares of Common Stock to
unrelated third parties in consideration for services rendered in the amount of
approximately $239,967. In February 1998, the Company issued 554,089 shares of
Common Stock to unrelated parties for the purposes of performing on certain
contractual obligations and compromising or paying in full certain accounts
payable or trade liabilities totaling approximately $248,347.
In June 1998, the Company authorized and issued 500 shares of 7% Series
A Convertible Preferred Stock to JNC Opportunity Fund Ltd. at a stated value of
$10,000 per share for a total of $5 million. Each share of the Preferred Stock
for a period of two years is convertible into the Company's Common Stock at the
lesser of (a) $8.885 per share, or (b) 78% multiplied by the average of the five
lowest per share market values of the Company's Common Stock during ten trading
days immediately preceding notice of conversion unless adjusted as per terms of
the Preferred Stock. In connection with this transaction, the Company issued
warrants to purchase 75,000 shares of the Company's Common Stock to JNC
Opportunity Fund Ltd. at a price of $9.625 per share exercisable over a term of
five years, and the Company also issued warrants to purchase 150,000 shares of
the Company's Common Stock to CDC Consulting, Inc. at a price of $9.625 per
share for a term of five years from June 1998. As a result of this transaction,
the Company received net proceeds of approximately $4,475,000. Under the terms
of the Preferred Stock Agreements, the
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<PAGE>
Company is required to file a registration statement for 200% of the Common
Stock underlying the Preferred Shares (including payments of dividends thereon
in the form of Common Stock) at the conversion price the lesser of $8.885 per
share, or 78% multiplied by the average of the five lowest per share market
prices of the Company's common stock during ten trading days immediately
preceding notice of conversion, along with an additional 225,000 shares of
common stock underlying the warrants, within 30 days of the Closing Date, and if
such registration statement was not declared effective within 95 days from the
Closing Date or by September 4, 1998. According to the Preferred Stock
agreements, the conversion price of the Preferred Stock is to be decreased by
2.5% if the applicable dates are not complied with, and after the second month,
the Preferred shareholder may demand additional 2.5% cumulative discounts or the
payment of 2.5% of the stated value of the preferred shares each month until
such registration statement becomes effective. On September 23, 1998, the
Company filed a registration statement on SEC Form 10-SB.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Rule 506 of Regulation D
promulgated under the Securities Act of 1933, as amended, and Section 4(2) of
said Act as transactions by an issuer not involving a public offering of
securities. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of exhibits filed as part of this Registration
Statement.
Acquisition Agreements Ex-1
a. Higher Ground Records Acquisition*
b. Ampro International Golf Tour, Inc. Reverse Merger*
c. Maestro Holding Corporation Acquisition*
d. Gulf Coast Music LLC and J.Jake, Inc.*
e. Master Recording Acquisition Agreements*
Material Contracts Ex-2
a. Sun Entertainment Agreement*
b. Monaco Agreement*
c. Atlantic Coast Digital Concepts, Inc. Agreement*
d. New Millennium Communications, Ltd. Agreement*
e. Black Tiger Records Agreement*
f. Nippon Columbia Agreement*
g. Multi-Media Industries Corporation Joint Venture Agreement*
II-3
<PAGE>
h. Multi-Media Industries Corporation Production Agreement*
i. JNC Opportunity Fund Ltd. Convertible Preferred Stock Purchase
Agreement*
j. Lease Agreement with Al Alberts On Stage, Ltd.*
k. Executive Compensation Agreement with Wallace M. Giakas*
l. Executive Compensation Agreement with John S. Arnone*
m. Executive Compensation Agreement with Joseph Venerri*
n. Purchase and Sale Agreement with Northeast One Stop, Inc.*
Articles of Incorporation* Ex-3
By-Laws of Incorporation*
Opinion Re: Legality Ex-5
Statement Regarding Earnings Per Share* Ex-11
Computation of Loss Per Common Share* Ex-17
Consents of Experts and Counsel Ex-23
Financial Data Schedule* Ex-27
- ----------
* Filed as Exhibits to Form 10-SB, File Number 000-22549, dated September 23,
1998 and are herein incorporated by reference.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was declared
effective. (2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MIDDLETOWN, NEW JERSEY,
THIS 25TH DAY OF SEPTEMBER, 1998
By: /s/ JOHN S. ARNONE
-----------------------------------
John S. Arnone
President, Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
Each person in so signing also makes, constitutes and appoints John S. Arnone
acting alone, his true and lawful attorney-in-fact, with full power of
substitution, to execute and cause to be filed with the Securities and Exchange
Commission pursuant to the requirements of the Securities Act of 1933, as
amended, any and all amendments and post-effective amendments to this
Registration Statement, and including any Registration Statement for the same
offering that its to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, with exhibits thereto and other documents in connection
therewith, and hereby ratifies and confirms all that said attorney-in-fact or
his substitute or substitutes may do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/s/ WALLACE M. GIAKAS
- -------------------------- Chairman of the Board, September 25, 1998
Wallace M. Giakas Secretary
/s/ JOSEPH VENNERI
- -------------------------- Executive Vice President, September 25, 1998
Joseph Venneri Director
/s/ RICHARD BLUESTINE
- -------------------------- Executive Vice-President, September 25, 1998
Richard Bluestine Chief Financial Officer,
</TABLE>
II-5
FROHLING, HUDAK & MCCARTHY, P.C.
COUNSELLORS AT LAW
425 EAGLE ROCK AVENUE P.O. BOX 22888
SUITE 200 NEWARK, NJ 07101
ROSELAND, NJ 07068 (201) 622-2800
(201) 226-4600
FAX (201) 226-0969 Please Reply to:
[X] Roseland
Newark
September 25, 1998
Wallace M. Giakis, Chairman
Planet Entertainment Corp.
222 Highway 35 South
Middletown, NJ 07748
Gentlemen:
We have reviewed all pertinent corporate documents and materials
required to be reviewed in connection with the status of the shares of common
stock (the "Shares") of the Company being registered with the U.S. Securities
and Exchange Commission on September 25, 1998 pursuant to Form SB-2 the
Securities Act of 1933, as amended, (the "Registration Statement") and in
connection therewith render the following opinion:
(a) All the Shares of Common Stock being registered pursuant to the
Registration Statement will, when issued upon the proper exercise of the
conversion rights and warrants, be validly issued, and non-assessable.
(b) All corporate action required to be taken by the Company in
connection with the registration of the Shares has been taken.
Very truly yours,
/s/ FROHLING HUDAK & McCARTHY P.C.
-------------------------------------
FROHLING HUDAK & McCARTHY P.C.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
3033 EAST 1ST AVENUE, SUITE 201
DENVER, COLORADO 80206
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
report dated August 12, 1998 and to the reference made to our firm under caption
"Experts" included in or made part of this Form SB-2.
/s/ AJ. ROBBINS, P.C.
-----------------------------------
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
Denver, Colorado
September 25, 1998
FROHLING, HUDAK & MCCARTHY, P.C.
COUNSELLORS AT LAW
425 EAGLE ROCK AVENUE P.O. BOX 22888
SUITE 200 NEWARK, NJ 07101
ROSELAND, NJ 07068 (201) 622-2800
(201) 226-4600
FAX (201) 226-0969 Please Reply to:
[X] Roseland
Newark
September 25, 1998
Wallace M. Giakis, Chairman
Planet Entertainment Corp.
222 Highway 35 South
Middletown, NJ 07748
Gentlemen:
We hereby consent to the use of our opinion in connection with this
Registration Statement on Form SB-2.
September 25, 1998
/s/ FROHLING, HUDAK & McCARTHY, P.C.
------------------------------------
Frohling, Hudak & McCarthy, P.C.
